<PAGE>
As filed with the SECURITIES AND EXCHANGE COMMISSION on May 11, 2000
Registration No. 333-35588
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO. 1 TO
REGISTRATION STATEMENT ON
FORM SB-2
UNDER THE SECURITIES ACT OF 1933
INFORUM COMMUNICATIONS, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 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 400
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 400
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.[ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
PROSPECTUS
Inforum Communications, Inc.
18,455,139 SHARES
COMMON STOCK
This prospectus relates to an offering of shares of the common stock of
Inforum Communications, Inc. (formerly known as 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:
* have been issued common stock in connection with our capital raising
activities;
* have been or will be issued common stock upon conversion of shares of
our series F convertible preferred stock; or
* have been or will be issued common stock upon the exercise of warrants
to purchase our common stock issued in connection with sales of our
series F convertible preferred stock.
See the sections entitled "Selling Security Holders" and "Description of
Securities."
Selling security holders may sell shares covered by this prospectus at
prices related to prevailing market prices or at negotiated prices. Our common
stock is currently traded over-the-counter and quoted on the Over-the-Counter
(OTC) Electronic Bulletin Board under the symbol "SKYK". On May 5, 2000, the
last reported bid price of our common stock was $1.46875 and the last reported
ask price was $1.53125.
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 3 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 May , 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY......................................................... 1
RISK FACTORS............................................................... 3
AVAILABLE INFORMATION...................................................... 7
SELLING SECURITY HOLDERS................................................... 8
USE OF PROCEEDS............................................................ 9
PLAN OF DISTRIBUTION....................................................... 9
LEGAL PROCEEDINGS.......................................................... 10
MANAGEMENT................................................................. 11
PRINCIPAL STOCKHOLDERS..................................................... 13
DESCRIPTION OF SECURITIES.................................................. 14
INDEMNIFICATION............................................................ 18
DESCRIPTION OF BUSINESS.................................................... 19
MANAGEMENT'S DISCUSSION AND ANALYSIS....................................... 26
DESCRIPTION OF PROPERTY.................................................... 31
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. 32
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS................... 33
EXECUTIVE COMPENSATION..................................................... 34
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 Inforum Communications, Inc. (formerly known as 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 ten Internet service providers serving customers in areas of
Arizona, California, Oregon, Nevada and Washington. We currently have
approximately 42,000 subscribers to our services.
Our plan is to acquire, invest in or enter into strategic arrangements with
additional Internet access and enhanced Internet-related product and service
providers in select markets in the United States. We intend to integrate these
businesses and their products and services into our existing operations to
provide Internet connection and advanced Internet-related products and services
to small and medium-sized businesses.
Our executive offices are located at 600 South Cherry Street, Suite 400,
Denver, Colorado 80246, and our telephone number is (303) 316-0400. Our world
wide web site address is: www.inforum.com
Recent Developments
Reincorporation
On December 14, 1999, we changed our state of incorporation from Colorado
to Delaware by completing a merger of SkyLynx Communications, Inc., a Colorado
corporation, with and into SkyLynx Communications, Inc., a Delaware corporation.
As a result of our redomestication, the Delaware corporation succeeded to all
the properties, assets, and liabilities of the Colorado corporation and
automatically assumed all of the Colorado corporation's reporting obligations
under the Securities Exchange Act of 1934, as amended. On the date of the
redomestication, all issued and outstanding shares of the Colorado corporation's
common stock and preferred stock were converted automatically into an equal
number of shares of the common stock and preferred stock of the Delaware
corporation. In addition, all outstanding options, warrants and other stock
purchase rights of the Colorado corporation became the obligation of the
Delaware corporation without modification or interruption.
Recent Financings
In November 1999 we issued $1,950,000 in convertible promissory notes and
warrants to 18 accredited investors in a private placement transaction. In
connection with our February 2000 sale of series F convertible preferred stock,
all of the convertible promissory notes automatically converted into 1,950
shares of series F convertible preferred stock and warrants exercisable for
three years to purchase an aggregate of 749,665 shares of our common stock at an
exercise price of $3.375 per share.
On February 2, 2000, we sold 5,500 shares of our series F convertible
preferred stock to three accredited investors in a private placement
transaction. We received an aggregate gross proceeds of $5,500,000 from this
transaction. Effective February 11, 2000, we sold an additional 7,866 shares of
our series F convertible preferred stock to 62 accredited investors for an
aggregate purchase price of $7,866,000.
Recent Acquisitions
On February 11, 2000, we completed the acquisition of Alternate Access,
Inc., an Internet service provider operating in the Seattle, Washington area
serving approximately 7,000 customers. The aggregate purchase price for this
acquisition was approximately $4.1 million consisting of $1.95 million in cash
and 684,430 shares of our common stock. In connection with our acquisition of
Alternate Access, Inc., we entered into an agreement to purchase 30% of the
outstanding capital stock of PDGT.COM, INC., a Seattle provider of advanced
telecommunications services to Internet service providers. The owner of
PDGT.COM INC. is the former owner of Alternate Access, Inc. The aggregate
purchase price for this transaction will be $1,150,000 in cash. On February
11, 2000, we purchased approximately 21.8% of PDGT.COM's outstanding capital
stock for $750,000.
On February 11, 2000, we completed the acquisition of Planetlink
Communications, Inc. d/b/a Inforum Communications, an Internet service
provider operating in the Sacramento - Placerville, California area serving
approximately 1,600 customers. The aggregate purchase price for this
acquisition was approximately $474,900, consisting of $237,450 in cash and
74,494 shares of our common stock.
Series D Exchange Offer
On March 7, 2000, we commenced an exchange offer to the holders of our
series D convertible preferred stock in which we offered to exchange each
outstanding share of series D convertible preferred stock for one share of our
series D-1 convertible preferred stock. The series D-1 convertible preferred
stock is substantially identical in all respects to the series D convertible
preferred stock, except that the conversion price for series D-1 convertible
preferred stock is fixed at $1.00 per share, subject to specific adjustments
for events that would result in dilution to the series D-1 holders. This means
that each share of series D-1 convertible preferred stock is convertible into
1,000 shares of common stock, subject to these adjustments.
Under the exchange offer, accrued and unpaid dividends on the series D
convertible preferred stock were carried over and applied to the series D-1
convertible preferred stock.
Holders of series D-1 convertible preferred stock will be eligible to sell
the common stock issued upon conversion of the series D-1 convertible preferred
stock under this prospectus in the same manner as a holder of series D
convertible preferred stock.
As of the date of this prospectus, all of the holders of our series D
convertible preferred stock who were participants in the exchange offer
described above have elected to exchange their shares of series D convertible
preferred stock for shares of series D-1 convertible preferred stock, and no
shares of series D convertible preferred stock are outstanding.
Name Change
On April 26, 2000, we changed our name to Inforum Communications, Inc.
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:
* have been issued common stock in connection with our capital raising
activities;
* have been or will be issued common stock upon conversion of shares of
our series F convertible preferred stock; or
* have been or will be issued common stock upon the exercise of warrants
issued in connection with our sales of series F convertible preferred
stock.
We are registering the common stock covered by this prospectus in order to
fulfill obligations we have under agreements with the selling security holders.
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<PAGE>
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.,
Inficad Computing and Design, LLC, Net Asset, LLC and Alternate Access. Inc.,
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, 1999,
combining our results for the year ended December 31, 1999 with those of
Simply Internet, Inc., Net Asset, LLC, InterAccess Corp., Inficad Computing
and Design, LLC, and CalWeb Internet Services, Inc. for the period from
January 1, 1999 through the respective acquisition dates and with those of
Alternate Access, Inc. for the year ended December 31, 1999. 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.,
InterAccess Corp., Simply Internet, Inc., Net Asset, LLC, Inficad Computing
and Design, LLC, CalWeb Internet Services, Inc. and Alternate Access, Inc.
<TABLE>
<CAPTION>
Pro Forma Combined Statements of Operations Data
(unaudited)
Year Ended December 31,
1999
Pro Forma
Actual Combined
<S> <C> <C>
Statement of Operations Data:
Revenues............................................ 4,726,589 9,616,877
Operating cost and expenses......................... (31,256,220) (40,084,438)
----------- -----------
Loss from operations................................ (26,529,631) (30,467,561)
Interest and other income (expenses)................ (446,013) (513,223)
----------- -----------
Net loss............................................ (26,975,644) (30,980,784)
Preferred stock dividends and
accretion of beneficial conversion feature of
preferred stock................................... (13,461,480) (13,576,772)
----------- -----------
Net loss applicable to common stockholders.......... (40,437,124) (44,557,556)
Basic loss per share................................ (3.44) (3.52)
Shares used in computing basic and diluted loss
per share......................................... 11,763,251 12,661,126
</TABLE>
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<PAGE>
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, invest in or enter into strategic arrangements
with Internet service providers may not be successful. Our success will depend
upon our ability to identify and acquire, invest in or enter into strategic
arrangements with local Internet service providers and integrate these acquired
businesses and their products and services into a comprehensive network that is
able to operate efficiently and profitably.
We believe that competition from other companies seeking to acquire or
invest in 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, 1999 and February 11, 2000, we acquired ten 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 or investments we make or strategic arrangements we enter
into may result in potentially dilutive issuances of our securities, or our
incurrence of additional debt. Further, these acquisitions, investments and
strategic arrangements involve a number of special risks, including failure of
the acquired business or investments 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 failure to successfully integrate and operate any companies we have
acquired or may acquire in the future, or inability to identify Internet related
investment opportunities and strategic arrangements, and/or high-costs
associated with these investments or arrangements, 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 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. There can be no assurance that we can obtain commitments for additional
financing 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.
Most of 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,
and 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 the lawsuits described in this prospectus in the section entitled
"Legal Proceedings." If any 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 operating 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.
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
-5-
<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. 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 of our company
through merger, tender offer, proxy contest or otherwise by making these
attempts more difficult or more costly to achieve.
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<PAGE>
The events described in forward-looking statements we make in this
prospectus may not occur. This prospectus contains forward-looking statements as
that term is defined in the federal securities laws. Generally, these statements
relate to business plans or strategies, projected or anticipated benefits or
other consequences of our plans or strategies, projected or anticipated benefits
from acquisitions made or to be made by us, or projections involving anticipated
revenues, earnings or other aspects of our operating results. The words "may,"
"will," "expect," "believe," "anticipate," "project," "plan," "intend,"
"estimate," "continue," their opposites and similar expressions are intended to
identify forward-looking statements. We caution readers that these statements
are not guarantees of future performance or events and are subject to a number
of uncertainties, risks and other influences, many of which are beyond our
control, that may influence the accuracy of the statements and the projections
upon which the statements are based, including but not limited to the factors
discussed in the risk factors described above. Any one or more of these
uncertainties, risks and other influences could materially affect our results of
operations and whether forward-looking statements made by us ultimately prove to
be accurate. Our actual results, performance and achievements could differ
materially from those expressed or implied in these forward-looking statements.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether from new information, future events or otherwise.
AVAILABLE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission (the "SEC"). You may
read and copy our filings at the SEC's public reference rooms in Washington,
D.C., New York, New York or Chicago, Illinois. Please call the SEC at 1-800-
SEC-0330 for further information on the operation of the public reference rooms.
Our SEC filings are also available to the public from commercial document
retrieval services and at the Internet web site maintained by the SEC at
"http://www.sec.gov."
We have filed with the SEC a registration statement on Form SB-2 to
register the shares of our common stock to be sold by the selling security
holders. This prospectus is part of that registration statement, and, as
permitted by the SEC's rules, does not contain all of the information set forth
in the registration statement. For further information with respect to us or our
common stock, you may refer to the registration statement and to the exhibits
and schedules filed as part of the registration statement. You can review a copy
of the registration statement and its exhibits and schedules at the public
reference room maintained by the SEC, and on the SEC's web site, as described
above.
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<PAGE>
SELLING SECURITY HOLDERS
The selling security holders are offering to sell 18,455,139 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:
o the selling security holders eligible to sell shares of common
stock under this prospectus;
o the number of shares beneficially owned by each selling security
holder prior to this offering;
o the maximum number of shares each selling security holder may sell
under this prospectus; and
o the number of shares each selling security holder will beneficially
own after the completion of the offering, assuming each selling
security holder does not acquire additional shares prior to the
completion of this offering.
<TABLE>
<CAPTION>
Number of shares Maximum number of Number of shares
beneficially shares to be sold beneficially owned
owned prior in offering (2) after offering
to offering (1)
<S> <C> <C> <C>
AAH Cashpoint Equity, L.L.C. 750,000 750,000 0
Jason Adelman 25,000 25,000 0
Alda Limited Partnership 83,067 83,067 0
Dean Alexander 75,000 75,000 0
Apollo Capital Fund, L.L.C. 200,000 200,000 0
Julia Balk 10,000 10,000 0
Matthew Balk 100,000 100,000 0
Scott J. Barraclough 25,000 25,000 0
Spencer Beal 25,000 25,000 0
Belle Haven Investment LP 50,000 50,000 0
Jeffrey Benton 154,611 54,611 100,000
William Benton 274,222 99,222 175,000
BE Partners 100,000 100,000 0
Gary Berardi 70,767 20,767 50,000
Ivan Berkowitz 250,000 250,000 0
Bess Holdings, Ltd. 1,830,000 1,830,000 0
Harvey Bibicoff 75,000 75,000 0
Marilyn A. Bradshaw 10,000 10,000 0
Robert Brooks 122,689 47,689 75,000
Canpartners Investments IV, LLC 1,000,000 1,000,000 0
Carlow Investments, Ltd. 1,830,000 1,830,000 0
Cluck Investments, L.L.C. 50,000 50,000 0
Cranshire Capital L.P. 500,000 500,000 0
The Dot Com Fund LLC 500,000 500,000 0
John P. Fowler 30,000 30,000 0
Ralph Giorgio 150,000 150,000 0
Merril Lynch FBO Stephen Gladstone IRA 150,000 150,000 0
Christopher Healy 50,000 50,000 0
Tim Healy 15,000 15,000 0
Brian J. Henry 25,000 25,000 0
Richard Hoffman 50,000 50,000 0
Homice Investments Ltd 692,222 692,222 0
Hyman Family Trust 28,000 28,000 0
Zubair Kazi 500,000 500,000 0
Brian R. Kenny 26,000 26,000 0
Bear Sterns Gerold FL Klauer IRA 500,000 500,000 0
Lawrence Kupferberg, Trustee, 62,000 62,000 0
The Evan Todd Heller 1997 Trust
Lawrence Kupferberg, Trustee, 62,000 62,000 0
The Rachel Beth Heller 1997 Trust
Lampe Conway & Co. 27,000 27,000 0
Leyton Investments, Ltd. 1,840,000 1,840,000 0
Les Lieberman 50,000 50,000 0
Christina Liff 50,000 50,000 0
Vincent Lijoi and Dawn Lijoi 15,000 15,000 0
Peter S. MacLeod 30,000 30,000 0
Mehrnoush Mahjobi 25,000 25,000 0
Ann Mantegrano 25,000 25,000 0
Mattison Family Trust 415,333 415,333 0
The Mattison Foundation, Inc. 207,667 207,667 0
William C. Mattison, Jr. 415,333 415,333 0
William C. Mattison, Jr. IRA Rollover 415,333 415,333 0
Jason M. McLoy 8,000 8,000 0
James Munro, Jr. 30,000 30,000 0
Patrick Murphy 154,611 54,611 100,000
Robert M. Murphy 154,611 54,611 100,000
Delaware Charter Guarantee & Trust 125,000 125,000 0
Custodian FBO David S. Nagelberg
IRA
Robert H. Neugebauer 25,000 25,000 0
Michael Nichols 45,000 20,000 25,000
Kevin O'Connell 25,000 25,000 0
James Oliphant 90,767 40,767 50,000
Matt Oristano 41,533 41,533 0
The Oristano Foundation, Inc. 41,533 41,533 0
Victor Oristano 41,533 41,533 0
George M. Ring 250,000 250,000 0
RPM Asset Management Corp. 389,989 139,989 250,000
James Rubenstein 39,000 39,000 0
Dan Shedrick 250,000 250,000 0
Kathy Simpson 39,000 39,000 0
Aet Singer IRA 150,000 150,000 0
Eric Singer 740,000(3) 100,000 240,000
Eric Singer IRA 250,000 250,000 0
Timothy Sommerfield 50,000 50,000 0
Michael D. Stallings 26,700 5,000 21,700
Laura Weiss Synnott 20,000 20,000 0
Vincent Tese 250,000 250,000 0
Frederick F. Tramutola, Jr. 43,844 13,844 30,000
Richard B. Trull 195,000 195,000 0
Norman Tulchin 300,000 100,000 200,000
Eugene S. Tuma 1,337,374(4) 789,474 547,900
Scott Weismann 25,000 25,000 0
David Wiener 50,000 50,000 0
Dennis Wolff 25,000 25,000 0
Zaykowski Partners, L.P. 40,000 40,000 0
Bulk Trade Inc. 1,000,000 1,000,000 0
H.C. Wainwright & Co., Inc. 500,000 500,000 0
Continental Capital & Equity Corporation 100,000 100,000 0
Total: 20,819,739 18,455,139 1,964,600
</TABLE>
(1) The shares listed have been or will be acquired by the selling security
holders:
o through direct purchases;
o upon conversion of shares of shares of our series D-1 or
series F convertible preferred stock; or
o upon exercise of warrants issued in connection with our
capital raising activities.
(2) The shares listed have been or will be acquired by the selling security
holders:
o upon conversion of shares of our series F convertible
preferred stock; or
o upon exercise of warrants issued in connection with our
capital raising activities.
(3) Includes 100,000 shares issuable upon conversion of shares of our
series F convertible preferred stock held by the Eric Singer IRA and 150,000
shares issuable conversion of shares of our series F convertible preferred stock
held by the Aet Singer IRA.
(4) Includes 7,500 shares issuable upon conversion of shares of our series C
convertible preferred stock held by Eugene Tuma & Associates, Inc., a
corporation controlled by Mr. Tuma, 67,500 shares issuable upon conversion of
shares of our series C convertible preferred stock held by Mr. Tuma and 526,316
shares issuable upon exercise of a warrant we have issued to Mr. Tuma.
Upon completion of this offering and assuming each selling security
holder does not acquire additional shares of our common stock prior to the
completion of this offering, no selling security holder will beneficially own
more than one percent of our common stock, except:
o RPM Asset Management Corp. will beneficially own
approximately 1.2% of our common stock ;
o Eric T. Singer will beneficially own approximately 1.2% of
our common stock; and
o Eugene S. Tuma will beneficially own approximately 2.7 % of
our common stock.
The percentages listed above are based on 20,262,164 shares of our common stock
outstanding as of April 20, 2000.
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 of 1933, as amended and is, therefore, unenforceable.
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<PAGE>
USE OF PROCEEDS
We will not receive any proceeds when selling security holders sell shares
of common stock under this prospectus. We have received proceeds from the sale
of the convertible preferred stock. We also may receive proceeds from the
exericse 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.
-9-
<PAGE>
Broker-dealers or agents may purchase shares directly from a selling
security holder or sell shares to another party 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:
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<PAGE>
1. In re: Cable Corporation of America d/b/a Paradise Cable (United States
--------------------------------------------------------
Bankruptcy Court, Middle District of Florida, Tampa Division).
On May 12, 1999, the United States Bankruptcy Court for the Middle District
of Florida confirmed a plan of reorganization involving Cable Corporation of
America, which does business under the name Paradise Cable Corporation. The plan
of reorganization provided for the transfer to us of substantially all of Cable
Corporation's assets, including wireless cable licenses issued by the Federal
Communications Commission (FCC) to a subsidiary of Cable Corporation. The
consideration we will pay in this transaction will be 220,000 shares of our
common stock and our assumption of approximately $891,000 of indebtedness, plus
accrued interest, previously owed by Paradise to the FCC. On June 3, 1999, the
effective date of the plan of reorganization, we delivered 120,000 shares of
common stock to the disbursing agent in the bankruptcy.
On October 8, 1999, E. Paul Hansen, the Former Chairman of the Board of
Cable Corporation and a creditor in the bankruptcy proceeding, filed a complaint
in the United States Bankruptcy Court, Middle District of Florida, seeking to
revoke the confirmation order. The complaint alleged that we failed to disclose
material facts during the bankruptcy and reorganization process and that this
failure was an intentional omission that constituted fraud on the court.
In response to Mr. Hansen's complaint, we filed a motion for summary
judgment with the bankruptcy court on October 15, 1999, asserting that there
were no issues of material fact in the proceeding and that we were entitled to
judgment as a matter of law. On January 7, 2000, the bankruptcy court granted
our motion for summary judgment on all issues, and ruled that we were entitled
to recover any costs incurred in the action from Mr. Hansen. Mr. Hansen has
appealed the bankruptcy court's ruling to the United States District Court for
the Middle District of Florida. The appeal is still pending.
On February 16, 2000, Morse, Berman & Gomez P.A., the disbursing agent in
the bankruptcy proceeding, filed a complaint with the United States Bankruptcy
Court for the Middle District of Florida seeking a declaration that we are in
breach of the terms of the bankruptcy plan and confirmation order for failing
to pay a portion of the consideration for the Cable Corporation assets. In the
complaint, the disbursing agent seeks damages and rescission of the
transactions already consummated under the bankruptcy plan. We believe this
complaint is without legal merit and intend to defend it vigorously.
2. Investment Management of America, Inc. v. SkyLynx Communications, Inc.,
-----------------------------------------------------------------------
(Circuit Court in and for Sarasota County, Florida, Case No. 9915657 CA). On
November 29, 1999 Investment Management of America Inc. filed suit against us in
the Sarasota County Circuit Court, alleging that we had breached a purported
agreement for services to be rendered by Investment Management. The complaint
demanded that we issue 300,000 shares of our common stock to Investment
Management pursuant to the purported agreement. On December 30, 1999, we filed
an answer to Investment Management's complaint, denying all of Investment
Management's claims and asserting affirmative defenses, including the lack of an
enforceable agreement between the parties. On January 11, 2000, Investment
Management filed a reply to our answer which denied our affirmative defenses. We
have begun discovery in this case and intend to defend it vigorously.
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 40 President, Chief Executive Officer and Director
Francis P. Ragano 70 Chairman of the Board
J. Samuel Ridley 50 Director, Vice Chairman of the Board
Robert J. Smith 42 Director
James E. Maurer 39 Chief Financial Officer and Director
Steven R. Jesson 51 Vice President, Integration
Ned Abell 45 Vice President, Mergers and Acquisitions
and Secretary
David H. Roberts 32 Vice President, Business Development
Jenny J. Kim 32 Vice President, Legal Affairs/General Counsel
</TABLE>
JEFFERY A. MATHIAS has been a director and our Chief Executive Officer
since October 1998 and has served as our President since July 1998. From June
1997 to June 1998, Mr. Mathias was the Vice President of Business Development of
Network System Technologies Inc., a provider of wireless Internet service. From
August 1995 to May 1997, Mr. Mathias was Chairman and Chief Executive Officer of
Wireless Holdings International, a start-up venture pursuing wireless cable
television projects in Europe. From December 1993 to August 1995, Mr. Mathias
was the Director of International Development and a director of American
Telecasting, Inc., a leading wireless cable provider in the U.S.
FRANCIS 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.
ROBERT J. SMITH has been a director since August 1999. From 1993 to 1998,
Mr. Smith held various management positions at America Online, Inc., including
Founder, Senior Vice President and General Manager of AOL's Digital Cities
network, Vice President of Affiliate Development, General Manager of AOL's
Lifestyles and Interests Channel and Manager of Business Development. Since
January 2000, Mr. Smith has been the Managing Director and Chief Executive
Officer of Vector Development, LLC, which develops and supports early stage
Internet companies.
J. SAMUEL RIDLEY has been a director since August 1999, and has been Vice
Chairman of our Board since December 29, 1999. Since March 2000, Mr. Ridley has
been the President of telX Communications Corporation, a full service provider
of colocation and value-added telecommunications services to Internet service
providers and telecommunications carriers. Since January 2000, Mr. Ridley has
also been a member of the Advisory Board of Intralinks Inc., which provides
software solutions for secure business information transfer. From 1998 to 1999,
Mr. Ridley was Senior Vice President and Head of Corporate Development for US
West. From 1986 to 1998, Mr. Ridley served as Senior Vice President and was a
member of the management committee of Polaroid Corporation. From 1993 to 1996,
Mr. Ridley was Senior Vice President, Strategic Development and Acquisitions for
Lane Industries, Inc., which conducted business in the office products,
hospitality, radio and protection services industries.
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.
-11-
<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.
JENNY J. KIM has been our General Counsel and Vice President, Legal Affairs
since July 1999. From December 1997 until July 1999, Ms. Kim was a corporate
transactional attorney with the Silicon Valley office of McDermott, Will &
Emery. From May 1996 to December 1997, Ms. Kim was associated with the law firm
of Graham & James LLP, and from December 1994 to May 1996 Ms. Kim was associated
with the law firm of King, Shapiro, Mittelman & Buchman.
-12-
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table lists the number of shares of our company stock owned
by:
. each person who owned of record, or was known to beneficially own
more than five percent (5%) of our outstanding shares of common own
stock;
. each of our directors, our chief executive officer and our four other
most highly compensated executive officers during 1999; and
. all of our current directors and executive officers as a group.
<TABLE>
<CAPTION>
Number of
Shares
Beneficially Percent of
Name and Address of Beneficial Owner (1) (2) Owned Class (3)
<S> <C> <C>
Jeffery A. Mathias 995,601(4) 4.7%
James E. Maurer 703,948(4) 3.4%
Francis P. Ragano 325,128(5) 1.6%
J. Samuel Ridley 75,000(4) *
Robert Smith 75,000(4) *
David H. Roberts 480,079(4) 2.3%
Ned Abell 414,800(4) 2.0%
Steven R. Jesson 207,231(6) 1.0%
Gary L. Brown 1,488,439(7) 7.3%
718 Siesta Key Circle
Sarasota, FL 34242
Network System Technologies, Inc. 1,495,985(8) 7.4%
55 South Market Street
Suite 240
San Jose, CA 95431
Bess Holdings Ltd. 1,830,000(9) 8.3%
c/o Parker Chapin Flattau & Kimpl
1211 Avenue of the Americas
New York, NY 10036
Carlow Investments IV LLC 1,830,000(9) 8.3%
c/o Parker Chapin Flattau & Kimpl
1211 Avenue of the Americas
New York, NY 10036
Leyton Investments, Ltd. 1,840,000(9) 8.3%
c/o Parker Chapin Flattau & Kimpl
1211 Avenue of the Americas
New York, NY 10036
Eugene S. Tuma 1,337,374(10) 6.4%
15 Edgehill Drive
Allison Park, PA 15101
All directors and executive officers as a group
(9 persons) 3,592,020 15.1%
</TABLE>
- -------------------
* less than one percent
(1) Unless otherwise noted, each stockholder's address is c/o Inforum
Communications, Inc., 600 South Cherry Street, Suite 400, Denver, CO
80246.
(2) Unless otherwise noted, each stockholder exercises sole investment and
voting power with respect to the share listed.
(3) The applicable percentage is based on 20,262,164 shares outstanding as of
May 5, 2000.
(4) Consists entirely of shares issuable pursuant to options exercisable within
60 days.
(5) Includes 200,000 shares issuable pursuant to options exercisable within
60 days, 10,000 shares issuable upon exercise of warrants and 5,000
shares issuable upon conversion of our series A convertible preferred
stock held by Mr. Ragano.
(6) Includes 182,231 shares issuable pursuant to options exercisable within
60 days.
(7) Includes 1,013,442 shares held in joint tenancy with Mr. Brown's wife,
204,000 shares held in the name of Mr. Brown's wife, 100,000 shares held by
Mr. Brown's daughter, 28,000 shares held by Mr. Brown's son and 60,000
shares held by Lineshark Communications, Inc., an entity controlled by Mr.
Brown.
(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 with
respect to these shares for purposes of Section 16 under the Securities and
Exchange Act of 1934, as amended.
(9) Consists entirely of shares issuable upon conversion of shares of our
series F convertible preferred stock.
(10) Includes 7,500 shares issuable upon conversion of shares of our series C
convertible preferred stock held by Eugene Tuma & Associates, Inc., a
corporation controlled by Mr. Tuma, 67,500 shares issuable upon
conversion of shares of our series C convertible preferred stock held by
Mr. Tuma, 526,316 shares issuable upon exercise of a warrant we have issued
to Mr. Tuma.
-13-
<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 Amended and Restated Certificate of Incorporation and Amended Bylaws and
by the provisions of applicable law.
Common Stock
As of May 5, 2000, 20,262,164 shares of our common stock were outstanding
and held by 208 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 7.6% 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 of our
company without any action by shareholders.
As of May 5, 2000, our issued and outstanding preferred stock consisted
of the following:
. 358,566 shares of series A convertible preferred stock;
. 696,419 shares of series C convertible preferred stock;
-14-
<PAGE>
. 1,440 shares of series D-1 convertible preferred stock; and
. 16,066 shares of series F 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, including the
share price of our common stock exceeding $6.00 for ten consecutive trading
days.
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 series A convertible preferred stock are entitled to vote with
the holders of shares of common stock as a single class on all matters presented
for a vote to our stockholders. Each holder of series A convertible preferred
stock may cast one vote for each share of common stock into which the holder's
shares of series A convertible preferred stock may be converted.
-15-
<PAGE>
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 of the
series C convertible preferred stock are also entitled to participate, pro rata,
in any dividends paid on the outstanding shares of common stock, 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.
-16-
<PAGE>
Series D-1 Convertible Preferred Stock.
The conversion price is subject to adjustment in the event we commence
an underwritten public offering of our common stock or for events such as stock
splits and business combinations involving an exchange of our common stock.
Unless sooner converted by their holders, all of the shares of our series D-1
convertible preferred stock will automatically convert into shares of common
stock three years after the date of our original issuance of our series D
convertible preferred stock, which date may be extended under some
circumstances. Notwithstanding the foregoing, the shares of series D-1
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-1 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-1 convertible preferred stock are entitled to
receive payment of dividends at the annual rate of $50 per share. Dividends on
the series D-1 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-1 convertible preferred stock, except that dividends on the series D-1
convertible preferred stock are payable only in shares of common stock upon any
conversion of the series D-1 convertible preferred stock into shares of common
stock or upon the redemption of the series D-1 convertible preferred stock.
The outstanding shares of series D-1 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-1 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-1 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-1 convertible preferred stock
require that we receive the affirmative vote of 75% of the then outstanding
shares of series D-1 convertible preferred stock in order to make specified
actions with respect to our liquidation, make specified changes to our Amended
and Restated Certificate of Incorporation or Amended Bylaws or otherwise affect
the rights of the series D-1 holders or take other actions as described in the
certificate of designation for the series D-1 convertible preferred stock.
We have granted registration rights to the holders of the series D-1
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-1 convertible
preferred stock holders upon conversion of their preferred stock or exercise of
warrants we have issued to them in connection with our original sale of series
D convertible preferred stock. We have filed a registration statement, of which
this prospectus is a part, in satisfaction of these registration rights.
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Series F Convertible Preferred Stock
Each share of our series F convertible preferred stock is convertible
voluntarily by the holder into 1,000 shares of our common stock, subject to
certain adjustments. Unless sooner converted by their holders, all of the shares
of our series F convertible preferred stock will automatically convert into
shares of our common stock three years after the date of the first issuance of
the series F convertible preferred stock, which date may be extended under some
circumstances.
Holders of the series F convertible preferred stock are not entitled to
receive any dividends on the preferred stock.
The outstanding shares of series F convertible preferred stock have a
liquidation preference equal to $1,000 per share. The shares of series F
convertible preferred stock are not entitled to demand, and we are not required
or entitled to effect, the redemption of any shares of series F convertible
preferred stock.
Holders of series F convertible preferred stock are entitled to vote with
the holders of shares of our common stock as a single class on all matters
presented for a vote to our stockholders. Each holder of series F convertible
preferred stock may cast one vote for each share of common stock into which the
holder's shares of series F convertible preferred stock may be converted.
In addition, the affirmative vote of 75% of the then outstanding shares of
series F convertible preferred stock is required before we may take specified
actions with respect to our liquidation, make specified changes to our
certificate of incorporation or bylaws which adversely affects the holders of
our series F convertible preferred stock, or otherwise affect the rights of the
series F holders or take other actions described in the certificate of
designation for the series F convertible preferred stock.
We have granted registration rights to the holders of the series F
convertible preferred stock under a registration rights agreement with the
series F holders. The registration rights agreement requires us to prepare and
file, within 60 days of the first issuance of series F convertible preferred
stock, a registration statement so as to permit the public offering and resale
of the shares of common stock issuable upon conversion of the series F
convertible preferred stock. The registration rights agreement also requires us
to cause the registration statement to become effective within 120 days of the
first issuance of series F convertible preferred stock, and to keep the
registration statement effective until all of the common stock registered under
the registration statement is sold or is able to be sold under exemptions from
the registration requirements of the securities laws.
Delaware Law
We are a Delaware corporation and are subject to Section 203 of the
Delaware General Corporation Law, an anti-takeover law. In general, Section 203
prevents an "interested stockholder" (defined generally as a person owning 15%
or more of a corporation's outstanding voting stock) from engaging in a
"business combination" with a Delaware corporation for three years following the
date such person became an interested stockholder. This restriction is subject
to exceptions such as approval of the board of directors and of the holders of
at least two-thirds of the outstanding shares of voting stock not owned by the
interested stockholder. The existence of this provision could have an
anti-takeover effect, possibly inhibiting takeover attempts that might result in
the payment of a premium over the market price for shares of our common
stock.
INDEMNIFICATION
As permitted of the Delaware General Corporation Law, our Amended and
Restated Certificate of Incorporation includes a provision that eliminates the
personal liability of a director for monetary damages resulting from breach of
his fiduciary duty as a director, except for liability:
. for any breach of the director's duty of loyalty to us or our
stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. under section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchase; or
. for any transaction from which the director derived an improper
personal benefit.
In addition, our Amended and Restated Certificate of Incorporation and
Amended Bylaws provide that:
. we are required to indemnify our directors, officers, agents and
employees to the fullest extent permitted by the Delaware General
Corporation Law, subject to very limited exceptions; and
. we are required to advance expenses, as incurred, to our directors,
officers agents and employees in connection with a legal
proceeding.
In addition to the indemnification required in our Amended and Restated
Certificate of Incorporation and Amended Bylaws, we have entered into
indemnification agreements with our senior executive officers which provide for
the indemnification of those officers for all expenses and liabilities incurred
in connection with any action or proceeding brought against them by reason of
the fact that they are or were our agents. We have obtained directors' and
officers' insurance to cover our directors, officers and some of our employees
for liabilities, including liabilities under securities laws. We believe that
these indemnification provisions and agreements and this insurance are necessary
to attract and retain qualified directors and officers.
The limitation of liability and indemnification provisions in our Amended
and Restated Certificate of Incorporation and our Amended Bylaws may discourage
stockholders from bringing a lawsuit against directors for breach of their
fiduciary duty. They may also reduce the likelihood or derivative litigation
against directors and officers, even though an action, if successful, might
benefit us and other stockholders.
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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DESCRIPTION OF BUSINESS
Overview
Our strategy is to become a leading provider of high-speed Internet access
and advanced Internet services to small and medium-sized businesses. Subject to
our ability to obtain additional capital, we plan to acquire or partner with
Internet-related product and service providers that complement or augment our
existing business. We currently have networks providing Internet services in
Tampa, Florida; Fresno, California; Eugene, Oregon; San Diego, California;
Seattle, Washington; Las Vegas, Nevada; Sacramento, California; and Phoenix,
Arizona and we have recently completed the acquisition of Internet service
providers located in Seattle, Washington and Placerville, California. We
currently have approximately 42,000 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. In
December 1999, we changed our state of incorporation to Delaware through a
merger of SkyLynx Communications, Inc., a Colorado corporation, with and into
SkyLynx Communications, Inc., a Delaware corporation. On April 26, 2000, we
changed to Inforum Communications, Inc.
Industry Background
We believe that the provision of Internet connection and advanced Internet
products and 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 connectivity and advancements in technologies required to navigate the
Internet have fostered the growth of Internet content and application
development. These factors have contributed to the exponential growth in the
number of commercial and residential Internet 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 enhance certain operations
such as 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 connectivity, 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;
. data storage and retrieval; and
. application services.
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 and hosting 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.
We intend to continue to identify additional Internet access and enhanced
Internet-related product and service providers for acquisition, investment and
strategic opportunity. We will look to leverage our knowledge base and
experience to focus on providing Internet access and enhanced services to the
small and medium size business community. We also intend to broaden our product
and service offerings by developing certain key technologies and by establishing
strategic relationships with outside companies that offer specific, business-
driven solutions to our target market. Our efforts to develop new technologies
and services involve internal entrepreneurial initiatives and selected market
trials of outside vendor products and services with our customer base. We
believe that our experience as an Internet related service provider for clients
in both the business and consumer market segments will enhance our ability to
assess market demand and eventual customer acceptance of our products and
services.
All of our efforts to acquire additional properties, develop new technology
solutions and establish joint ventures are subject to our existing financial
resources and our ability to obtain additional financing. As we continue to
identify additional Internet access and enhanced service providers for
acquisition, investment and strategic partnerships, we will attempt to develop a
series of narrowly focused products and services. These products and services
may include wholesale and retail Internet connection services, Internet related
security and security software, business-to-business electronic commerce
applications and World Wide Web-based productivity applications and
infrastructure.
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. Additionally, we
plan to offer our customer base a series of new products and services that are
designed to improve connectivity, security, productivity and cost-effective
acquisition of key goods and services.
Small and medium-size businesses are purchasing an increasing number of
advanced Internet products and services. We believe we will be able to derive
additional revenue from both new and existing customers by selling an expanding
array of products and services, including:
. enhanced retail broadband Internet access;
. wholesale Internet connection services;
. web site hosting;
. Internet security and security related products and services;
. electronic commerce applications;
. business productivity applications and infrastructure;
. world wide web based access to third parties' business and
software application services, such as email, financial
reporting, sales and project management; and
. voice services over the Internet.
We intend to encourage our regional operating locations to share their
ideas and knowledge of innovative Internet services among each other and to our
affiliated companies and strategic partners. We believe this practice will allow
us to further understand our target market segments and continue to foster
development of new technology product and service offerings designed to meet
customer demand.
Current Markets and Acquisitions
Listed below are the markets in which we currently 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 35,164 shares of our common stock.
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 $497,541, consisting of $343,379 in cash, the assumption of $50,000 of debt
and 19,160 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. On February 11, 2000, we
completed the acquisition of Alternate Access Inc., an Internet service provider
operating in the Seattle, Washington area serving approximately 7,000 customers.
The aggregate purchase price for this acquisition was approximately $4.1
million, consisting of $1.95 million in cash and 684,430 shares of our common
stock. We entered into a consulting agreement with the founder of Alternate
Access under which he will provide consulting services to us until May 11, 2000.
In connection with this acquisition we entered into an agreement to purchase 30%
of the outstanding capital stock of PDGT.COM, INC., a Seattle provider of
wholesale Internet connectivity to Internet service provider. PDGT.COM, INC. is
qualified as a competitive local exchange carrier (CLEC) in Washington, Oregon,
Idaho and Montana. The aggregate purchase price for this transaction will be
$1,150,000 in cash. The owner of PDGT.COM is the former owner of Alternate
Access. As of February 11, 2000, we purchased approximately 21.8% of PDGT.COM's
outstanding capital stock for $750,000 in cash. The closing of our purchase of
the remaining 8.2% of common stock is subject to certain conditions, including
PDGT.COM's attainment of prescribed revenue levels, and is expected to close by
February 2001.
Sarasota, Florida. On June 4, 1999, we obtained a 25 year lease for 12
wireless channels in the Sarasota-Bradenton area. The lease gives us coverage
over six Florida counties: Sarasota, Manatee, Charlotte, DeSoto, Pasco and
Pinellas.
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.
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. On
February 11, 2000, we acquired substantially all of the assets of Planetlink
Communications, Inc. d/b/a Inforum Communications, an Internet service provider
operating in the Sacramento - Placerville, California area serving approximately
1,600 customers. The aggregate purchase price for this acquisition was
approximately $474,900, consisting of approximately $237,450 in cash and
74,494 shares of our common stock.
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 offer, through our regional Internet service provider operations and
strategic partnerships, a comprehensive range of Internet connection and
advanced Internet services. In addition to key products and services that are
not limited by geographic boundaries, the specific services we offer in each
market are 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 products and 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 products and services. Our product development and marketing groups
will focus on developing new advanced products and 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 local operating centers.
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
use of their web sites by others.
Web site co-location. We also offer web site co-location, pursuant to
which 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 each of our local operating centers.
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 both directly
and 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 a combination of internal initiatives and strategic
partnerships, we offer a comprehensive set of network-based security
products, including firewall maintenance and management, authentication of
network users and data encryption services. Moreover, we have developed a
series of host-based security solutions designed to prevent, rather than
simply detect, Internet-based security breaches and exploitation of our
clients' systems. We intend to develop and commercialize these products in
the coming months.
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 described above, we intend to offer our
customers voice over the Internet services. Voice over the Internet allows
customers to make telephone calls using 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 7,000,000 customers in the U.S., and Internet use by
this market segment is expected to grow at over 40% per year. 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 offer our products and services through a direct sales force, resellers
and other indirect sales channels. We also use the world wide web to market our
products and services.
Direct sales. We currently employ a direct sales force to focus on our
target customers. We plan to continue to hire sales representatives who
have strong Internet-related backgrounds and who understand the needs of
their local businesses. These representatives are 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 will continue to employ and further
develop 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
programs 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 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.
Web based sales and marketing. We will continue to employ and further
develop an Internet-based sales and marketing channel for certain of our
products and services that can be sold and distributed over the world wide
web. We will use our existing knowledge of web transactions and our ongoing
vendor relationships to capitalize on targeted e-commerce sales and
marketing opportunities.
Operations
Network management. We currently manage our local network full-time using
management, monitoring and tracking systems at each of our local operations
centers. Our local operations centers monitor the local networks delivering
Internet services to our customers.
Support services. In addition to our monitoring capabilities, we plan to
offer in the future the following support services to increase the quality and
consistency of our services:
. Customer technical support. We intend to establish 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 have and may acquire.
. Billing and collections. We also plan to implement a centralized
billing and collections system for all Internet service providers we
have and may 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 such as
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;
. regional telephone operating companies like US West, SBC
Communications and Bell South;
. providers of wholesale and retail advanced Internet connectivity
services including competitive local exchange carriers such as ICG and
TCG and data local exchange carriers such as Covad and Northpoint;
. emerging and established enhanced Internet-related product and service
providers in specific areas including application service providers
such as Future Link and USInternetworking and providers of business-
to-business e-commence services and products such as Purchase Pro and
Vertical Net; and
. companies providing Internet-related security applications and
products like Tripwire, McAfee and Checkpoint.
We also believe that new competitors will continue to enter the Internet
access and related Internet markets. 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 believe that 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 March 30, 2000, we employed approximately 154 people, including 141
full-time and 13 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
The following discussion and analysis should be read in conjunction with
the Financial Statements and Notes thereto included elsewhere in this
report.
Overview
We provide a range of Internet access and Internet-related services
to small and medium-sized business and residential customers. The primary
services we offer include:
. broadband and dial-up Internet access;
. registration and administration of customers' Internet domain names;
. web site hosting services;
. web site development services; and
. Internet security services.
We earn revenue primarily from subscriptions from our customers for
Internet 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 customers pay us on a monthly basis. We
earn additional revenue from hosting and developing commercial and individual
web sites, registration and administration of customers' Internet domain names,
and various Internet - related security services, such as penetration
assessments and network security consulting services. 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.
Over time, the composition of our revenue may change as we develop our strategy
to provide additional Internet security services and web site hosting and
development services to our customers.
Our costs and expenses primarily fall into the following categories:
. telecommunications;
. selling, general and administrative; and
. amortization and depreciation.
Our telecommunications and operating expenses consist of our cost of non-
capital equipment and telecommunication costs associated with providing services
to subscribers, including the cost of local telephone lines and the costs of
leased lines connecting the Internet and our operations centers. We expect these
costs to increase over time to support our growing subscriber base. However, we
expect these costs to decrease as a percentage of revenues over time as we
utilize our increased size to negotiate more favorable rates with
telecommunication carriers.
Our selling, general and administrative expenses include employee salaries
and benefits, non-capital equipment costs, office rent and utilities, customer
service and technical support costs and the sales and marketing costs associated
with acquiring new subscribers, including bonuses, sales commissions and
advertising. We expect our general and administrative costs to increase
accordingly with our planned growth in our customer base. We also expect our
customer service, technical support and sales and marketing costs to increase
over time as we grow our business and add new subscribers. New subscribers tend
to be particularly heavy users of
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customer service and technical support.
Our amortization expenses primarily relate to the amortization of goodwill
and other intangible assets acquired in our purchases of Internet service
providers, and are based upon the useful lives of these intangibles. Our
amortization expenses are expected to increase as we make additional
acquisitions, and will vary according to purchase prices and the proportion of
intangible assets acquired.
Our depreciation expenses primarily relate to our equipment and are based
on the estimated useful lives of the assets of five years using the straight-
line method. Depreciation expense is expected to increase as our Internet
service providers expand their networks to support new and existing subscribers.
Between January 1, 1999 and February 11, 2000, we acquired ten Internet
service providers for aggregate consideration of approximately $10.4 million in
cash, 1,361,572 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 purchased (approximately $11.7 million), has been
recorded as goodwill. This goodwill will be amortized over its estimated useful
life of three years as a non-cash charge to operating income.
We currently provide services to approximately 42,000 customers in six
states. At December 31, 1998, we served less than 300 customers. Our goal is to
become a leading provider of broadband Internet access and related Internet
services to small and medium-sized businesses. We plan to focus our future
growth on acquiring small and medium-sized business customers in the markets in
which we compete and on offering enhanced Internet services, such as security
services and website hosting services, to both our existing customers and to new
customers.
Reverse Split
Unless otherwise stated, all share and per share information contained in
this report 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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<PAGE>
Results of Operations
The discussion of our pro forma results set forth below for the year ended
December 31, 1999 assumes that we acquired InterAccess Corp., Simply Internet,
Inc., Net Asset LLC, CalWeb Internet Services, Inc. and Inficad Computing
Design, L.L.C. and Alternate Access, Inc. on January 1, 1999, with certain pro
forma adjustments as described elsewhere in this prospectus. The pro forma
results of operation are not necessarily indicative of the results we would
have obtained had we actually acquired these businesses on that date, or of
our future results.
Unaudited Pro Forma Results for the Year Ended December 31, 1999
Revenue. Pro forma revenue was $9,616,877 for the year ended December 31,
1999.
Operating Costs and Expenses. Pro forma operating costs and expenses were
$40,084,438 for the year ended December 31, 1999, or 417% of pro forma revenue.
The most significant components of operating costs and expenses were
telecommunications costs, employee salaries, non-capital equipment costs,
customer service and technical support costs, sales and marketing costs and non-
cash compensation charges associated with vesting of stock options granted to
certain executives. Pro forma amortization of goodwill was $3,170,690 or 33% of
pro forma revenue.
Loss from Operations. Pro forma loss from operations was $30,467,561 or 317% of
pro forma revenue for the year ended December 31, 1999.
Interest and other expenses. Pro forma interest and other expenses were $513,223
or 5% of pro forma revenue for the year ended December 31, 1999.
Net Loss. Pro forma net loss was $44,557,556 or 463% of pro forma net revenue
for the year ended December 31, 1999.
Historical Results of Operations
The discussion of our historical results of operations 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, 1999 as
compared to the year ended December 31, 1998. The historical results for the
year ended December 31, 1999 include the results of the eight businesses we
acquired prior to December 31, 1999 from their respective dates of acquisition.
Historical Results for the Year Ended December 31, 1999 as Compared to the Year
Ended December 31, 1998.
Revenue. For the year ended December 31, 1999, our revenues from operations
increased to $4,726,589 from $7,898 for the year ended December 31, 1998. The
increase was primarily the result of our acquisition of eight Internet service
providers between January 1, 1999 and July 29, 1999 and the customer and
revenue growth experienced by those businesses from the dates on which they were
acquired through December 31, 1999. Our revenues from operations consisted
primarily of customer revenues received for Internet access services, equipment
set-up and installations, web hosting services and security related services. We
earn access revenues primarily from subscriptions from our customers for
Internet connection and access. The subscription fees paid by our customers vary
among our Internet service providers and by the billing plans offered by a
particular Internet service provider.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 1999 increased to
$26,236,781 from $5,034,628 for the year ended December 31, 1998, an increase of
421%. The increase was due primarily to the costs associated with acquiring our
Internet service providers, the ongoing operating costs associated with the
existing customer bases of these Internet service providers as well as the costs
associated with growth of our customer base and non-cash compensation expense
relating to the vesting of options granted to certain of our directors and
officers. Our primary operating costs include employee salaries and benefits,
non-capital equipment costs, office rent and utilities, customer service and
technical support costs and the sales and marketing costs associated with
acquiring new subscribers, including bonuses, sales commissions and advertising.
Cost of Services. Our cost of services consists of our cost of non-capital
equipment and telecommunications costs associated with providing services to
subscribers, including the cost of local telephone lines and the costs of leased
lines connecting to the Internet and our operations centers. Our cost of
services for the year ended December 31, 1999 was $2,021,293. We had no
telecommunications expenses for the year ended December 31, 1998.
Amortization Expenses. Our amortization expenses primarily relate to the
amortization of goodwill and other intangible assets acquired in our purchases
of Internet service providers, and are based upon the expected useful lives of
these intangibles. Our amortization expenses for the year ended December 31,
1999 were $2,167,928, up from $6,938 for the year ended December 31, 1998.
Net Loss. Our activities for the year ended December 31, 1999 resulted in a net
loss of $26,975,644, as compared to a net loss of $5,274,832 for the year ended
December 31, 1998.
Assets. Our total assets at December 31, 1999 and December 31, 1998 were
$16,532,181 and $2,407,603, respectively. Our assets at December 31, 1999
consisted principally of cash of $1,947,982, net accounts receivable of
$710,878, prepaid expenses and other current assets of $734,569, net property
and equipment of $3,566,045 and net intangible assets of $9,572,707.
Liabilities and Shareholder's Equity. Our total liabilities at December 31, 1999
and December 31, 1998 were $6,489,451 and $1,174,233 respectively. Our
liabilities at December 31, 1999 consisted primarily of accounts payable and
accrued liabilities of $2,359,897, short term notes payable of $1,529,529
deferred revenue of $998,230, short term capital lease obligations of $584,186,
dividends payable on preferred stock of $720,082, long term capital lease
obligations of $290,776 and long term notes payable of $6,751. Our shareholders'
equity at December 31, 1999 and December 31, 1998 was $10,042,730 and
$1,233,370, respectively.
Liquidity and Capital Resources
Since our inception, we have relied principally upon the proceeds of
private equity financings to fund our working capital requirements. While our
Internet service provider operations generate operating cash flow, that cash
flow is not sufficient to cover our operating expenses.
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 721,419 shares of our
series C convertible preferred stock at a price of $4.00 per share. We received
aggregate gross proceeds of $2,885,676 from this offering.
In April and 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. 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. 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.
In November 1999 we issued $1,950,000 in convertible promissory notes to 18
accredited investors in a private placement transaction. In connection with our
February 2000 sale of series F convertible preferred stock, all of the
convertible promissory notes automatically converted into 1,950 shares of series
F convertible preferred stock and warrants exercisable for three years to
purchase an aggregate of 749,665 shares of our common stock at an exercise price
of $3.375 per share.
Effective February 2, 2000 and February 11, 2000 we issued and sold to
private investors an aggregate of 13,366 shares of our series F convertible
preferred stock at a price of $1,000 per share. We received aggregate gross
proceeds of $13,366,000 from these sales.
Between January 1, 1999 and February 11, 2000, we acquired ten Internet
service providers for aggregate consideration of approximately $10.4 million in
cash, 1,361,572 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.
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<PAGE>
At December 31, 1999, we had cash of $1,987,982. Net cash used by
operating activities for the year ended December 31, 1999 was $5,534,639. Net
cash used for investing activities was $10,077,841, primarily as a result of
our acquisition of eight Internet service providers during the year. Net cash
provided by financing activities was $17,047,537, primarily as a result of the
private equity financings and the promissory note financing undertaken during
the year ended December 31, 1999.
We expect our capital expenditures to increase as our operations continue
to expand. We anticipate that we will use our financial resources to acquire
additional communications equipment and improvements in our network technology
to better support our existing and new customers and facilitate the integration
of our financial reporting systems.
At April 10, 2000, we had cash of approximately $8.2 million. We anticipate
that our current cash on hand plus the cash flow from our Internet service
providers will be sufficient to fund existing operations through the remainder
of the fiscal year. However, we intend to continue to pursue additional
acquisitions and to expand the range of Internet related services we offer, such
as security services and web hosting and design services, to more
comprehensively address the needs of small and medium-sized business customers.
These activities will likely require the use of our cash on hand, cash from our
Internet service provider operations and the issuance of additional equity
and/or debt. There can be no assurance that such equity or debt financing will
be available to us at all, or on terms acceptable to us. Any additional equity
financing we undertake may be dilutive to our existing shareholders and any debt
financing 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 fully execute our business strategy or may be
required to reduce our operations, which could have a material adverse affect on
our business, financial condition or results of operations.
-29-
<PAGE>
Year 2000 Issues
Many existing computer systems and applications currently use two-digit
date fields to designate a particular year. Date sensitive systems and
applications may recognize the year 2000 as 1900 or not at all. The inability to
recognize or properly treat the year 2000 issue may cause computer systems and
applications to incorrectly process critical information and operational
information. During 1999, we undertook an effort to identify and correct any
potential year 2000 issues that may have existed with our information systems,
suppliers and facilities. As of the date of this report, our business has not
been materially affected by the year 2000 issue. We intend to continue to
monitor the impact of the year 2000 issue on our business throughout the year
ending December 31, 2000. There can be no assurance that the year 2000 issue
will not adversely affect our business, financial condition or results of
operations in future periods.
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<PAGE>
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 lease all of our facilities and do not own any real property. Our
corporate headquarters is located at 600 South Cherry Street, Suite 400,
Denver, Colorado, where we lease approximately 6,000 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 spaces in the following locations:
Fresno, California, 4,000 square feet; San Diego, California, 2,347 square feet;
Tampa, Florida, 2,500 square feet; Eugene, Oregon, 1,800 square feet;
Washington, D.C., 500 square feet; Seattle, Washington, 505 square feet and
3,650 square feet; Sacramento, California, 4,000 square feet; Placerville,
California, 1,200 square feet; Las Vegas, Nevada, 1,000 square feet; Phoenix,
Arizona, 7,000 square feet and 2,873 square feet; and San Francisco, California,
1,700 square feet. We believe that our existing facilities are adequately
covered by insurance and are adequate for the foreseeable future.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Settlement Agreement with Network System Technologies, Inc.
In January 1999, we entered into a settlement agreement with Network System
Technologies, Inc., and Eduardo Moura, Network System's founder and chief
executive officer, regarding two lawsuits: SkyLynx Communications, Inc., v.
-------------------------------
Network System Technologies, Inc., and Eduardo Moura (United States District
- ----------------------------------------------------
Court, Middle District of Florida, Tampa Division), and Network System
--------------
Technologies Inc. v. SkyLynx Communications, Inc., et al., (Superior Court for
- ----------------------------------------------------------
the State of California in and for Santa Clara County). In the
settlement agreement, all of the parties to the two cases agreed to dismiss
all claims against each other, and to mutually release each other from any
further liability in connection with the subject matter of the suits. In
addition, we agreed to purchase all rights and title to two Internet domain
names from Network System. Network System is a beneficial owner of more than
5% of our common stock.
Agreements with Gary L. Brown
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<PAGE>
In July 1999, we entered into an agreement with Gary L. Brown, a beneficial
holder of more than 5% of our common stock in connection with Mr. Brown's
resignation from our Board of Directors. Under this agreement we are obligated
to issue to Mr. Brown a non-qualified stock option under our 1998 Equity
Incentive Plan to purchase 50,000 shares of our common stock at an exercise
price of $2.30 per share. Mr. Brown has agreed to transfer the options to a new
corporation he controls, and has also agreed 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.
On July 29, 1999, we and Gary Brown entered into a settlement agreement
with James F. Gordon with respect to Mr. Gordon's claims against us and Mr.
Brown in James Gordon v. Gary Brown and SkyLynx Communications, Inc. (Circuit
----------------------------------------------------------
Court for the Twelfth Judiciary Circuit in and for Sarasota County, Florida,
Case No. 98-6394-cc). Under this agreement, we have transferred 115,000 shares
of our common stock to Mr. Gordon and Mr. Brown has transferred 20,000 shares of
our common stock held by him to Mr. Gordon.
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
"IFMC". 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 prices are shown below for the period
from July 31, 1998 through May 5, 2000, as reported on the OTC Electronic
Bulletin Board. The prices presented are bid and ask prices, rounded to the
nearest one thousandth, 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 $ 8.938 $2.750 $ 9.125 $2.750
Fourth Quarter $ 5.406 $2.000 $ 5.438 $2.125
2000:
First Quarter $ 6.125 $2.750 $ 6.188 $2.375
Second Quarter (through May 5, 2000) $ 3.563 $1.469 $ 3.344 $1.531
</TABLE>
On May 5, 2000, the last reported bid price of our common stock was
$1.53125 and the last reported ask price was $1.46875. As of May 5, 2000,
there were approximately 208 shareholders of record of our common stock.
Dividends
Since inception, we have not paid or declared any cash dividends on our
common stock. Our Board of Directors does not currently intend to pay any cash
dividends on our common stock in the future. In addition, provisions of our
outstanding preferred stock restrict our ability to pay dividends on our common
stock.
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<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table presents summary information concerning compensation of
our Chief Executive Officer and each of our other four most highly compensated
executive officers as of December 31, 1999 for the periods indicated for
services rendered to the Company and its subsidiaries. We refer to these
officers as the "Named Executive Officers" in this prospectus.
<TABLE>
<CAPTION>
Long Term Compensation
----------------------
Annual Compensation Restricted Securities
------------------- Stock Underlying
Name and Principal Position Year Salary Bonus Other Awards ($) Options
--------------------------- ---- ------ ----- ----- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Jeffery A. Mathias............ 1999 $141,176 $75,000(1) $27,000(2) $747,500 --
President and Chief 1998 53,877 65,000(3) -- -- 1,211,400
Executive Officer
James E. Maurer(4)............ 1999 120,599 65,000(1) 5,500(5) 172,500 --
Chief Financial Officer 1998 -- -- -- -- 847,000
David H. Roberts(6)........... 1999 107,692 55,000(1) 4,800(5) 149,100 680,000
Vice President--Business 1998 -- -- -- -- --
Development
Ned Abell..................... 1999 117,175 40,000(1) 4,800(5) 115,000 230,000
Vice President--Mergers 1998 32,000 15,000(3) -- -- 418,800
and Acquisitions
Steven R. Jesson(7)........... 1999 116,692 40,000(1) -- -- 195,000
Vice President--Integration 1998 -- -- -- -- 130,434
</TABLE>
- --------------------
(1) This amount was paid during 2000 based upon the Named Executive Officer's
performance during 1999.
(2) Includes a housing allowance of $19,200 and an automobile allowance of
$7,800.
(3) $20,000 of this amount was paid in 1998 and the remaining $45,000 of this
amount was paid during 1999 based upon the Named Executive Officer's
performance during 1998.
(4) Mr. Maurer's employment with the Company began as of December 23, 1998.
(5) Consists of an automobile allowance paid during the calendar year 1999.
(6) Mr. Roberts' employment with the Company began as of January 7, 1999.
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<PAGE>
(7) Mr. Jesson's employment with the Company began as of January 1, 1999.
Equity Incentive Plan
Our Board of Directors and shareholders have adopted and approved our 1998
Equity Incentive Plan, as amended. Pursuant to the plan, stock options granted
to eligible participants may take the form of incentive stock options under
Section 422 of the Internal Revenue Code of 1986, as amended, or options which
do not qualify as incentive stock options, known as non-qualified stock options.
As required by Section 422 of the Internal Revenue Code, the aggregate fair
market value of our common stock with respect to our incentive stock options
granted to an employee exercisable for the first time in any calendar year may
not exceed $100,000. This limitation does not apply to non-qualified stock
options. The exercise price of an incentive stock option may not be less than
100% of the fair market value of the shares of common stock on the date of
grant. An option is not transferable, except by will or the laws of descent and
distribution. If the employment of an optionee who has been granted incentive
stock options terminates for any reason, other than for cause, or by reason of
death, disability, or retirement, the optionee may exercise his incentive stock
options within a ninety day period following such termination to the extent he
was entitled to exercise the options at the date of termination. Either our
Board of Directors can administer the plan, provided that a majority of
directors are "disinterested," or the Board of Directors may designate a
committee comprised of directors meeting certain requirements to administer the
plan. The plan administrator will decide when and to whom to make grants, the
number of shares to be covered by the grants, the vesting schedule, the type of
award and the terms and provisions relating to the exercise of the awards. An
aggregate of 8,000,000 shares of common stock is currently reserved for issuance
under the plan.
As of April 10, 2000, we had granted stock options under the plan
exercisable to purchase an aggregate of 6,692,128 shares of common stock at a
weighted average exercise price of $2.42 per share to our directors, officers,
employees and consultants. Of these options, we granted options exercisable to
purchase: 1,211,400 shares to Mr. Mathias, 644,800 shares to Mr. Abell, 325,434
shares to Mr. Jesson, 680,000 shares to Mr. Roberts, 847,000 shares to Mr.
Maurer, 200,000 shares to Mr. Ragano, 75,000 shares to Mr. Ridley and 75,000
shares to Mr. Smith. Of the total number of options we had granted as of April
10, 2000, options to purchase an aggregate of 3,121,737 shares of common stock
are currently vested.
Option Grants in 1999
The following table sets forth information concerning the grant of stock
options during 1999 to the Named Executive Officers:
<TABLE>
<CAPTION>
Percentage
Number of of Total
Shares Options
Underlying Granted to Exercise
Options Employees in Price Expiration
Name Granted(1) Fiscal 1999 (per share) Date
---- ---------- ----------- ----------- ----
<S> <C> <C> <C> <C>
Jeffery A. Mathias..... -- -- -- --
James E. Maurer........ -- -- -- --
Ned Abell.............. 230,000(2) 6.9% $4.99 4/28/2009
Steven R. Jesson....... 195,000(3) 5.8% 2.34 12/29/2004
David H. Roberts....... 560,000(4) 16.7% 2.13 1/07/2009
120,000(5) 3.6% 2.75 12/29/2004
</TABLE>
- --------------------
(1) All of such options were granted pursuant to the Company's 1998 Equity
Incentive Plan, as amended and, except as otherwise indicated, terminate
ten years after the grant date.
(2) The indicated option vests in accordance with a vesting schedule based on
the Company's annualized gross revenues.
(3) The indicated option vests 25% on March 31, 2000, and 1/48 of the remainder
per month thereafter.
(4) The indicated option vests in accordance with a vesting schedule based on
the Company's achievement of certain performance-based criteria, including
number of subscribers, funding commitments, number of internet service
providers and annualized gross revenues.
(5) The indicated option vests 25% on March 31, 2000, and 1/48 of the remainder
per month thereafter. The indicated option terminates five years after the
grant date.
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<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
No options were exercised during 1999 by the Named Executive Officers. The
following table sets forth information concerning fiscal year-end option
values:
<TABLE>
<CAPTION>
Number of Securities Value of
Underlying Options at In-the-Money Options at
December 31, 1999 December 31, 1999(1)
----------------- --------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Jeffery A. Mathias 611,209 600,191 $1,212,134 $1,236,394
James E. Maurer 449,137 397,863 878,266 819,598
Ned Abell 414,800 230,000 807,532 --
Steven R. Jesson 130,434 195,000 221,738 323,700
David H. Roberts 249,068 430,932 465,757 731,443
</TABLE>
- --------------------
(1) Calculated as the difference between the aggregate fair market value of
such options based on the last reported sale price of the Common Stock as
of December 31, 1999 ($4.00 per share) and the aggregate exercise
price.
Compensation of Directors
Each of our non-employee directors is entitled to receive cash compensation
of $1,000 for each meeting of our Board of Directors they attend. Our Chairman
of the Board is entitled to receive an additional $5,000 annually for his
services. In addition to cash compensation, each of our non-employee directors
is entitled to receive an initial grant of non-qualified stock options to
purchase 75,000 shares of our common stock, and additional annual grants of non-
qualified stock options to purchase 25,000 shares of common stock. Each of the
options granted to our non-employee directors is fully vested as of its date of
grant and has an exercise price equal to the market value of our common stock on
the date of grant. Our directors are also reimbursed for expenses incurred in
attending meetings of our Board of Directors.
Employment Agreements
We have an employment agreement with Mr. Jeffery A. Mathias effective as of
December 1, 1998, amended as of April 20, 1999 and amended and restated as of
August 23, 1999. Mr. Mathias' employment agreement has an initial term ending on
October 1, 2000 with automatic one year extensions each year after the initial
term unless either we or Mr. Mathias gives two months' notice of termination.
Pursuant to his employment agreement, Mr. Mathias is entitled to receive an
annual salary of not less than $144,000 and a salary increase each year of not
less than 10% of his prior year's salary. Upon the completion of an initial or
secondary public offering of our common stock, the agreement requires us to
grant stock options to Mr. Mathias, or cancel such stock options belonging to
him, as is required for Mr. Mathias to hold an equity interest equal to 7% of
our issued and outstanding common stock. If the agreement is terminated by us
without cause, by Mr. Mathias for adequate reason or by either party upon or
after a change in control of our company, we are obligated to pay Mr. Mathias a
lump sum amount equal to the aggregate of one-half of his then annual base
salary plus the pro rata portion of any bonus amounts paid by us in the prior
year as bonuses. In addition, in the event of a change in control of our
company, all of Mr. Mathias' stock options shall immediately become fully
vested. The agreement also contains covenants requiring Mr. Mathias to maintain
certain confidentiality requirements during his employment period and for a
period of two
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<PAGE>
years thereafter, prohibiting Mr. Mathias from soliciting employees during the
term of the agreement and for a period of one year thereafter, and prohibiting
Mr. Mathias from competing with us during his employment period. The agreement
requires us to indemnify and defend Mr. Mathias in the event that he is involved
in certain litigation. The agreement also provides for customary benefits and
perquisites.
We have an employment agreement with Mr. James E. Maurer effective as of
December 23, 1998 and amended and restated as of August 23, 1999. The employment
agreement has an initial term of two years with automatic one year extensions
each year after the initial term unless either we or Mr. Maurer gives two
months' notice of termination. Pursuant to his employment agreement, Mr. Maurer
is entitled to receive an annual salary of not less than $120,000 and a salary
increase each year of not less than 10% of his prior year's salary. Upon the
completion of an initial or secondary public offering of our common stock, the
agreement requires us to grant stock options to Mr. Maurer, or cancel stock
options belonging to him, as is required for Mr. Maurer to hold an equity
interest equal to 4% of our issued and outstanding common stock. If the
agreement is terminated by us without cause, by Mr. Maurer for adequate reason
or by either party upon or after a change in control of the Company, we are
obligated to pay Mr. Maurer a lump sum amount equal to the aggregate of one-half
of his then annual base salary plus the pro rata portion of any bonus amounts
paid by us in the prior year as bonuses. In addition, in the event of a change
in control of our company or the termination of Mr. Mathias' employment
agreement with us, all of Mr. Maurer's stock options shall immediately vest in
full. The agreement also contains covenants requiring Mr. Maurer to maintain
certain confidentiality requirements during his employment period and for a
period of two years thereafter, prohibiting Mr. Maurer from soliciting employees
during the term of the agreement and for a period of one year thereafter, and
prohibiting Mr. Maurer from competing with us during his employment period. The
agreement requires us to indemnify and defend Mr. Maurer in the event that he is
involved in certain litigation. The agreement also provides for customary
benefits and perquisites.
We have an employment agreement with Mr. Ned Abell effective as of
December 1, 1998. The employment agreement has an initial term of two years with
automatic one year extensions each year after the initial term unless either we
or Mr. Abell gives two months' notice of termination. Pursuant to his employment
agreement, Mr. Abell is entitled to receive an annual salary of not less than
$108,000 and a salary increase each year of not less than 10% of his prior
year's salary. If the agreement is terminated without cause by us or with cause
by Mr. Abell, we are obligated to pay Mr. Abell six months of his then-current
base salary and any earned, prorated bonus under the agreement that is fully
accrued at the time of termination. The agreement also contains covenants
requiring Mr. Abell to maintain certain confidentiality requirements during the
term of the agreement, prohibiting Mr. Abell from soliciting employees during
the term of the agreement and for a period of one year thereafter, and
prohibiting Mr. Abell from competing with us during the term of the agreement.
The agreement requires us to indemnify and defend Mr. Abell in the event that he
is involved in certain litigation. The agreement also provides for customary
benefits and perquisites.
-37-
<PAGE>
We have an employment agreement with Mr. Steven R. Jesson effective as of
July 9, 1998, as modified in August 1998. As amended, the employment agreement
has an initial term from January 1, 1999, to August 31, 2000. Pursuant to his
employment agreement, Mr. Jesson is entitled to receive an annual salary of
$144,000 during 1999 and $156,000 during 2000. In the event that Mr. Jesson is
terminated without cause, or upon a change in control of our company, certain of
the stock options held by Mr. Jesson will immediately vest in full. The
agreement contains covenants prohibiting Mr. Jesson from competing with us
during the employment term or disclosing confidential information for a period
of five years after any termination of his employment. The agreement also
provides for customary benefits and perquisites. Mr Jesson's employment
agreement was modified in August 1998 such that his base salary is commensurate
with our other vice presidents. Notwithstanding his written agreement, pursuant
to a verbal agreement between us and Mr. Jesson, Mr Jesson's annual salary
during 1999 was $120,000.
We have an employment agreement with Mr. David H. Roberts effective as of
January 7, 1999 and amended and restated as of August 23, 1999. The employment
agreement has an initial term of two years with automatic one year extensions
each year after the initial term unless either we or Mr. Roberts gives two
months' notice of termination. Pursuant to his employment agreement, Mr. Roberts
is entitled to receive an annual salary of not less than $120,000 and a salary
increase each year of not less than 10% of his prior year's salary. Upon the
completion of an initial or secondary public offering of our common stock, the
agreement requires us to award such stock options to Mr. Roberts, or cancel such
stock options belonging to him, as is required for Mr. Roberts to hold an equity
interest equal to 3% of our issued and outstanding common stock. If the
agreement is terminated by us without cause, by Mr. Roberts for adequate reason
or by either party upon or after a change in control of our company, we are
obligated to pay Mr. Roberts a lump sum amount equal to the aggregate of one-
half of his then annual base salary plus the pro rata portion of any bonus
amounts paid by us in the prior year as bonuses. In addition, in the event of a
change in control of our company or the termination of Mr. Mathias' employment
agreement with us, all of Mr. Roberts' stock options shall immediately become
fully vested. The agreement also contains covenants requiring Mr. Roberts to
maintain certain confidentiality requirements during his employment period and
for a period of two years thereafter, prohibiting Mr. Roberts from soliciting
employees during the term of the agreement and for a period of one year
thereafter, and prohibiting Mr. Roberts from competing with us during his
employment period. The agreement requires us to indemnify and defend Mr. Roberts
in the event that he is involved in certain litigation. The agreement also
provides for customary benefits and perquisites.
-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 Statement of Operations for the year ended
December 31, 1999
Unaudited Pro Forma Condensed, Combined Balance Sheet as of December 31, 1999
Notes to Unaudited Pro Forma Condensed, Combined Financial Statements
SKYLYNX COMMUNICATIONS, INC. AND SUBSIDIARIES F-7
Report of Independent Certified Public Accountants
Consolidated Balance Sheet as of December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended December 31, 1999 and 1998
Consolidated Statements of Stockholders' Equity the years ended December 31, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December 31, 1999 and 1998
Notes to Consolidated Financial Statements years ended December 31, 1999 and 1998
INTERACCESS CORPORATION F-29
Independent Auditors' Report
Balance Sheet as of December 31, 1998
Statements of Operation and Accumulated Deficit for the Year ended
December 31, 1998
Statements of Cash Flows for the years ended December 31, 1998
Notes to Financial Statements
SIMPLY INTERNET, INC. F-39
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-54
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-68
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
INFICAD COMPUTING AND DESIGN, LLC F-83
Report of Independent Certfied Public Accountants
Balance sheet as of December 31, 1998
Statement of Operations for the Years ended December 31, 1998 and 1997
Statement of Members' Deficit for the 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 June 30, 1999
Unaudited Statements of Operations for the six-month period ended June 30,
1999
Unaudited Statements of Cash Flows for the six-month period ended June 30,
1999
Notes to Unaudited Financial Statements
ALTERNATE ACCESS, INC. F-96
Report of Independent Certified Public Accountants
Balance Sheet as of December 31, 1999
Statement of Operations for the Year ended December 31, 1999
Statement of Stockholders' Deficit for the Year ended December 31, 1999
Statement of Cash Flows for the Year ended December 31, 1999
Notes to Financial Statements
</TABLE>
F-2
<PAGE>
* SKYLYNX COMMUNICATIONS
* UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
* BASIS OF PRESENTATION
The following unaudited pro forma combined condensed financial statements give
effect to our acquisitions of the assets of InterAccess Corp., Simply Internet,
Inc., InfiCad Computing and Design, LLC, Net Asset, LLC, and Alternate Access,
Inc. and our acquisition of the capital stock of CalWeb Internet Services,
Inc.
The unaudited pro forma combined condensed statement of operations give effect
to the acquisitions as if they had occurred as of January 1, 1999, combining our
results for the year ended December 31, 1999 with those of Simply Internet, Inc.
Net Asset, LLC, Interaccess Corp., InfiCad Computing and Design, LLC, and CalWeb
Internet Services, Inc., for the period from January 1, 1999 through the
respective acquisition dates and with those of Alternate Access, Inc. for the
year ended December 31, 1999. The pro forma condensed combined balance sheet
gives effect to the acquisition of Alternate Access, Inc. as if it had occurred
on December 31, 1999. The unaudited pro forma financial statements 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 "Risk Factors", "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
financial statements of SkyLynx Communications, Inc., Simply Internet, Inc., Net
Asset, LLC, InfiCad Computing Design, LLC, CalWeb Internet Services, Inc. and
Alternate Access, Inc.
PRO FORMA CONDENSED, COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1999.
<TABLE>
<CAPTION>
SkyLynx Acquired Proforma Proforma
Communications, Companies Adjustments Combined
Inc.
<S> <C> <C> <C> <C>
Revenues 4,726,589 4,890,288 - 9,616,877
Operating costs and expenses (31,256,220) (5,657,528) (3,170,690)(a) (40,084,438)
------------ ----------- ------------ -------------
Loss from operations (26,529,631) (767,240) (3,170,690) (30,467,561)
Interest and other income (expenses) (446,013) (67,210) - (513,223)
------------ ----------- ------------ -------------
Net loss (26,975,644) (834,450) (3,170,690) (30,980,784)
Dividends and Accretion of Beneficial Conversion
Feature of Preferred Stock (13,461,480) - (115,292)(b) (13,576,772)
------------ ----------- ------------ -------------
Net Loss Applicable to Common Shareholders (40,437,124) (834,450) (3,285,982) (44,557,556)
Net Loss per share - basic and diluted (3.44) (3.52)
Weighted average common shares
outstanding - basic and diluted 11,763,251 897,875 (c) 12,661,126
</TABLE>
(a) Adjustments to reflect amortization of intangibles and goodwill related to
the acquisitions.
(b) Adjustment to reflect additional preferred stock dividends for the
preferred stock sales needed to raise the cash paid for the acquisitions.
(c) Adjustment for the common shares issued for the acquisitions.
PRO FORMA CONDENSED, COMBINED BALANCE SHEET AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
SkyLynx Alternate Pro Forma Pro Forma
Communications, Access, Inc. Adjustments Combined
Inc.
<S> <C> <C> <C> <C>
Assets:
Cash 1,947,982 67,907 (1,950,000)(a) 65,889
Accounts Receivable 710,878 98,074 808,952
Prepaid Expenses and other current assets 734,569 1,417 735,986
------------ ----------- ------------ -------------
Current Assets 3,393,429 167,398 (1,950,000) 1,610,827
Property and equipment 3,566,045 146,589 3,712,634
Goodwill and intangible assets 9,572,707 - 4,742,032 (c) 14,314,739
Other assets - 15,015 15,015
------------ ----------- ------------ -------------
Total Assets 16,532,181 329,002 2,792,032 19,653,215
============ =========== ============ =============
Liabilities and Equity:
Accounts payable and accrued liabilities 2,359,897 777,191 3,137,088
Notes payable and convertible debt 1,529,529 - 1,529,529
Deferred revenue 998,230 162,219 1,160,449
Obligations under capital leases, current 584,186 - 584,186
Dividends payable on preferred stock 720,082 - 720,082
------------ ----------- ------------ -------------
Total Current Liabilities 6,191,924 939,410 7,131,334
Obligations under capital leases 290,776 - 290,776
Notes payable 6,751 - 6,751
------------ ----------- ------------ -------------
Total Liabilities 6,489,451 939,410 7,428,861
Stockholders' Equity:
Common stock 15,194 30,000 (29,316)(a)(b) 15,878
Additional paid in capital 48,725,112 - 2,180,940 (b) 50,906,052
Preferred stock 7,293,134 - 7,293,134
Retained Deficit (45,990,710) (640,408) 640,408 (b) (45,990,710)
------------ ----------- ------------ -------------
Total Stockholders' Equity (Deficit) 10,042,730 (610,408) 2,792,032 12,224,354
Total Liabilities and Stockholders' Equity 16,532,181 329,002 19,653,215
============ =========== ============ =============
</TABLE>
F-3
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
SkyLynx Communications, Inc.:
We have audited the accompanying consolidated balance sheets of SkyLynx
Communications, Inc. (a Delaware corporation) and subsidiaries as of December
31, 1999 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SkyLynx Communications, Inc.
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended 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 has incurred significant losses
since inception. The factors discussed in Note 2 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 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado
April 11, 2000
F-4
<PAGE>
SKYLYNX COMMUNICATIONS, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1999 and 1998
---------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1999 1998
------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,947,982 $ 512,925
Accounts receivable, net 710,878 --
Prepaid expenses and other current assets 734,569 20,135
------------ -----------
Total current assets 3,393,429 533,060
PROPERTY AND EQUIPMENT, net 3,566,045 1,632,370
GOODWILL AND INTANGIBLE ASSETS, net of accumulated amortization for
1999 and 1998 respectively of $2,167,928 and $6,938 9,572,707 89,195
OTHER ASSETS -- 152,978
------------ -----------
Total assets $ 16,532,181 $ 2,407,603
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 2,359,897 $ 360,176
Notes payable and convertible debt, current 1,529,529 363,138
Deferred revenue 998,230 --
Obligations under capital leases, current 584,186 --
Dividends payable on preferred stock 720,082 39,759
Deposits on unissued shares of common stock and preferred stock -- 411,160
------------ -----------
Total current liabilities 6,191,924 1,174,233
------------ -----------
OBLIGATIONS UNDER CAPITAL LEASES 290,776 --
Notes Payable 6,751 --
------------ -----------
Total liabilities 6,489,451 1,174,233
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 150,000,000 shares authorized,
15,194,255 shares issued and outstanding at 1999 and 9,531,186
issued and outstanding at 1998 15,194 9,531
Additional paid-in capital 48,725,112 4,171,356
Preferred stock, Series A, $.01 par value; 5,000,000 shares authorized,
379,941 shares issued and outstanding at 1999 and 988,750 shares
issued and outstanding at 1998 1,058,378 2,606,069
Preferred stock, Series C, $.01 par value; 2,000,000 shares authorized,
696,419 shares issued and outstanding at 1999 and no shares issued
and outstanding at 1998 1,814,019 -
Preferred stock, Series D, $.01 par value; 12,000 shares authorized,
5,590 shares issued and outstanding at 1999 and no shares issued
and outstanding at 1998 4,420,737 -
Retained Deficit (45,990,710) (5,553,586)
------------ -----------
</TABLE>
F-5
<PAGE>
<TABLE>
<S> <C> <C>
Total stockholders' equity 10,042,730 1,233,370
------------ -----------
Total liabilities and stockholders' equity $16,532,181 $ 2,407,603
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-6
<PAGE>
SKYLYNX COMMUNICATIONS, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999 and 1998
----------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
REVENUES $ 4,726,589 $ 7,898
COST OF SERVICES 2,021,293 0
DEPRECIATION & AMORTIZATION 2,998,146 266,206
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 26,236,781 5,034,628
---------- -----------
OPERATING LOSS (26,529,631) (5,292,936)
NET INTEREST (EXPENSE) INCOME (446,013) 18,104
---------- -----------
NET LOSS BEFORE PROVISION FOR INCOME TAXES (26,975,644) (5,274,832)
PROVISION FOR INCOME TAXES - -
---------- -----------
NET LOSS (26,975,644) (5,274,832)
PREFERRED STOCK DIVIDENDS (1,297,203) (39,759)
ACCRETION OF BENEFICIAL CONVERSION FEATURE
OF PREFERRED STOCK (12,164,277) (73,029)
---------- -----------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $(40,437,124) $(5,387,620)
========== ===========
NET LOSS PER SHARE-BASIC $ (3.44) $ (0.60)
NET LOSS PER SHARE-DILUTED $ (3.44) $ (0.60)
SHARES USED IN COMPUTING NET LOSS PER SHARE-BASIC 11,763,251 8,946,874
SHARES USED IN COMPUTING NET LOSS PER SHARE-DILUTED 11,763,251 8,946,874
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
SKYLYNX COMMUNICATIONS, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
----------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock, Series A Preferred Stock, Series B Preferred Stock, Series C
-------------------------- ------------------------- -------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 - $ - -- $ -- -- $ --
Net loss
Proceeds from issuance of preferred stock,
Series A with 1,977,500 warrants on various
dates, net of offering costs of $214,593 988,750 2,533,040 -- -- -- --
Common stock issued for acquired assets on
August 20, 1998 - - -- -- -- --
Common stock issued for services on June 12,
1998, at fair value - - -- -- -- --
Common stock issued for services on
September 23, 1998, at fair value - - -- -- -- --
Preferred stock dividend - -- -- -- --
Accretion of beneficial conversion feature
of preferred stock - 73,029 -- -- -- --
------------ ------------ ------------ ----------- ------------ -----------
BALANCE, December 31, 1998 988,750 2,606,069 -- -- -- --
------------ ------------ ------------ ----------- ------------ -----------
Net loss - - -- -- -- --
Proceeds from issuance of preferred stock,
Series A with 141,682 warrants,
net of offering costs of $185,365 70,841 82,787 -- -- -- --
<CAPTION>
Preferred Stock, Series D Preferred Stock, Series E Common Stock
------------------------- ------------------------- ----------------------
Shares Amount Shares Amount Shares Amount
------------ ---------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 -- $ -- -- $ -- 8,772,189 $ 8,772
Net loss
Proceeds from issuance of preferred
stock, Series A with 1,977,500 warrants on
various dates, net of offering costs of
$214,593 -- -- -- -- -- --
Common stock issued for acquired assets on
August 20, 1998 -- -- -- -- 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 -- -- -- -- -- --
Accretion of beneficial conversion feature
of preferred stock -- -- -- -- -- --
------------ ---------- ------------ ---------- ---------- ----------
BALANCE, December 31, 1998 -- -- -- -- 9,531,186 9,531
------------ ---------- ------------ ---------- ---------- ----------
Net loss -- -- -- -- -- --
Proceeds from issuance of preferred stock,
Series A with 141,682 warrants,
net of offering costs of $185,365 -- -- -- -- -- --
<CAPTION>
Additional
Paid-in Retained
Capital Deficit 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,
Series A with 1,977,500 warrants on various
dates, net of offering costs of $214,593 1,207,367 -- 3,740,407
Common stock issued for acquired assets on
August 20, 1998 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) - (39,759)
Accretion of beneficial conversion feature
of preferred stock (73,029) -- --
----------- ----------- -----------
BALANCE, December 31, 1998 4,171,356 (5,553,586) 1,233,370
----------- ----------- -----------
Net loss -- (26,975,644) (26,975,644)
Proceeds from issuance of preferred stock,
Series A with 141,682 warrants,
net of offering costs of $185,365 15,192 97,979
</TABLE>
F-8
<PAGE>
SKYLYNX COMMUNICATIONS, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999,
--------------------------------------
AND 1998
-----------------
(continued)
<TABLE>
<CAPTION>
Preferred Stock, Series A Preferred Stock, Series B Preferred Stock, Series C
-------------------------- ------------------------- -------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Proceeds from issuance of preferred stock,
Series B with 120,000 warrants and 15,000
shares of common stock on January 19,
1999, net of offering costs of $159,015 -- -- 600 141,563 -- --
Proceeds from issuance of preferred stock, -- -- -- -- 721,419 423,716
Series C, net of offering costs of $379,344
Proceeds from issuance of preferred stock, -- -- -- -- -- --
Series D with 405,880 warrants, net of
offering costs of $777,198
Proceeds from issuance of preferred stock, -- -- -- -- -- --
Series E with 91,764 warrants, net of
offering costs of $218,430
Exercise of options and warrants -- -- -- -- -- --
Warrants issued in connection with promissory
notes -- -- -- -- -- --
Stock based compensation -- -- -- -- -- --
Proceeds from issuance of common stock,
with 526,316 warrants. -- -- -- -- -- --
Common stock issued for acquired assets -- -- -- -- -- --
Common stock issued for services -- -- -- -- -- --
Common stock issued for litigation settlement -- -- -- -- -- --
Conversion of Preferred Stock (679,650) (1,893,260) (600) (291,050) (25,000) (89,076)
Preferred stock dividends -- -- -- -- -- --
Accretion of beneficial conversion feature
of preferred stock -- 262,782 -- 149,487 -- 1,479,379
------------ ------------ ------------ ----------- ------------ -----------
BALANCE, December 31, 1999 379,941 1,058,378 - $ - 696,419 $ 1,814,019
============ ============ ============ =========== ============ ===========
<CAPTION>
Preferred Stock, Series D Preferred Stock, Series E Common Stock
--------------------------- ------------------------- -------------------------
Shares Amount Shares Amount Shares Amount
------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Proceeds from issuance of preferred stock,
Series B with 120,000 warrants and 15,000
shares of common stock on January 19,
1999, net of offering costs of $159,015 -- -- -- -- 15,000 15
Proceeds from issuance of preferred stock,
Series C, net of offering costs
of $379,344 -- -- -- -- -- --
Proceeds from issuance of preferred stock, 10,000 -- -- -- -- --
Series D with 405,880 warrants, net of
offering costs of $777,198
Proceeds from issuance of preferred stock, -- -- 3,000 -- -- --
Series E with 91,764 warrants, net of
offering costs of $218,430
Exercise of options and warrants -- -- -- -- 351,820 352
Warrants issued in connection with promissory
notes -- -- -- -- -- --
Stock based compensation -- -- -- -- -- --
Proceeds from issuance of common stock,
with 526,316 warrants -- -- -- -- 263,158 263
Common stock issued for acquired assets -- -- -- -- 479,405 479
Common stock issued for services -- -- -- -- 850,274 850
Common stock issued for litigation settlement -- -- -- -- 115,000 115
Conversion of Preferred Stock (4,410) (3,487,557) (3,000) (2,364,335) 3,497,514 3,498
Preferred stock dividends -- -- -- -- 90,898 91
Accretion of beneficial conversion feature
of preferred stock -- 7,908,294 -- 2,364,335 -- --
------------ ----------- --------- ---------- ---------- ----------
BALANCE, December 31, 1999 5,590 $ 4,420,737 -- -- 15,194,255 15,194
============ =========== ========= ========== ========== ==========
<CAPTION>
Additional
paid-in Retained
Capital Deficit Total
------- ------- -----
<S> <C> <C> <C>
Proceeds from issuance of preferred stock,
Series B with 120,000 warrants and 15,000
shares of common stock on January 19,
1999, net of offering costs of $159,015 407,407 -- 548,985
Proceeds from issuance of preferred stock,
Series C net of offering costs
of $379,344 2,082,616 -- 2,506,332
Proceeds from issuance of preferred stock,
Series D with 405,880 warrants, net of
offering costs of $777,198 9,222,802 -- 9,222,802
Proceeds from issuance of preferred stock,
Series E with 91,764 warrants, net of
offering costs of $218,430 2,781,570 -- 2,781,570
Exercise of options and warrants 755,404 -- 755,756
Warrants issued in connection with promissory
notes 892,025 -- 892,025
Stock based compensation 13,077,278 -- 13,077,278
Proceeds from issuance of common stock,
with 526,316 warrants 499,737 -- 500,000
Common stock issued for acquired assets 3,274,406 -- 3,274,885
Common stock issued for services 2,216,971 -- 2,217,821
Common stock issued for litigation settlement 820,260 -- 820,375
Conversion of Preferred Stock 8,121,780 -- --
Preferred stock dividends 386,308 (1,297,203) (910,804)
Accretion of beneficial conversion featured-in
of preferred stock -- (12,164,277) --
------------ ------------ ---------
BALANCE, December 31, 1999 $ 48,725,112 $(45,990,710) $10,042,730
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-9
<PAGE>
SKYLYNX COMMUNICATIONS, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
----------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (26,975,644) $(5,274,832)
Adjustments to reconcile net loss to net cash used in
operating activities-
Common stock issued for services 2,217,821 1,771,618
Depreciation and amortization 2,998,146 266,206
Equipment reserve -- 87,150
Loss on disposal of fixed assets 155,755 --
Imputed interest expense on convertible debt 446,013 --
Stock-based compensation expense 13,077,278 --
Litigation settlement expense paid in common stock 820,375 --
Changes in operating assets and liabilities-
Accounts receivable (710,878) --
Prepaid expenses and other current assets (714,434) (20,135)
Other assets 152,978 91,772
Accounts payable and accrued liabilities 1,999,721 661,382
Accounts payable, related party -- (391,299)
Deferred revenue 998,230 --
Other current liabilities -- (1,375)
------------- --------------
Net cash used in operating activities (5,534,639) (2,809,513)
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (892,763) (1,357,239)
Purchase of subsidiaries, net of cash acquired (9,185,078) --
------------- --------------
Net cash used in investing activities (10,077,841) (1,357,239)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of notes payable and convertible debt 1,107,975 -
Principal repayments of notes payable and convertible debt (380,846) (100,000)
Proceeds from issuance of debt with warrants 892,025 --
Principal repayments of obligations under capital leases (343,400) --
Proceeds from the issuance of common stock, warrants, and preferred stock,
net of offering costs 15,246,508 3,740,407
Advances on unissued shares -- 411,160
Proceeds from the exercise of options and warrants 755,756 --
Dividends paid (230,481) --
------------- --------------
Net cash provided by financing activities 17,047,537 4,051,567
------------- --------------
NET INCREASE IN CASH 1,435,057 (115,185)
CASH, beginning of period 512,925 628,110
------------- --------------
CASH, end of period 1,947,982 $ 512,925
============= ==============
</TABLE>
F-10
<PAGE>
SKYLYNX COMMUNICATIONS, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
----------------------------------------------
(continued)
<TABLE>
<CAPTION>
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for-
Interest 88,279 4,043
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of common stock for property and equipment - 117,750
Common stock issued for acquired assets 3,274,885 206,250
Property and equipment acquired under capital leases 540,694 -
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-11
<PAGE>
SKYLYNX COMMUNICATIONS, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1999 AND 1998
--------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------------------------
Description of Business
- -----------------------
SkyLynx Communications, Inc. ("the Company") provides dial-up and high-speed
Internet connectivity and other advanced Internet services to both business and
residential customers. The Company's primary service and product offerings
include dial-up and high-speed Internet access, web site development and hosting
services and Internet and network security consulting services and security
related products. To date, the Company's primary geographical area of focus has
been the western United States. The majority of the Company's customers are
located in the states of California, Oregon, Washington, Nevada and Arizona.
Organization
- ------------
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.
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. Subsequent
to the merger, AWI changed its name to SkyLynx Communications, Inc.
On December 14, 1999, SkyLynx Communications, Inc., a Colorado corporation,
culminated a tax-free reorganization pursuant to which it completed a
redomestication as a corporation formed and organized under the laws of the
state of Delaware by way of a merger by and between SkyLynx Communications,
Inc., a Colorado corporation and the Company, after which the Company emerged as
the surviving entity.
Prior to June 30, 1999, the condensed consolidated financial statements were
presented in the accordance with Statement of Financial Accounting Standards No.
7, "Accounting and Reporting by Development Stage Enterprises."
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.
F-12
<PAGE>
Principles of Consolidation
- ---------------------------
The Company's consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All material intercompany accounts
and transactions have been eliminated in consolidation.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value of Financial Instruments
- -----------------------------------
The carrying value of financial instruments on the accompanying consolidated
balance sheets approximates their fair value.
Reclassifications
- -----------------
Certain prior balances 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. Property and equipment under capital lease are
depreciated using the straight-line method over the lesser of the estimated
useful lives of the assets or the term of the related 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 consolidated statements of operations.
Goodwill and Intangible Assets
- ------------------------------
Goodwill and intangible assets are stated net of accumulated amortization.
Amortization is provided using the straight-line method over three years. The
Company evaluates on a regular basis whether events and circumstances have
occurred that indicate that the carrying amount of goodwill and intangible
assets may warrant revision. Amortization of goodwill and intangibles for the
years ended December 31, 1999 and 1998 was $2,160,990 and $6,938.
F-13
<PAGE>
Management believes that there has been no impairment of the goodwill and
intangible assets as reflected in the Company's consolidated financial
statements as of December 31, 1999.
Revenue Recognition and Deferred Revenue
- ----------------------------------------
Revenue, composed primarily of billings for internet services, is recognized as
the services are provided.
Any amounts collected in advance of the provision of service are reflected as
deferred revenue until the service is rendered.
Income Taxes
- ------------
Provision for income taxes includes federal and state income taxes payable for
the current period and the change during the period in deferred tax assets and
liabilities.
Research and Development
- ------------------------
Research and development costs are expensed as incurred.
Loss Per Share
- --------------
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, 1999, there were 6,473,870 stock options, preferred stock
convertible into 2,939,693 shares of common stock, and 2,222,526 common stock
purchase warrants outstanding which were not included in the calculation net
loss per share - diluted because they were antidilutive. As of December 31,
1998, there were 3,579,736 stock options, preferred stock convertible into
988,750 shares of common 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.
F-14
<PAGE>
2. 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 has incurred losses of
$26,975,644 and $5,274,832 for the years ended December 31, 1999 and 1998,
respectively. This factor among others raises substantial doubt about the
Company's ability to continue as a going concern.
At April 10, 2000, the Company had cash on hand of approximately $8 million.
Although the Company believes that its current cash on hand plus the cash flow
generated by its Internet service providers will be sufficient to fund existing
operations through the remainder of the fiscal year, if the Company chooses to
pursue additional acquisitions, expand the range of Internet related services it
offers, or otherwise change its strategy, it will likely be required to issue
additional equity or debt. There can be no assurance that such equity or debt
financing will be available to the Company, or that it will be available on
terms acceptable to the Company. Further, any additional equity financing may be
dilutive to existing shareholders, and any debt financing may involve pledging
all or some of the Company's existing assets and may contain restrictive
covenants with respect to raising future capital and other financial and
operational matters. As a result of these factors, substantial doubt exists
about the Company's ability to continue as a going concern.
3. PURCHASE OF ASSETS:
-------------------
In 1998, the Company purchased certain assets of Nadex West, Inc. The assets
purchased included property and equipment, including leases covering two
Multipoint Distribution Service channels granted under licenses issued by the
Federal Communications Commission 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.
On February 2, 1999, the Company purchased certain assets of InterAccess
Corporation, an Internet service provider. 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 $390,770, consisting of $195,385 in cash and 35,164 shares of
the Company's common stock with a fair value of $195,385. Goodwill and
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.
On March 24, 1999, the Company purchased certain assets of ContiNet, LLC, an
Internet service provider. 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 consisted of
$343,379 in cash, a promissory note in the amount of $50,000, 10,173 shares of
the Company's common stock with a fair value of $104,162 and an additional 8,937
shares that have been escrowed for one year from the purchase date to secure any
obligations of the seller. Goodwill and 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.
On April 28, 1999, the Company acquired substantially all of the assets of
Simply Internet, Inc., an Internet service provider. 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 $2,123,775 in cash. Goodwill and 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.
On April 29, 1999, the Company acquired substantially all of the assets of Net
Asset, LLC, an Internet service provider. This acquisition was accounted for as
a purchase and has been reflected in the Company's consolidated financial
statements
F-15
<PAGE>
from the date of acquisition. The consideration paid in this transaction was
$1,100,000 in cash and an additional $75,000 in escrow at December 31, 1999, to
secure any obligations of the seller. Goodwill and 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.
On May 7, 1999, the Company acquired substantially all of the assets of
SeaTac.Net, Inc., an Internet service provider. 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 $400,000, consisting of $200,000 in cash and 19,865 shares of
the Company's common stock with a fair value of $200,000. Goodwill and
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.
On July 16, 1999, the Company acquired substantially all of the assets of
Network Training and Consulting d/b/a ISAT Network, an Internet service
provider. 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 consisted of $450,000 in
cash, 45,000 shares of the Company's common stock with a fair value of $360,000,
and an additional 11,250 shares that have been escrowed for one year from the
purchase date to secure any obligations of the seller. Goodwill and 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.
On July 27, 1999, the Company acquired all of the capital stock of CalWeb
Internet Services, Inc, an Internet service provider. 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 for
this transaction consisted of $2.6 million in cash, 190,977 shares of the
Company's common stock with a fair value of $1,270,000 and an additional 64,662
shares that have been escrowed for one year from the purchase date to secure any
obligations of the seller. Goodwill and 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.
On July 29, 1999, the Company acquired substantially all of the assets of
InfiCad Computing and Design, LLC, an Internet service provider. This
F-16
<PAGE>
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 for this transaction consisted of approximately $1,125,000 in
cash, 178,226 shares of the Company's common stock with a fair value of
$1,193,000 and additional 38,394 shares that have been escrowed for one year
from the purchase date to secure any obligations of the seller. Goodwill and
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. PROPERTY AND EQUIPMENT:
-----------------------
Property and equipment consisted of the following as of December 31, 1999 and
1998:
<TABLE>
<CAPTION>
Useful Lives
in Years 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Communications and computer equipment 5 $ 3,712,541 $ 1,637,719
Furniture and fixtures 5 240,503 110,253
Leasehold improvements 5 166,342 143,666
Software 5 316,961 -
------------ ------------
4,436,347 1,891,638
Less- Accumulated depreciation
and amortization (870,302) (259,268)
------------ ------------
Property and equipment, net $ 3,566,045 $ 1,632,370
============ ============
</TABLE>
5. NOTES PAYABLE AND CONVERTIBLE DEBT
As part of the purchase agreement with Continet, LLC, the Company issued a
promissory note for $50,000. Principal and interest is payable monthly through
March 2001 with an annual interest rate of 9%. Principal payments to be made
in 2000 and 2001 are $25,541 and $6,751, respectively.
In November 1999, in exchange for $1,950,000, the Company issued an aggregate
principal amount of $1,950,000 convertible promissory notes and 749,665 warrants
exercisable at $3.375 for four years to purchase shares of the Company's common
stock. The $1,950,000 convertible promissory notes converted into 1,950 shares
of the Company's Series F convertible preferred stock simultaneously with the
first closing of the Company's Series F convertible preferred stock in February
2, 2000 and prior to February 14, 2000, the repayment date for the notes.
6. INCOME TAXES:
-------------
F-17
<PAGE>
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, 1999 and 1998
the Company had net operating loss (NOL) carryforwards of $25,852,969 and
$5,283,770, respectively, 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
carryforwards will expire in 2018 and 2019.
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
is a result of the following as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ - $ 14,010
Accrued liabilities - 40,984
Net operating loss carryforward 9,727,218 1,932,034
------------ ------------
Valuation allowance (9,727,218) (1,987,028)
------------ ------------
Net deferred tax asset - $ -
============ ============
</TABLE>
The change in the valuation allowance for the years ended December 31, 1999 and
1998, was $7,740,190 and $5,206,532.
A reconciliation between the statutory federal income tax rate (34 percent) and
the effective rate of income tax for the years ended December 31, 1999 and 1998,
is as follows:
1999 1998
------ ------
F-18
<PAGE>
Statutory income tax rate (34)% (34)%
Increase (decrease) in taxes resulting from:
State taxes, net of U.S. Federal tax benefit (3.6) (3.6)
Increase in valuation allowance 28.7 35.6
Tax effect of nondeductible stock compensation 8.9 --
Other -- 2.0
---- ----
-- --
---- ----
6. 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.
The Company has agreed to buy substantially all of the assets of Cable
Corporation of America, which is in bankruptcy. 120,000 shares of the Company's
common stock have been placed in escrow pending the resolution of certain
complaints filed in the bankruptcy proceeding.
On July 29, 1999, the Company issued 115,000 shares of common stock to James
Gordon to settle a claim brought by him against the Company.
F-19
<PAGE>
Lease Commitments
- -----------------
The Company leases certain property and other equipment under operating leases
and capital 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 under noncancellable operating leases and capital
leases as of December 31, 1999, are as follows:
<TABLE>
<CAPTION>
Year Ending Capital Operating
December 31, Leases Leases
-------------- ---------- ----------
<S> <C> <C>
2000 $ 628,527 $ 740,388
2001 359,508 691,085
2002 46,913 400,684
2003 -- 110,010
2004 -- --
---------- ----------
Total minimum lease payments 1,034,948 1,942,167
========== ==========
Less: Amount representing interest 159,986
----------
Present value of minimum capital lease payments 874,962
Less: Current maturities of obligations
under capital leases 584,186
----------
Obligations under capital leases,
less current maturities $ 290,776
==========
</TABLE>
Rent expense under operating leases was $464,780 and $90,292 for the years ended
December 31, 1999 and 1998, respectively.
Employment Agreements
- ---------------------
The Company has entered into employment agreements with certain Company officers
and management. The remaining minimum commitment under the terms of these
agreements as of December 31, 1999, is approximately $818,400, all of which is
payable in 2000. These employment agreements expire on various dates through
December 2000. In addition, under these employment contracts, 3,454,398 non-
qualified stock options have been granted.
7. COMMON STOCK:
-------------
During 1998, the Board of Directors of the Company (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.
During the year ended December 31, 1999, the Board approved the issuance of
850,274 shares of common stock to employees and others in exchange for services.
F-20
<PAGE>
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. Both warrants associated with the unit purchase made by the investor
in January 31, 1999 were subsequently cancelled in 2000 and re-issued by the
Company as a warrant to purchase 526,316 shares of common stock of the Company
at an exercise price of $4.00, which expires three years from the date of the
initial purchase of the units described above.
The Company has issued from time to time during the fiscal year 1999 common
stock in connection with its acquisitions of Internet-related businesses, as
described in Note 3.
The Company has also issued common stock during the fiscal year 1999 in
connection with exercise of option grants by its employees, consultants, or
directors, as described in Note 9.
8. PREFERRED STOCK:
----------------
Unit Offerings
- --------------
Series A
During 1998, the Company, through a private placement offering, sold an
additional 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.
In January 1999, the Company, through a private placement offering, sold an
additional 70,841 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.
F-21
<PAGE>
The Company's Series A convertible preferred stock has a par value of $0.01 per
share and a dividend rate of 10 percent, which is cumulative. Each share of
preferred stock is convertible into one share of the Company's 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.
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.
In February 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 of all Class
B warrants.
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 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 and a dividend rate of 8 percent, which is cumulative and payable in cash
or common stock. Each share of preferred stock is convertible into shares of
common stock at a rate of 80% of the market price of the common stock, as
defined. Each 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 per share.
Series C
During 1999, the Company sold 721,419 Series C convertible preferred stock to
qualified investors at a price of
F-22
<PAGE>
$4.00 per share. The total proceeds of the Series C convertible preferred stock
offering was $2,885,676.
The Company's Series C convertible preferred stock has a par value of $0.01 per
share and a dividend rate of 10 percent, which is cumulative and payable in
preferred stock. Series C investors are also entitled to participate, on a pro
rata basis, in any dividends paid on the outstanding shares of common stock,
after payment of dividends on the preferred stock. Each share of preferred
stock is convertible into one share of the Company's common stock. The
preferred stock may be converted, at the option of the Series C investor, after
one year from the date of issue or upon effective registration of the underlying
common shares, or it will automatically convert on the third anniversary of the
date of issue. The preferred stock has a liquidation preference of $4.00 per
share.
Series D
In April and May 1999, the Company sold 10,000 shares of its Series D
convertible preferred stock to qualified investors at a price of $1,000 per
share. The total proceeds of the Series D convertible preferred stock offering
was $10,000,000. In connection with said offering, the Company issued warrants
to acquire a total of 405,880 shares of the Company's common stock at $8.17 per
share.
The Company's Series D convertible preferred stock has a par value of $0.01 per
share and a dividend rate of 5 percent, which is cumulative and payable in cash
or preferred stock at the option of the Series D investor. Each share of
preferred stock is convertible into 333 shares of the Company's common stock.
The preferred stock may be converted at the option of the Series D investor or
it will automatically convert upon the third anniversary of the date of issue.
If, after April 16, 2000, the Company's common stock is trading at less than
$3.00 per share, the Company may redeem the preferred stock at $1,200 per share
plus any unpaid dividends. The preferred stock has a liquidation preference of
$1,000 per share.
Series E
In May 1999, the Company, through a private placement offering, sold 3,000
shares of the Company's Series E convertible preferred stock to qualified
investors at a price of $1,000 per share. The total proceeds for the Series E
convertible preferred stock offering was $3,000,000. In connection with said
offering, the Company issued warrants to acquire a total of 91,764 shares of
common stock at $8.17 per share.
The Company's Series E convertible preferred stock has a par value of $0.01 per
share and a dividend rate of 5 percent per share, which is cumulative and
payable in cash or preferred stock at the option of the Series E investor. Each
share of preferred stock is convertible into
F-23
<PAGE>
333 shares of the Company's common stock, subject to adjustments. The preferred
stock may be converted at the option of the Series E investor or it will
automatically convert upon the third anniversary of the date of issue. If, after
May 6, 2000, the Company's common stock is trading at less than $3.00 per share,
the Company may redeem the preferred stock at $1,200 per share plus any unpaid
dividends. The preferred stock has a liquidation preference of $1,000 per share.
As of December 31, 1999, the Company had accrued unpaid dividends on preferred
stock of $720,082.
Beneficial Conversion Feature
- -----------------------------
Series A
The Company recorded a beneficial conversion feature of $337,488 related to its
Series A convertible preferred stock, which was fully accreted as of
December 31, 1999.
Series B
The Company recorded a beneficial conversion feature of $149,487 related to its
Series B convertible preferred stock, which was fully accreted as of December
31, 1999.
Series C
The Company recorded a beneficial conversion feature of $2,082,616 related to
its Series C convertible preferred stock, which is being accreted over one year.
Series D
The Company recorded a beneficial conversion feature of $7,908,294 related to
its Series D convertible preferred stock, which was fully accreted as of
December 31, 1999. The total excess of fair value over the conversion price at
the date of grant was $24,849,998.
Series E
The Company recorded a beneficial conversion feature of $2,364,335 related to
its Series E convertible preferred stock, which was fully accreted as of
December 31, 1999. The total excess of fair value over the conversion price at
the date of grant was $9,449,991.
9. STOCK-BASED COMPENSATION:
-------------------------
Effective January 23, 1998, the Company adopted the 1998 Equity Incentive Plan
(Plan) under which 1,750,000 shares of common stock of the Company were
authorized and reserved for use in
F-24
<PAGE>
the Plan. Effective August 23, 1999, the Company's board of directors and
stockholders adopted an amendment whereby the total shares subject to the plan
was increased to 8,000,000 shares. 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 become
exercisable over either three or 4 year vesting schedules, depending on the
specific option grant, and expire five years from the date of grant.
In addition to the incentive stock options granted under the Plan, the Company
also granted non-qualified stock options to certain officers, directors, and
other employees. Of the non-qualified options granted, certain options are
exercisable immediately and others become exercisable over 5 to 10 years or upon
meeting performance criteria, and expire one to ten years from the date of
grant.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted Average
Outstanding as of Remaining Weighted Average Exercisable as of Weighted Average
---------------- ----------------- ----------------
Range of Exercise Price 31-Dec-99 Contractual Life Exercise Price 31-Dec-99 Exercise Price
- ----------------------- --------- ---------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
1.94-2.13 2,641,898 4.13 1.98 1,083,844 1.98
2.30-2.75 3,601,972 3.06 2.38 1,699,840 2.33
4.99 230,000 5.00 4.99 - -
</TABLE>
<TABLE>
<CAPTION>
Grant Price
compared to Weighted average Weighted average
fair value exercise price fair value
----------- ---------------- -----------------
<S> <C> <C>
Exceeds 4.99 2.46
Less than 2.33 4.26
</TABLE>
F-25
<PAGE>
Stock option activity for the years ended December 31, 1999 and 1998, was as
follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------- ------------------------------
Number Weighted Number Weighted
Of Average of Average
Shares Exercise Price Shares Exercise Price
---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period 3,579,736 2.12 --- ---
Granted 3,628,000 2.43 3,579,736 2.12
Exercised (97,420) 2.30 --- ---
Canceled or expired (636,446) 2.52 --- ---
---------- ---------- ---------- ----------
Outstanding, end of period 6,473,870 2.39 3,579,736 2.12
========== ========== ========== ==========
Options vested at year-end 2,753,684 2.15 670,720 2.43
========== ========== ========== ==========
</TABLE>
The Company accounts for its stock-based compensation plan under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25). Compensation expense of $13,077,278 and $2,001,618 was recognized for
stock-based compensation under APB 25 for the years ended December 31, 1999 and
1998, respectively. 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: for 1999, risk-free interest rate of 4.43 to 6.32 percent, expected
volatility of 80 percent, expected life of four to five years, and no expected
dividends, for 1998, 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. 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:
1999 1998
-------- --------
As reported:
Net loss available to common
stockholders (40,437,124) (5,274,832)
Net loss per share - basic and diluted $(3.44) $(0.60)
Pro Forma:
F-26
<PAGE>
Net loss available to common stockholders (50,687,794) (6,215,209)
Net loss per share - basic and diluted (4.31) (.71)
10. RELATED-PARTY TRANSACTIONS:
---------------------------
During 1998, despite suspension of agreement with Network System Technologies,
Inc. (NST), (a related party) 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.
11. SUBSEQUENT EVENTS:
------------------
Effective March 1, 2000, the Company issued a warrant to purchase 1,000,000
shares of the Company's common stock at an exercise price of $.01 per share to
one investor as consideration for such investor having participated as the lead
investor in the Company Series F convertible preferred stock financing.
As of February 11, 2000, the Company completed an offering of 15,316 shares of
Series F convertible preferred stock for an aggregate purchase price of
$15,316,000, which includes, the issuance of 1,950 shares of Series F
convertible preferred stock to associated with the conversion of an aggregate
principal amount of $1,950,000 convertible promissory notes issued by the
Company in November, 1999.
Effective February 11, 2000, the Company acquired substantially all of the
assets of Alternate Access, Inc. for a total purchase price of $4,131,624, of
which $1,950,000 in cash and 684,431 shares of the Company's common stock. In
connection with said transaction, the Company also obtained has the right to
acquire up to 30% equity ownership in PDGT.COM, Inc. The Company has currently
acquired a 21.8% interest for a cash consideration of $750,000.
Effective February 11, 2000, the Company acquired substantially all of the
assets of Planetlink Corporation, Inc. d/b/a Inforum Communications for $237,450
in cash and 74,494 shares of the Company's common stock.
Effective February 11, 2000, the Company issued two warrants to H. C.
Wainwright, exercisable to purchase an aggregate of 500,000 shares of the
Company's common stock at the following
F-27
<PAGE>
exercise prices: (i) with respect to 400,000 shares, an exercise price of $.01,
in connection with their role as placement agent in the Series F convertible
preferred stock financing; and (ii) with respect to 100,000 shares, an exercise
price of $3.00 per share, in connection with their role as placement agent in
the November 1999 convertible loan transaction.
Between March 7, 2000 and March 31, 2000, the Company effected a 1 to 1 exchange
offer to its then Series D convertible preferred stockholders pursuant to which
the Company issued a total of 4,440 shares of the Company's D-1 convertible
preferred stock. The Company's Series D-1 convertible preferred stock has a par
value of $0.01 per share and a dividend rate of 5 percent.
FINANCIAL RESULTS OF OPERATIONS (UNAUDITED):
The following unaudited pro forma information for the year ended December 31,
1999, include the results of the Company and Interaccess Corporation, Simply
Internet, Inc., Net Asset, LLC, Calweb Internet Services, Inc. and InfiCad
Computing and Design, LLC as if the acquisitions had occurred as of January 1,
1999. 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.
Amount
(unaudited)
Revenues $ 7,721,148
=============
Net loss $ (29,392,196)
=============
Net loss applicable to common stockholders $ (42,968,968)
=============
Per share net loss applicable to common
stockholders-basic and diluted (3.59)
=============
Shares used in computing per share net
loss applicable to common stockholders-basic
and diluted 11,976,695
=============
F-28
<PAGE>
To the Board of Directors and Shareholders
Interaccess Corp.
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheet of Interaccess Corp. as of
December 31, 1998, and the related statements of operations, shareholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Interaccess Corp., as of
December 31, 1998, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Cordovano and Harvey, P.C.
Denver, Colorado
April 16, 1999
F-29
<PAGE>
INTERACCESS CORP.
-----------------
Balance Sheet
December 31, 1998
ASSETS
CURRENT ASSETS
Cash $ 344
Accounts receivable, net of allowance for
uncollectible accounts totaling $50,100 19,321
---------
TOTAL CURRENT ASSETS 19,665
PROPERTY AND EQUIPMENT, less accumulated depreciation
of $50,800 (Note C) 15,629
---------
$ 35,294
LIABILITIES AND SHAREHOLDER'S DEFICIT
CURRENT LIABILITIES
Accounts payable $ 10,547
Current maturities on advances payable,
related parties (Note B) 21,340
Accrued interest expense, related party
(Note B) 1,750
Unearned revenue 5,795
Other accrued expenses 2,506
TOTAL CURRENT LIABILITIES 41,938
SHAREHOLDERS' DEFICIT
Common stock, no par value; 7,500 shares authorized;
500 shares issued and outstanding 100
Retained deficit (6,744)
TOTAL SHAREHOLDER'S DEFICIT (6,644)
$ 35,294
See accompanying summary of significant accounting policies and
notes to the financial statements.
F-30
<PAGE>
INTERACCESS CORP.
-----------------
Statement of Operations
For The Year Ended December 31, 1998
REVENUES
Sales and $ 273,516
Less: discounts (11,225)
-----------
NET REVENUES 262,291
-----------
OPERATING COSTS AND EXPENSES
Cost of sales and services 139,773
Salaries and payroll taxes 69,847
Consulting fees 15,901
Rent, related party (Note B) 6,425
Professional fees 2,155
Telephone 3,318
Travel 686
Insurance 5,068
Office and supplies 4,068
Depreciation 18,486
Other 3,393
PROVISION FOR UNCOLLECTIBLE ACCOUNTS 50,100
----------
TOTAL OPERATING COSTS AND EXPENSES 319,220
LOSS FROM OPERATIONS (56,929)
NON-OPERATING (EXPENSE) INCOME
Interest expense (Note B) (1,813)
Interest income 41
-----------
LOSS BEFORE INCOME TAXES (58,701)
INCOME TAXES (Note D) -
----------
NET LOSS $(58,701)
Basic weighted average common shares outstanding 500
Basic loss per common share $(117.40)
See accompanying summary of significant accounting policies and
notes to the financial statements.
F-31
<PAGE>
INTERACCESS CORP.
----------------
Statement of Shareholder's Deficit
January 1, 1998 through December 31, 1998
Additional Total Total
Common Stock Paid-in Retained Shareholders'
Shares Par Value Capital Deficit Equity
Balance,
January 1,
1998 500 $ 100 $ - $ 51,957 $ 52,057
Net loss for
the year
ended
December 31,
1998 - - - - (58,701) (58,701)
BALANCE,
DECEMBER 31,
1998 500 $ 100 $ - $(6,744) $ (6,644)
See accompanying summary of significant accounting policies and notes to
the financial statements.
F-32
<PAGE>
INTERACCESS CORP.
------------------
Statement of Cash Flows
For The Year Ended December 31, 1998
OPERATING ACTIVITIES
Net loss $ (58,701)
Transactions not requiring cash:
Depreciation 18,486
Provision for uncollectible accounts 44,100
Changes in current assets and current liabilities:
Increase in receivables and other current assets (11,408)
Increase in accounts payable and other
current liabilities 22,017
----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 14,494
INVESTING ACTIVITIES
Purchases of equipment (6,039)
----------
NET CASH (USED IN) INVESTING ACTIVITIES (6,039)
FINANCING ACTIVITIES
Principal debt payments (13,248)
----------
NET CASH (USED IN) FINANCING ACTIVITIES (13,248)
NET INCREASE IN CASH (4,793)
Cash, beginning of period 5,137
----------
CASH, END OF PERIOD $ 344
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- --------------------------------------------------
Cash paid during the period for:
Interest $ -
Income taxes $ -
See accompanying summary of significant accounting policies and
notes to the financial statements.
F-33
<PAGE>
INTERACCESS CORP.
------------------
Summary of Significant Accounting Policies
December 31, 1998
Use of estimates
- ----------------
The preparation of the financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect certain reported amounts of assets and liabilities 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. Accordingly, actual results could differ from those
estimates.
Cash equivalents
- ----------------
For the purpose of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
Property, equipment and depreciation
- ------------------------------------
Property and equipment is stated at cost and depreciated using the straight-line
method over the estimated useful lives of the assets. Maintenance and repair
costs are charged to expense as incurred. Gains or losses on disposition of
property and equipment are reflected in income.
Revenues
- --------
Revenues consist of monthly charged fees to members for Internet access,
Internet access consulting and for certain customers, hardware and other
computer equipment. Internet service revenues are recognized in the period
services are provided. Sales of products, such as computers and related
equipment are recognized when the products are delivered. From time to time,
Internet customers may prepay for Internet service. Deferred revenue of $5,795
consists of payment received for services to be performed in future periods.
Income Taxes
- ------------
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the recorded book basis and tax basis
of assets and liabilities for financial and income tax reporting. The deferred
tax assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred taxes are also recognized for
operating losses that are available to offset future taxable income and tax
credits that are available to offset future federal income taxes.
Fair value of financial instruments
- -----------------------------------
The Company has determined, based on available market information and
appropriate valuation methodologies, that the fair value of its financial
instruments approximates carrying value. The carrying amounts of cash,
receivables, payables and other current liabilities approximate fair value.
F-34
<PAGE>
INTERACCESS CORP.
------------------
Summary of Significant Accounting Policies
December 31, 1998
Earnings per common share
- -------------------------
Effective December 31, 1997, SFAS 128 "Earnings per Share" requires a dual
presentation of earnings per share-basic and diluted. Basic earnings per common
share has been computed based on the weighted average number of common shares
outstanding. Diluted earnings per share reflects the increase in weighted
average common shares outstanding that would result from the assumed exercise of
outstanding stock options. However, the Company has a simple capital structure
for the period presented and, therefore, there is no variance between the basic
and diluted earnings per share.
Recently issued accounting pronouncements
- -----------------------------------------
The Company has adopted the following new accounting pronouncements for the year
ended December 31, 1998. There was no effect on the financial statements
presented from the adoption of the new pronouncements. SFAS No. 130, "Reporting
Comprehensive Income," requires the reporting and display of total comprehensive
income and its components in a full set of general- purpose financial
statements. SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," is based on the "management" approach for reporting
segments. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. SFAS No. 131 also requires
disclosure about the Company's products, the geographic areas in which it earns
revenue and holds long-lived assets, and its major customers. SFAS No. 132,
"Employers' Disclosures about Pensions and Other Post-retirement Benefits,"
which requires additional disclosures about pension and other post-retirement
benefit plans, but does not change the measurement or recognition of those
plans.
F-35
<PAGE>
INTERACCESS CORP.
----------------
Notes to Financial Statements
December 31, 1998
Note A: Nature of Organization
- ------ ----------------------
Interaccess Corp. (the "Company") was incorporated in Florida on March
29, 1995. The Company is an Internet service provider that was formed
to help members derive meaningful benefits from the extensive resources
of the Internet.
Note B: Related party transactions
- ------ --------------------------
During the year ended December 31, 1998, the Company paid an affiliate
$550 per month for office space on a month-to-month basis. Rent
expense for the year ended December 31, 1998 totaled $6,425. The affiliate
also charged the Company $2,973 for services provided during the year
ended December 31, 1998. The $2,973 is included in indebtedness to
related parties in the accompanying financial statements.
At January 1, 1998, the Company owed an officer $31,615 for working
capital advances. The advances bear interest at seven percent and are
due on demand. The Company repaid $13,248 during the year ended
December 31, 1998. The remaining balance of $18,367 at December 31,
1998 is included in indebtedness to related parties in the accompanying
balance sheet. Accrued interest on the advances totaled $1,750 at
December 31, 1998 and is included as accrued interest expense, related
party in the accompanying financial statements.
Note C: Property and equipment
- ------ ----------------------
Property and equipment consisted of the following at December 31, 1998:
Furniture 401
Computer hardware 62,640
Computer software 3,388
---------
66,429
Less accumulated depreciation (50,800)
----------
$15,629
F-36
<PAGE>
INTERACCESS CORP.
-------------------
Notes to Financial Statements
December 31, 1998
Note D: Income taxes
- ------ ------------
A reconciliation of the U.S. statutory federal income tax rate to the
effective rate follows for the year ended December 31, 1998:
U.S. statutory federal rate 16.48%
State income tax rate, net of federal
benefit 0.00%
Net operating loss for which no tax
benefit is currently available -16.48%
---------
0.00%
Deferred taxes consisted of the following at December 31, 1998:
Deferred tax asset, net operating
loss
carryforward $9,675
Valuation allowance ( 9,675)
--------
Net deferred taxes $ -
The valuation allowance offsets the deferred tax assets for which there
is no assurance of recovery. The change in the valuation allowance for
the year ended December 31, 1998 totaled $9,675. The net operating loss
carryforward expires through the year 2018.
The valuation allowance will be evaluated at the end of each year,
considering positive and negative evidence about whether the deferred tax
asset will be realized. At that time, the allowance will either be
increased or reduced; reduction could result in the complete elimination
of the allowance if positive evidence indicates that the value of the
deferred tax assets is no longer impaired and the allowance is no longer
required.
F-37
<PAGE>
INTERACCESS CORP.
Notes to Financial Statements
December 31, 1998
Note E: Year 2000 compliance
- ------ --------------------
The Year 2000 issue (Y2K) is the result of computer programs written
using two digits rather than four to define the applicable year. Any of
the Company's computer and telecommunications programs that have date
sensitive software may recognize a date using "00" as the year 1900
instead of 2000. This could result in system failure or miscalculations
causing disruptions in operations, including the ability to process
transactions, send invoices, or engage in similar normal business
activities.
The Company cannot determine the extent to which the Company is
vulnerable to third parties' failure to remediate their own Y2K problems.
As a result, there can be no guarantee that the systems of other
companies on which the Company's business relies will be timely
converted, or that failure to convert by another company, or a conversion
that is incompatible with the Company's systems, would have a material
adverse affect on the Company. In view of the foregoing, there can be no
assurance that the Y2K issue will not have a material adverse effect on
the Company's business.
Note F: Subsequent event
- ------ -----------------
Asset Purchase Agreement
------------------------
Effective February 2, 1999, the Company consummated an Asset Purchase
Agreement pursuant to which substantially all of its assets were sold to
SkyLynx Communications, Inc. ("SkyLynx"), an Internet service provider
operating in Florida, California and Oregon and serving approximately 1,400
customers. The purchase price of this acquisition was $390,770, consisting of
$195,385 in cash and 25,607 shares of SkyLynx common stock.
F-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Members of
Net Asset, LLC:
We have audited the accompanying balance sheet of Net Asset, LLC (a California
limited liability company) as of December 31, 1998, and the related statements
of operations, members' deficit and cash flows for the years ended December 31,
1998 and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Net Asset, LLC as of December
31, 1998, and the results of its operations and its cash flows for the years
ended December 31, 1998 and 1997, in conformity with generally accepted
accounting principles.
Tampa, Florida,
June 11, 1999
F-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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-67
<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-68
<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-69
<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-70
<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-71
<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-72
<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-73
<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-74
<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-75
<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-76
<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-77
<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-78
<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-79
<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-80
<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-81
<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-82
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Members of
InfiCad Computing and Design, LLC:
We have audited the accompanying balance sheet of InfiCad Computing and Design,
LLC (an Arizona 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 InfiCad Computing and Design,
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.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
September 29, 1999
F-83
<PAGE>
INFICAD COMPUTING AND DESIGN, LLC
---------------------------------
BALANCE SHEET -- DECEMBER 31, 1998
----------------------------------
ASSETS
CURRENT ASSETS:
Cash $ 4,012
Accounts receivable, net of
allowance for doubtful
accounts of $11,285 180,616
Prepaid expenses and other current
assets 13,003
-----------
Total current assets 197,631
PROPERTY AND EQUIPMENT, net 470,220
-----------
Total assets $ 667,851
===========
LIABILITIES AND MEMBERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 318,719
Accrued liabilities 96,890
Deferred revenue 224,256
Current maturities of capital lease
obligations 139,877
Line of credit 97,958
Notes payable to members 736,630
-----------
Total current liabilities 1,614,330
CAPITAL LEASE OBLIGATIONS, net of current
maturities 193,111
-----------
COMMITMENTS AND CONTINGENCIES
MEMBERS' DEFICIT:
Contributed capital 1,500
Accumulated deficit (1,141,090)
-----------
Total members' deficit (1,139,590)
-----------
Total liabilities and
members' deficit $ 667,851
===========
The accompanying notes are an integral part of this balance sheet.
F-84
<PAGE>
INFICAD COMPUTING AND DESIGN, LLC
---------------------------------
STATEMENTS OF OPERATIONS
-------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
----------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
REVENUES $1,410,340 $ 798,264
---------- ----------
COST AND EXPENSES:
Cost of revenues 353,087 229,728
Selling, general and administrative 1,415,805 794,188
Total cost and expenses 1,768,892 1,023,916
---------- ----------
LOSS FROM OPERATIONS (358,552) (225,652)
INTEREST EXPENSE (101,872) (75,196)
---------- ----------
NET LOSS $ (460,424) $ (300,848)
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-85
<PAGE>
INFICAD COMPUTING AND DESIGN, LLC
---------------------------------
STATEMENTS OF MEMBERS' DEFICIT
-------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
-----------------------------------------------
Members' Accumulated
Capital Deficit Total
----------- ----------- -----------
BALANCE, December 31, 1996 $ 1,500 $ (379,818) $ (378,318)
Net loss -- (300,848) (300,848)
----------- ----------- -----------
BALANCE, December 31, 1997 1,500 (680,666) (679,166)
Net loss -- (460,424) (460,424)
----------- -----------
BALANCE, December 31, 1998 $ 1,500 $(1,141,090) $(1,139,590)
The accompanying notes are an integral part of these statements.
F-86
<PAGE>
INFICAD COMPUTING AND DESIGN, LLC
---------------------------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
-----------------------------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(460,424) $(300,848)
Adjustments to reconcile net loss
to net cash provided by
(used in) operating activities-
Depreciation and amortization 181,935 169,638
Changes in operating assets
and liabilities-
Accounts receivable (95,121) (48,161)
Prepaid expenses and
other current assets (5,493) (1,781)
Accounts payable 235,274 26,397
Accrued liabilities 36,319 40,451
Deferred revenue 117,739 84,517
Net cash provided
by (used in)
operating activities 10,229 (29,787)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition of
property and equipment (57,143) (176,986)
--------- ---------
Net cash used in investing
activities (57,143) (176,986)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable, net 368,000 121,050
Payments on capital lease
obligations (72,348) (29,897)
(Payments) borrowings on line of
credit, net (262,042) 111,999
--------- ---------
Net cash provided by
financing activities 33,610 203,152
--------- ---------
NET DECREASE IN CASH (13,304) (3,621)
CASH, beginning of year 17,316 20,937
--------- ---------
CASH, end of year $ 4,012 $ 17,316
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 73,392 $ 47,465
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITY:
Equipment acquired under
capital leases $ 122,394 $ 303,279
The accompanying notes are an integral part of these statements.
F-87
<PAGE>
INFICAD COMPUTING AND DESIGN, LLC
---------------------------------
NOTES TO FINANCIAL STATEMENTS
------------------------------
DECEMBER 31, 1998 AND 1997
----------------------------
1. ORGANIZATION AND BUSINESS:
-------------------------
InfiCad Computing and Design, LLC (the Company) is an Arizona limited
liability company, formed in February 1996 pursuant to the terms of the
Operating Agreement for InfiCad Computing and Design, LLC. The Company was
formed through the investments of three individuals (the Members) to provide
high-speed Internet connectivity and enhanced Internet services to businesses
through the use of wireline technologies. The Company sells primarily to
businesses in the Phoenix, Arizona 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 double-declining balance 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. Customer set-up fees
are recognized upon completion of the services. Revenue from consulting services
is recognized as the services are provided.
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
F-88
<PAGE>
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.
Newly Issued Accounting Standard
- --------------------------------
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 provides
guidance for capitalizing and expensing the costs of computer software developed
or obtained for internal use. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. The Company has not yet
determined the effect of the adoption of SOP-98-1 on its financial reporting.
3. LIQUIDITY:
---------
The Company incurred operating losses for the years ended December 31, 1998
and 1997. As further discussed in Note 9 to the financial statements, the
Company sold substantially all of its assets to SkyLynx Communications, Inc.
(SkyLynx) in exchange for cash and SkyLynx common stock in July 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 consist of the following as of December 31, 1998:
Useful
Lives in
Years Amount
-------- -------
Communications equipment 5 $ 782,653
Computer equipment 5 16,358
Furniture and fixtures 5 60,461
Leasehold improvements 3-5 6,010
---------
865,482
Less- Accumulated depreciation
and amortization (395,262)
---------
Property and equipment, net $ 470,220
5. NOTES PAYABLE TO MEMBERS:
------------------------
The Company has notes payable to various members. These members have
F-89
<PAGE>
loaned monies to the Company to fund operations. The notes payable bear interest
at 8.75 percent and are due on demand.
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 inherent 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, net of accumulated amortization, as of December 31, 1998, was
$218,764.
Future minimum lease payments required under capital leases for equipment
at December 31, 1998, are as follows:
Year Ending
December 31, Amount
------------ --------
1999 $186,766
2000 147,695
2001 70,982
--------
Net minimum lease payments
under capital leases 405,443
Less- Portion representing
interest (72,455)
--------
Present value of net minimum
lease payments 332,988
Less- Current maturities (139,877)
--------
Capital lease obligations,
less current maturities $193,111
The lease agreements required payments of principal and interest under capital
leases of $97,603 for 1998.
7. LINE OF CREDIT:
--------------
The Company maintains a line of credit (the Line) with a financial
institution, under which it may borrow up to $100,000. The Line bears interest
at the prime rate (7.75 percent at December 31, 1998) plus one and a half and is
due on June 18, 1999. The Company had $97,958 in borrowings under the Line as of
December 31, 1998, and borrowings available under the Line were $2,042 at that
date.
The Line is secured by marketable securities owned by certain members of
the Company.
8. COMMITMENTS AND CONTINGENCIES:
-----------------------------
Operating Leases
- ----------------
F-90
<PAGE>
The Company leases real estate and equipment under operating leases.
Certain real estate and equipment 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 $146,295
2000 102,634
2001 13,655
---------
$262,584
=========
Rent expense under operating leases for the years ended December 31, 1998 and
1997, totaled $153,978 and $66,107, respectively.
9. SUBSEQUENT EVENT:
----------------
Effective July 29, 1999, the Company sold substantially all of its assets
to SkyLynx for $1,125,000 in cash and $1,450,000 in SkyLynx common stock. The
cash portion of the purchase price was paid as follows: (i) $125,388 was
retained by SkyLynx in repayment of a loan, (ii) $520,553 was paid to certain
creditors of the Company, and (iii) the remaining $479,059 was paid to the
Company. The common stock issued upon consummation of the transaction is
classified as restricted shares under the Securities Act of 1933. Additionally,
SkyLynx will hold back shares having a market value equivalent to $257,500 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-91
<PAGE>
INFICAD COMPUTING AND DESIGN, LLC
---------------------------------
BALANCE SHEET -- JUNE 30, 1999
------------------------------
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash $ --
Accounts receivable, net of
allowance for doubtful accounts
of $7,484 at June 30, 1999 227,971
Prepaid expenses and other
current assets 11,712
-----------
Total current assets 239,683
PROPERTY AND EQUIPMENT, net 406,682
Total assets $ 646,365
===========
LIABILITIES AND MEMBERS' DEFICIT
--------------------------------
CURRENT LIABILITIES:
Accounts payable $ 610,638
Accrued liabilities 124,115
Deferred revenue 119,816
Current maturities of capital
lease obligations 77,801
Line of credit 175,000
Notes payable to members and
related parties 879,630
-----------
Total current liabilities 1,987,000
CAPITAL LEASE OBLIGATIONS, net of current
maturities 193,111
-----------
COMMITMENTS AND CONTINGENCIES
MEMBERS' DEFICIT:
Contributed capital 1,500
Accumulated deficit (1,535,246)
-----------
Total members' deficit (1,533,746)
-----------
Total liabilities and
members' deficit $ 646,365
===========
The accompanying notes are an integral part of this balance sheet.
F-92
<PAGE>
INFICAD COMPUTING AND DESIGN, LLC
---------------------------------
STATEMENTS OF OPERATIONS
-------------------------
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
-------------------------------------------------------
(Unaudited)
Six-month
Period Ended
June 30,
----------------------
1999 1998
------- -------
REVENUES $1,092,382 $ 653,200
---------- ---------
COST AND EXPENSES:
Cost of revenues 631,594 135,685
Selling, general and
administrative 796,996 737,832
---------- ---------
Total cost and expenses 1,428,590 873,517
---------- ---------
LOSS FROM OPERATIONS (336,208) (220,317)
INTEREST EXPENSE (57,948) (50,360)
---------- ---------
NET LOSS $ (394,156) $(270,677)
========== =========
The accompanying notes are an integral part of these statements.
F-93
<PAGE>
INFICAD COMPUTING AND DESIGN, LLC
----------------------------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
-------------------------------------------------------
(Unaudited)
Six-month
Period Ended
June 30,
-----------------------------
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(394,156) $(270,677)
Adjustments to reconcile net
loss to net cash (used in)
provided by operating
activities-
Depreciation 105,994 57,656
Changes in operating assets
and liabilities-
Accounts receivable (47,355) (48,775)
Prepaid expenses and other
current assets 1,291 290
Accounts payable 291,919 235274
Accrued liabilities 27,225 31,540
Deferred revenue (104,440) 58,870
--------- ---------
Net cash (used in) provided
by operating activities (119,522) 64,178
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition of
property and equipment (42,456) (49,710)
--------- ---------
Net cash used in investing
activities (42,456) (49,710)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable, net 143,000 100,000
Payments on capital lease
obligations (62,076) (42,429)
Borrowings (payments) on line
of credit, net 77,042 (36,000)
--------- ---------
Net cash provided by financing
activities 157,966 21,571
NET (DECREASE) INCREASE IN CASH (4,012) 36,039
CASH, beginning of period 4,012 17,316
--------- ---------
CASH, end of period $ - $ 53,355
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 32,194 $ 31,100
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITY:
Equipment acquired under
capital leases $ - $ 106,691
The accompanying notes are an integral part of these statements.
F-94
<PAGE>
INFICAD COMPUTING AND DESIGN, LLC
----------------------------------
NOTES TO FINANCIAL STATEMENTS
------------------------------
JUNE 30, 1999
-------------
(Unaudited)
1. INTERIM FINANCIAL INFORMATION:
The interim financial statements as of June 30, 1999, and for the six-
month periods ended June 30, 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 InfiCad Computing and Design, 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-95
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
Alternate Access, Inc.:
We have audited the accompanying balance sheet of Alternate Access, Inc. (a
Delaware corporation) as of December 31, 1999, and the related statements of
operations, stockholders' deficit and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Alternate Access, Inc., as of
December 31, 1999, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States.
Tampa, Florida,
April 11, 2000
<PAGE>
ALTERNATE ACCESS, INC.
BALANCE SHEET -- DECEMBER 31, 1999
ASSETS
CURRENT ASSETS:
Cash $ 67,907
Accounts receivable 14,079
Related party receivable 83,995
Prepaid expenses 1,417
----------
Total current assets 167,398
PROPERTY AND EQUIPMENT, net 344,528
OTHER ASSETS 15,015
----------
Total assets $ 526,941
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 777,191
Deferred revenue 162,219
Current portion of capital lease obligations 130,407
----------
Total current liabilities 1,069,817
CAPITAL LEASE OBLIGATIONS, less current maturities 69,251
STOCKHOLDERS' DEFICIT:
Common stock, no par value; 1,500 shares authorized,
1,499 shares issued and outstanding 30,000
Accumulated deficit (642,127)
----------
Total stockholders' deficit (612,127)
----------
Total liabilities and stockholders' deficit $ 526,941
==========
The accompanying notes are an integral part of this balance sheet.
<PAGE>
ALTERNATE ACCESS, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<S> <C>
REVENUES $ 1,895,729
COSTS AND EXPENSES:
Cost of revenues 603,737
Selling, general and administrative 1,043,848
Depreciation and amortization 234,042
------------
Total costs and expenses 1,881,627
------------
INCOME FROM OPERATIONS 14,102
------------
INTEREST AND OTHER EXPENSE (24,732)
------------
NET LOSS $ (10,630)
============
NET LOSS PER SHARE - BASIC AND DILUTED $ (7.09)
SHARES USED IN COMPUTING NET LOSS PER SHARE -
BASIC AND DILUTED 1,499
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
ALTERNATE ACCESS, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Common Stock Accumulated
Shares Amount Deficit Total
------- -------- ----------- -------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1998 1,499 $30,000 $ (409,915) $(379,915)
Distributions - - (221,582) (221,582)
Net loss - - (10,630) (10,630)
------ -------- ----------- ----------
BALANCE, December 31, 1999 1,499 $30,000 $ (642,127) $(612,127)
====== ======== =========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
<TABLE>
<CAPTION>
ALTERNATE ACCESS, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10,630)
Adjustments to reconcile net loss to net
cash provided by operating activities-
Depreciation and amortization 234,042
Changes in operating assets and liabilities-
Accounts receivable (13,025)
Related party receivable (66,021)
Prepaid expenses 123
Other assets (11,926)
Accounts payable and accrued liabilities 287,975
Deferred revenue 22,975
------------
Net cash provided by operating activities 443,513
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (65,780)
-----------
Net cash used in investing activities (65,780)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on related party debt (4,386)
Principal payments on capital lease obligations (173,891)
Distributions (221,582)
-----------
Net cash used in financing activities (399,859)
NET DECREASE IN CASH (22,126)
CASH, beginning of year 90,033
-----------
CASH, end of year $ 67,907
===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 788
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Acquisition of property and equipment through
capital lease obligations $ 57,381
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
ALTERNATE ACCESS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION AND BUSINESS:
-------------------------
Alternate Access, Inc., a Delaware corporation (the Company), was formed to
provide high-speed Internet connectivity and enhanced Internet services to
residential and commercial customers in the Seattle 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.
Fair Value of Financial Instruments
- -----------------------------------
The carrying value of financial instruments on the accompanying balance sheet
approximates their fair value.
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.
Revenue Recognition and Deferred Revenue
- ----------------------------------------
Revenue, comprised primarily of billings for internet services, is recognized as
the services are provided. Any amounts collected in advance of the provision of
service are reflected as deferred revenue until the service is rendered.
Income Taxes
- ------------
The Company has elected S corporation status under the provisions of the
Internal Revenue Code. Accordingly, income of the Company is passed through to
the stockholders; therefore, the Company has recorded no provision for income
taxes for federal tax purposes.
Loss Per Share
- --------------
Net loss per share - basic and diluted is determined by dividing net loss
available to stockholders by the number of common shares outstanding at December
31, 1999. There
<PAGE>
is no difference between the basic and diluted shares outstanding during the
period.
3. PROPERTY AND EQUIPMENT:
----------------------
Property and equipment consisted of the following as of December 31, 1999:
Useful Lives
in Years Amount
------------ ------
Computer equipment 3-7 $225,688
Office equipment 5 78,274
Office furniture 7 3,584
Leasehold improvements 5 13,294
Capital leases 3-5 565,025
--------
885,865
Less- Accumulated depreciation (541,337)
--------
Property and equipment, net $344,528
========
4. CAPITAL LEASE OBLIGATIONS:
-------------------------
As of December 31, 1999, the Company had capital lease obligations aggregating
approximately $200,000, bearing imputed interest of 9 percent, maturing through
November 2003 and secured by various computer equipment.
Maturities of capital lease obligations are as follows as of December 31, 1999:
Year Ending
December 31, Amount
------------ ---------
2000 $130,407
2001 40,071
2002 18,479
2003 10,702
---------
$199,659
=========
5. OPERATING LEASES:
----------------
The Company leases office space and computer equipment under operating leases.
Future minimum lease payments for noncancellable operating leases in effect at
December 31, 1999, are as follows:
Year Ending
December 31, Amount
------------ ---------
2000 $111,508
2001 121,404
2002 123,424
2003 127,632
2004 131,448
<PAGE>
Thereafter 294,262
---------
$909,678
==========
Rent expense under operating leases for the year ended December 31, 1999,
totaled approximately $112,000.
6. RELATED-PARTY TRANSACTIONS:
--------------------------
During 1999, the Company paid approximately $66,000 in expenses on behalf of an
entity owned by the Company's primary stockholder. As of December 31, 1999,
approximately $84,000 was due to the Company related to these transactions and
is included in related party receivable in the accompanying financial
statements. During 1999, the Company also paid in full debt owed to a former
stockholder totaling $4,386.
7. EMPLOYEE 401(K) PROFIT SHARING PLAN:
-----------------------------------
The Company has a 401(k) profit sharing plan (the Plan). No contributions were
made during the year ended December 31, 1999.
8. SUBSEQUENT EVENTS:
-----------------
On February 11, 2000, the Company signed an agreement with SkyLynx
Communications, Inc. (SkyLynx), to which it will sell substantially all of the
Company's net assets for $1.95 million in cash and approximately $2.2 million in
SkyLynx common stock. Additionally, SkyLynx will hold back approximately
204,000 shares of SkyLynx common stock, which will be used to indemnify SkyLynx
for Company liabilities incurred, but unknown as of the date of closing on the
acquisition.
<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.
Inforum Communications, Inc.
Common Stock
18,455,139 Shares
May , 2000
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
As permitted of the Delaware General Corporation Law, our Amended and
Restated Certificate of Incorporation includes a provision that eliminates the
personal liability of a director for monetary damages resulting from breach of
his fiduciary duty as a director, except for liability;
. for any breach of the director's duty of loyalty to us or our
stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. under section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchase; or
. for any transaction from which the director derived an improper
personal benefit.
In addition, our Amended and Restated Certificate of Incorporation and
Amended Bylaws provide that:
. we are required to indemnify our directors, officers employees and
agents to the fullest extent permitted by the Delaware General
Corporation Law, subject to very limited exceptions; and
. we are required to advance expenses, as incurred, to our directors,
officers, employees and agents in connection with a legal proceeding.
In addition to the indemnification required in our Amended and Restated
Certificate of Incorporation and Amended Bylaws, we have entered into
indemnification agreements with our senior executive officers. These agreements
provide for the indemnification of those officers for all expenses and
liabilities incurred in connection with any action or proceeding brought against
them by reason of the fact that they are or were our agents. We have obtained
directors' and officers' insurance to cover our directors, officers and some of
our employees for liabilities, including liabilities under securities laws. We
believe that these indemnification provisions and agreements and this insurance
are necessary to attract and retain qualified directors and officers.
The limitation of liability and indemnification provisions in our amended
and restated certificate of incorporation and our bylaws may discourage
stockholders from bringing a lawsuit against directors for breach of their
fiduciary duty. They may also reduce the likelihood of derivative litigation
against directors and officers, even though an action, if successful, might
benefit us and other stockholders.
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.
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 $ 8,222
Legal fees and expenses $ 15,000*
Accounting fees and expenses $ 10,000*
Miscellaneous expenses $ 6,778
Total $ 40,000
*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 and subject to appropriate transfer
restrictions, were issued without registration under the Securities Act in
reliance upon the exemption provided in Section 4(2) of the Securities Act.
6. From May to October 1998, we sold an aggregate of 988,750 units, each
unit consisting of one share of series A convertible preferred stock and
warrants to purchase two shares of our common stock, for aggregate consideration
of $3,955,000, or $4.00 per unit. The shares were sold exclusively to persons
who qualified as "accredited investors" within the meaning of Rule 501(a) of
Regulation D under the Securities Act, and to a limited number of other
investors who satisfied certain investor suitability requirements including,
without limitation, that they possessed a level of knowledge and experience in
financial and business matters enabling them to evaluate the merits and risks of
an investment in our securities. The securities, which were acquired for
investment purposes and subject to appropriate transfer restrictions, were
issued without registration under the Securities Act in reliance upon Section
4(2) thereof and Rule 506 of Regulation D thereunder.
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7. In June 1998, we issued an aggregate of 653,997 shares of our common
stock in consideration of services rendered by consultants and other persons
between April and June 1998. The shares were issued to non-affiliated persons,
all of whom were "accredited investors" within the meaning of Rule 501(a) of
Regulation D under the Securities Act. The securities, which were taken for
investment and were subject to appropriate transfer restrictions, were issued
without registration under the Securities Act in reliance upon the exemption
provided in Section 4(2) of the Securities Act.
8. In October 1998, we issued an aggregate of 55,000 shares of our common
stock in consideration of services rendered by consultants. The shares were
issued to four non-affiliated persons, all of whom were "accredited investors"
within the meaning of Rule 501(a) of Regulation D under the Securities Act. The
securities, which were taken for investment and were subject to appropriate
transfer restrictions, were issued without registration under the Securities Act
in reliance upon the exemption provided in Section 4(2) of the Securities Act.
9. On January 1, 1999, we issued an aggregate of 450,000 shares of our
common stock as signing bonuses for three of our executive officers, and 125,000
shares of our common stock to a non-affiliated person in exchange for services
rendered. The shares were issued exclusively to persons who qualified as
"accredited investors" within the meaning of Rule 501(a) of Regulation D under
the Securities Act. The securities, which were taken for investment and were
subject to appropriate transfer restrictions, were issued without registration
under the Securities Act in reliance upon the exemption provided by Section 4(2)
of the Securities Act.
10. On January 7, 1999, we issued an aggregate of 121,355 shares of our
common stock to a current employee and his consulting company as a signing bonus
and for services rendered while this executive officer was a consultant to us.
The securities were issued exclusively to persons who qualified as
"accredited investors" within the meaning of Rule 501(a) of Regulation D under
the Securities Act. The securities, which were taken for investment and were
subject to appropriate transfer restrictions, were issued without registration
under the Securities Act in reliance upon the exemption provided by Section 4(2)
of the Securities Act.
11. On January 21, 1999, we issued 3,919 shares of our common stock to a
non-affiliated person in exchange for services rendered. The securities were
issued exclusively to a person who satisfied certain investor suitability
requirements including, without limitation, that he possessed a level of
knowledge and experience in financial and business matters enabling him to
evaluate the merits and risks of an investment in our common stock. The
securities, which were taken for investment and were subject to appropriate
transfer restrictions, were issued without registration under the Securities Act
in reliance upon the exemption provided by Section 4(2) of the Securities Act.
12. In January 1999, we issued and sold to one investor 263,158 units at a
price of $1.90 per unit, for aggregate consideration of $500,000. Each unit
sold in this offering consisted of one share of our common stock, and warrants
to purchase two additional shares of our common stock. The securities were sold
exclusively to a person who qualified as an "accredited investor" within the
meaning of Rule 501(a) of Regulation D under the Securities Act. The
securities, which were taken for investment and were subject to appropriate
transfer restrictions, were issued without registration under the Securities Act
in reliance upon the exemption provided by Section 4(2) of the Securities Act.
13. In January 1999, we issued an aggregate of 79,591 shares of our series
A convertible preferred stock and warrants to purchase an aggregate of 159,182
shares of our common stock to broker-dealers as commissions for services
rendered to us. The securities were sold exclusively to persons who qualified
as "accredited investors" within the meaning of Rule 501(a) of Regulation D
under the Securities Act. The securities, which were taken for investment and
were subject to appropriate transfer restrictions, were issued without
registration under Section 4(2) of the Securities Act and Rule 506 of Regulation
D thereunder.
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14. In January 1999, we issued to one investor 600 shares of our series B
convertible preferred stock, 15,000 shares of our common stock and warrants
exercisable to purchase, in the aggregate, 120,000 shares of our common stock.
The aggregate purchase price for these securities was $600,000. The securities
were sold exclusively to a person who qualified as an "accredited investor"
within the meaning of Rule 501(a) of Regulation D under the Securities Act. The
securities, which were taken for investment and were subject to appropriate
transfer restrictions, were issued without registration under the Securities Act
in reliance upon the exemption provided by Section 4(2) of the Securities Act
and Rule 506 of Regulation D thereunder.
15. On February 2, 1999, we issued an aggregate of 25,607 shares of our
common stock in connection with our acquisition of substantially all of the
assets of InterAccess Corp. The securities were issued to a person who
qualified as an "accredited investor" within the meaning of Rule 501(a) of
Regulation D under the Securities Act and to one other investor who satisfied
certain investor suitability requirements including, without limitation, that he
possessed a level of knowledge and experience in financial and business matters
enabling him to evaluate the merits and risks of an investment in our common
stock. The securities, which were taken for investment and were subject to
appropriate transfer restrictions, were issued without registration under the
Securities Act in reliance upon the exemption provided by Section 4(2) of the
Securities Act.
16. On March 23, 1999, we issued an aggregate of 19,110 shares of our
common stock in connection with our acquisition of substantially all of the
assets of ContiNet, LLC. The securities were issued to one investor who
satisfied certain investor suitability requirements including, without
limitation, that he possessed a level of knowledge and experience in financial
and business matters enabling him to evaluate the merits and risks of an
investment in our common stock. The securities, which were taken for investment
and were subject to appropriate transfer restrictions, were issued without
registration under the Securities Act in reliance upon the exemption provided by
Section 4(2) of the Securities Act.
17. In April 1999, we issued to private investors an aggregate of 721,419
shares of our series C convertible preferred stock, at a price of $4.00 per
share. The aggregate purchase price for these securities was $2,885,676. The
securities were sold exclusively to persons who qualified as "accredited
investors" within the meaning of Rule 501(a) of Regulation D under the
Securities Act. The securities, which were taken for investment and were
subject to appropriate transfer restrictions, were issued without registration
under the Securities Act in reliance upon the exemption provided by Section 4(2)
of the Securities Act and Rule 506 of Regulation D thereunder.
18. On May 7, 1999, we issued an aggregate of 19,865 shares of our common
stock in connection with our acquisition of substantially all of the assets of
SeaTac.Net, Inc. The securities were sold to one person who qualified as an
"accredited investor" within the meaning of Rule 501(a) of Regulation D under
the Securities Act and to one other investor who satisfied certain investor
suitability requirements including, without limitation, that he possessed a
level of knowledge and experience in financial and business matters enabling him
to evaluate the merits and risks of an investment in our common stock. The
securities, which were taken for investment and were subject to appropriate
transfer restrictions, were issued without registration under the Securities Act
in reliance upon the exemption provided by Section 4(2) of the Securities Act.
19. In May 1999, we issued to private investors an aggregate of 10,000
shares of our series D convertible preferred stock, at a price of $1,000 per
share, and warrants to purchase an aggregate of 405,880 shares of our common
stock. The aggregate purchase price for these securities was $10,000,000. The
securities were sold exclusively to persons who qualified as "accredited
investors" within the meaning of Rule 501(a) of Regulation D under the
Securities Act. The securities, which were taken for investment and were
subject to appropriate transfer restrictions, were issued without registration
under the Securities Act in reliance upon the exemption provided by Section 4(2)
of the Securities Act and Rule 506 of Regulation D thereunder.
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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.
25. In December 1999 we issued an aggregate of 345,406 shares of our
common stock to the holder of our series B convertible preferred stock upon its
conversion of 600 shares of series B convertible stock. The shares of common
stock were issued exclusively to an entity who qualified as an "accredited
investor" 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.
26. Between August 24, 1999 and January 6, 2000, we issued an aggregate of
1,908,299 shares of our common stock to holders of our series D convertible
preferred stock upon their conversion of an aggregate of 5,560 shares of our
series D convertible preferred stock. 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.
27. Between September 1999 and December 1999, we issued an aggregate of
1,000,000 shares of our common stock to holders of our series E convertible
preferred stock upon their conversion of an aggregate of 3,000 shares of our
series E convertible preferred stock. 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.
28. In November 1999 we issued $1,950,000 aggregate principal amount of
convertible promissory notes and warrants exercisable to purchase certain shares
of our common stock, determined based upon a formula which takes into account,
among other things, the date of the closing of our Series F convertible
preferred stock. 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 and Rule 506 thereunder.
29. On February 2, 2000, we issued 1,950 shares of our series F
convertible preferred stock to 18 investors upon their conversion of $1,950,000
aggregate principal amount of our convertible promissory notes. The investors
also acquired the right to purchase 749,665 shares of our common stock under the
warrants issued in November 1999. 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 and Rule 506
thereunder.
30. On February 2, 2000, we issued a warrant to purchase 1,000,000 shares
of our common stock at an exercise price of $.01 per share to one investor in
connection with our offering of series F convertible preferred stock. The
security was issued to a person who qualified as an "accredited investor" within
the meaning of Rule 501(a) of Regulation D under the Securities Act. The
security, which was taken for investment and was subject to appropriate transfer
restrictions, was issued without registration under the Securities Act in
reliance upon the exemption provided by Section 4(2) of the Securities Act and
Rule 506 thereunder.
31. Effective February 2 and February 11, 2000, we issued an aggregate of
13,366 shares of our series F convertible preferred stock to 65 investors for an
aggregate purchase price of $13,366,000. 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
thereunder.
32. On February 11, 2000, we issued an aggregate of 684,431 shares of our
common stock in connection with our acquisition of Alternate Access, Inc. 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 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 and Rule 506 thereunder.
33. On February 11, 2000, we issued an aggregate of 74,494 shares of our
common stock in connection with our acquisition of Planetlink Communications,
Inc. d/b/a Inforum Communications. 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 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 and Rule 506
thereunder.
34. On February 11, 2000, we issued two warrants exercisable to purchase
an aggregate of 500,000 shares of our common stock to one investor in exchange
for services rendered to us in connection with our series F preferred stock
offering. The first warrant is exercisable to acquire 400,000 shares of our
common stock at an exercise price of $0.01 per share and the second warrant is
exercisable to acquire 100,000 shares of our common stock at $3.00 per share.
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. 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.
35. Between March 7, 2000 and March 31, 2000, we issued an aggregate of
4,400 shares of our series D-1 convertible preferred stock to holders of our
series D convertible preferred stock upon their exchange of an aggregate of
4,400 shares of our series D convertible preferred 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 3(a)(9) of the Securities Act.
36. Between March 7, 2000 and March 31, 2000, we issued an aggregate of
3,000,000 shares of our common stock to holders to two holders of our series D-1
convertible preferred stock upon their conversion of an aggregate of 3,000
shares of our series D-1 convertible preferred stock. The shares were issued
exclusively to persons who qualified as "accredited investors" within the
meaning of Rule 501(a) of Regulation D under the Securities Act. The securities,
which were taken for investment and were subject to appropriate transfer
restrictions, were issued without registration under the Securities Act in
reliance upon the exemption provided by Section 4(2) of the Securities Act.
37. On March 10, 2000, we issued a warrant to purchase 526,316 shares of
our common stock to one investor in consideration of such investor having
participated in a private equity transaction in January 1999. The security was
issued to a person who qualified as an "accredited investor" within the meaning
of Rule 501(a) of Regulation D under the Securities Act. The security, which was
taken for investment and was subject to appropriate transfer restrictions, was
issued without registration under the Securities Act in reliance upon the
exemption provided by Section 4(2) of the Securities Act and Rule 506
thereunder.
Item 27. Exhibits
Exhibit No. Title
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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).
2.3 Agreement and Plan of Merger, dated as of December 13, 1999, by
and between SkyLynx Communications, Inc., a Colorado corporation,
and SkyLynx Communications, Inc., a Delaware corporation
(incorporated by reference to Exhibit 1.2 to the Company's
Current Report on Form 8-K dated December 14, 1999 and filed with
the SEC on December 20, 1999).
3.1 [Reserved]
3.2 [Reserved]
3.3 [Reserved]
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3.4 [Reserved]
3.5 Amended Bylaws of the Company (incorporated by reference to the
same-numbered Exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999).
3.6 [Reserved]
3.7 [Reserved]
3.8 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 1.3 to the Company's
Current Report on Form 8-K dated December 14, 1999 and filed with
the SEC on December 20, 1999).
3.9 Certificate of Amendment to Amended and Restated Certificate of
Incorporation of the Company (incorporated by reference to
Exhibit 1.1 to the Company's Current Report on Form 8-K dated
April 26, 1999 and filed with the SEC on May 4, 2000).
4.1 Certificate of Designation of Rights and Preferences of the
Company's Series A Convertible Preferred Stock (included in
Exhibit 3.8).
4.2 Specimen Common Stock Certificate (incorporated by reference to
the same-numbered Exhibit to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1999).
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 3.8).
4.7 Certificate of Designation and Rights and Preferences of the
Company's Series C Convertible Preferred Stock (included in
Exhibit 3.8).
4.8 Certificate of Designation and Rights and Preferences of the
Company's Series D Convertible Preferred Stock (included in
Exhibit 3.8).
4.9 Certificate of Designation and Rights and Preferences of the
Company's Series E Convertible Preferred Stock (included in
Exhibit 3.8).
4.10 Form of Warrant issued to the holder of the Company's Series B
Convertible Preferred Stock (incorporated by reference to the
same numbered Exhibit to the Company's Registration Statement on
Form SB-2 (Registration No. 333-83705)).
4.11 Form of Warrant issued to the holders of the Company's Series D
Convertible Preferred Stock (incorporated by reference to the
same numbered Exhibit to the Company's Registration Statement on
Form SB-2 (Registration No. 333-83705)).
4.12 Form of Warrant issued to the holders of the Company's Series E
Convertible Preferred Stock (incorporated by reference to the
same numbered Exhibit to the Company's Registration Statement on
Form SB-2 Registration No. 333-83705)).
4.13 Form of Warrant issued to the holders of the Company's Series F
Convertible Preferred Stock (incorporated by reference to the
same-numbered Exhibit to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1999).
4.14 Warrant, dated as of February 11, 2000, issued by the Company to
the Wainwright & Co., Inc. (incorporated by reference to the
same-numbered Exhibit to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1999).
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4.15 Form of Warrant, dated as of February 7, 2000, issued by the
Company to Continental Capital & Equity Corporation (incorporated
by reference to the same-numbered Exhibit to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1999).
4.16 Form of Warrant, dated as of February 2, 2000, issued by the
Company to Bulk Trade Inc. (incorporated by reference to the
same-numbered Exhibit to the Company's Annual Report on Form 10-
KSB for the year ended December 31, 1999).
4.17 Form of Warrant, dated as of March 10, 2000, issued by the
Company to Eugene S. Tuma (incorporated by reference to the same-
numbered Exhibit to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1999).
4.18 Amended Certificate of Designation and rights and preferences of
the Company's Series F Convertible Preferred Stock (incorporated
by reference to the same-numbered Exhibit to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1999).
5.1 Opinion of Gibson, Dunn & Crutcher (previously filed).
10.1 SkyLynx Communications, Inc. 1998 Equity Incentive Plan, as
amended (incorporated by reference to the same-numbered Exhibit
to the Company's Registration Statement on Form S-8, Post-
Effective Amendment No. 1 to (Registration No. 333-92065)).
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 (incorporated by reference to the same-numbered
Exhibit to the Company's Registration Statement on Form SB-2
(Registration No. 333-83705)).
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 (incorporated by reference to the
same-numbered Exhibit to the Company's Registration Statement on
Form SB-2 (Registration No. 333-83705)).
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10.14 Form of Purchase Agreement by and between the Company and the
holders of the Company's Series D Convertible Preferred Stock
(incorporated by reference to the same-numbered Exhibit to the
Company's Registration Statement on Form SB-2 (Registration No.
333-83705)).
10.15 Form of Registration Rights Agreement by and between the Company
and the holders of the Company's Series D Convertible Preferred
Stock (incorporated by reference to the same-numbered Exhibit to
the Company's Registration Statement on Form SB-2 (Registration
No. 333-83705)).
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 (incorporated by reference to the same-numbered
Exhibit to the Company's Registration Statement on Form SB-2
(Registration No. 333-83705)).
10.17 Form of Registration Rights Agreement by and between the Company
and the holders of the Company's Series E Convertible Preferred
Stock (incorporated by reference to the same-numbered Exhibit to
the Company's Registration Statement on Form SB-2 (Registration
No. 333-83705)).
10.18 [Reserved]
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).
10.21 Form of Convertible Loan and Warrant Agreement, by and among the
Company and certain investors (incorporated by reference to the
same-numbered Exhibit to the Company's Annual Report on Form 10-
KSB for the year ended December 31, 1999).
10.22 Agreement and Plan of Merger, dated as of December 10, 1999, by
and among the Company, Alternate Access, Inc., Skylynx
Communications of Pacific Northwest, Inc., Joseph Portman III and
Sammie L. Portman (incorporated by reference to Exhibit 1.1 to
the Company's Current Report on Form 8-K, dated February 11, 2000
and filed March 2, 2000).
10.23 Amendment, dated as of February 11, 2000, to Agreement
and Plan of Merger by and among the Company, Alternate Access,
Inc., Skylynx Communications of Pacific Northwest, Inc., Joseph
Portman III and Sammie L. Portman (incorporated by reference to
Exhibit 1.2 to the Company's Current Report on Form 8-K, dated
February 11, 2000 and filed March 2, 2000).
10.24 Form of Series F Preferred Stock Purchase Agreement, dated as of
February 2, 2000, by and between the Company and the holders of
the Company's Series F Convertible Preferred Stock (incorporated
by reference to the same-numbered Exhibit to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1999).
10.25 Form of Registration Rights Agreement, dated as of February 2,
2000, by and between the Company and the holders of the Company's
Series F Convertible Preferred Stock (incorporated by reference
to the same-numbered Exhibit to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1999).
10.26 Amendment No. 2 to Financial Services Agreement, dated as of
December 22, 1999, between the Company and H.C. Wainwright & Co.,
Inc. (incorporated by reference to the same-numbered Exhibit to
the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1999).
10.27 Amended and Restated Employment Agreement, dated as of August 23,
1999, between the Company and Jeffery A. Mathias (incorporated
by reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-8 (Registration No. 333-30152)).
10.28 Amended and Restated Employment Agreement, dated as of August 23,
1999, between the Company and James E. Maurer (incorporated by
reference to Exhibit 10.2 to the Company's Registration Statement
on Form S-8 (Registration No. 333-30152)).
10.29 Amended and Restated Employment Agreement, dated as of August 23,
1999, between the Company and David H. Roberts (incorporated by
reference to Exhibit 10.3 to the Company's Registration Statement
on Form S-8 (Registration No. 333-30152)).
10.30 Employment Agreement, dated as of December 1, 1998, between the
Company and Ned Abell (incorporated by reference to Exhibit 10.4
to the Company's Registration Statement on Form S-8 (Registration
No. 333-30152)).
10.31 Employment Agreement, effective as of July 15, 1999, between the
Company and Jenny J. Kim (incorporated by reference to Exhibit
10.5 to the Company's Registration Statement on Form S-8
(Registration No. 333-30152)).
10.32 Employment Agreement, as of July 9, 1998, between the Company and
Steven R. Jesson (incorporated by reference to the same-numbered
Exhibit to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1999).
10.33 Modification Agreement, dated as of August 26, 1998, between the
Company and Steven R. Jesson incorporated by reference to the
same numbered Exhibit to the Company Annual Report in Form 10-
KSB.
16.1 Letter of Cordovano and Harvey, P.C. (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 (incorporated by reference to the
same-numbered Exhibit to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1999).
23.1 Consent of Arthur Andersen LLP (filed herewith).
23.2 Consent of Cordovano and Harvey, P.C. (filed herewith).
23.3 Consent of Gibson, Dunn & Crutcher (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 controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matters
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-9
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Amendment No. 1
to Registration Statement to be signed on its behalf by the undersigned, in the
City of Denver, State of Colorado, on May 10, 2000.
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
registration statement was signed by the following persons in the capacities and
on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Jeffery A. Mathias President, Chief Executive Officer
- ------------------------- (Principal Executive Officer) and May 10, 2000
Jeffery A. Mathias Director
/s/ Francis P. Ragano* Chairman of the Board May 10, 2000
- -------------------------
Francis P. Ragano
/s/ J. Samuel Ridley* Director and Vice Chairman of the May 10, 2000
- ------------------------- Board
J. Samuel Ridley
/s/ Robert J. Smith* Director May 10, 2000
- -------------------------
Robert J. Smith
/s/ James E. Maurer Chief Financial Officer (Principal May 10, 2000
- ------------------------- Financial and Accounting Officer)
James E. Maurer and Director
* By: /s/ James E. Maurer
--------------------
James E. Maurer
Attorney-in-Fact
</TABLE>
II-10
<PAGE>
INDEX OF EXHIBITS
FILED HEREWITH*
Number Description of Document
- ------ -----------------------
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Cordovano and Harvey, P.C.
* For a complete list of Exhibits to this Registration Statement, see Part II,
Item 27.
<PAGE>
EXHIBIT 23.1
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
May 10, 2000
<PAGE>
EXHIBIT 23.2
TO: The Securities and Exchange Commission
RE: Inforum Communications, Inc. (formerly known as Skylynx Communications,
Inc.)
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement on Form
SB-2 of Inforum Communications, Inc. (formerly known as Skylynx Communications,
Inc.) of our report dated April 16, 1999 for InterAccess Corp. for the period
ended December 31, 1998.
/s/ Cordovano and Harvey, P.C.
Cordovano and Harvey, P.C.
Denver, Colorado
May 10, 2000
