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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB/A
Amendment No. 1
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 0-24687
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SkyLynx Communications, Inc.
(Name of small business issuer in its charter)
Delaware 84-1360029
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
600 South Cherry Street, Suite 400
Denver, Colorado 80246
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (303) 316-0400
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [x] No [ ]
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The issuer's revenues for the fiscal year ended December 31, 1999 were
$4,726,589.
The aggregate market value of the issuer's common stock held by non-
affiliates of the issuer, based upon the average bid and asked price of such
common stock as quoted on the OTC Electronic Bulletin Board as of March 22,
2000, was $56,743,673.
As of April 10, 2000, 19,862,524 shares of the issuer's common stock were
outstanding.
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Documents Incorporated by Reference
The following documents are incorporated by reference into Item 13 of this
Report:
1. The Company's Registration Statement on Form 10-SB, as filed with the
Commission on July 27, 1998.
2. The Company's Registration Statement on Form 10-SB/A-1, as filed with
the Commission on September 18, 1998.
3. The Company's Registration Statement on Form 10-SB/A-3, as filed with
the Commission on October 26, 1998.
4. The Company's Current Report on Form 8-K, as filed with the Commission
on January 6, 1999.
5. The Company's Current Report on Form 8-K, as filed with the Commission
on February 16, 1999.
6. The Company's Current Report on Form 8-K, as filed with the Commission
on March 2, 1999.
7. The Company's Current Report on Form 8-K, as filed with the Commission
on April 7, 1999.
8. The Company's Current Report on Form 8-K, as filed with the Commission
on May 12, 1999.
9. The Company's Current Report on Form 8-K, as filed with the Commission
on May 14, 1999.
10. The Company's Current Report on Form 8-K, as filed with the Commission
on May 21, 1999.
11. The Company's Current Report on Form 8-K, as filed with the Commission
on July 28, 1999.
12. The Company's Current Report on Form 8-K, as filed with the Commission
on August 10, 1999.
13. The Company's Current Report on Form 8-K, as filed with the Commission
on December 20, 1999.
14. The Company's Registration Statement on Form S-8, Registration No.
333-30152, as filed with the Commission on February 11, 2000.
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Forward-Looking Statements
Certain statements made in this Annual Report are "forward-looking
statements" (within the meaning of the Private Securities Litigation Reform Act
of 1995) regarding the plans and objectives of management for future operations.
Such statements involve known and unknown risks, uncertainties and other factors
that may cause our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. These risks, uncertainties and other
factors include, among other things: the speculative nature of an investment in
our Common Stock, our history of operating at a loss, competition from other
providers of high-speed Internet access and other advanced Internet services,
our ability to successfully integrate our Internet service providers and acquire
or partner with Internet-related product and service providers that complement
or augment our existing business, our ability to raise funds for working capital
and other risk factors described from time to time in our reports filed with the
Securities and Exchange Commission. The forward-looking statements made in this
Report are based on current expectations that involve numerous risks and
uncertainties. Our plans and objectives are based, in part, on assumptions
involving the growth and expansion of business. Assumptions relating to the
foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond our control. Although we believe that our assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the forward-looking
statements made in this Report will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements made in
this Report, particularly in view of our early stage of operations, the
inclusion of such information should not be regarded as a representation by us
or any other person that our objectives and plans will be achieved.
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PART I
Item 1. 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.
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 provision.
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 sectors. The development efforts for these
new technologies and services come from a combination of internal
entrepreneurial initiatives and from selected market trials of outside vendor
solutions 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 is a critical component of our ability to assess market demand and
eventual customer acceptance.
All of the Company's efforts with respect to acquiring additional
properties, developing new technology solutions and establishing joint ventures
are subject to our existing financial resource base and our ability to obtain
additional financing. As we continue to identify additional Internet access and
enhanced service providers for acquisition, investment and strategic opportunity
we will look to develop a series of narrowly focused products and services.
These include, but are not limited to, wholesale and retail connectivity
offerings, with a key emphasis on the resale of leased capacity and
digital-subscriber-line (DSL) technology, Internet related security and security
software, business-to-business electronic commerce applications and Web-based
productivity applications and infrastructure. We will look to expand our market
presence in each of these areas and will develop both internally and as a result
of strategic relationships, advanced products and services to our customers.
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 to our installed 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 SkyLynx and its affiliated
companies and partners 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 - with an emphasis on
DSL;
. reliable and cost effective wholesale connectivity;
. web site hosting;
. Internet security and security related products and services;
. electronic commerce applications - with a focus of
business-to-business solutions;
. business productivity applications and infrastructure - with Web
based productivity solutions, such as enhanced access for mobile
workforces, as the key target area;
. application services provision for cost-effective, efficient
Web-based access to mission critical and other software; 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 certain of the markets in which we currently operate, and
certain of 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
$497,541, consisting of $343,379 in cash, and 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 provider of wholesale
Internet connectivity to Internet service providers located in the Seattle area.
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. We have begun the process of applying to the Federal Communications
Commission to upgrade the system to a two-way licensed frequency system.
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 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 platforms such as Purchase Pro and Vertical
Net; and
. Companies providing network and host-based 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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Item 2. 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: 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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Item 3. Legal Proceedings
We are a party to the following material legal proceedings:
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1. In re: Cable Corporation of America d/b/a Paradise Cable (United States
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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.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of the fiscal year
ended December 31, 1999 to a vote of security holders.
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Market Information
Our common stock is traded over-the-counter and quoted on the OTC
Electronic Bulletin Board on a limited and sporadic basis under the symbol
"SKYK." Our common stock began trading over-the-counter on July 31, 1998.
There is no assurance that our common stock will continue to be quoted or that
any liquidity exists or will exist for our common stock.
The reported high and low bid and asked prices are shown below for the
period from July 31, 1998 through December 31, 1999, as reported on the OTC
Electronic Bulletin Board. The prices presented are bid and asked 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 ASKED
<S> <C> <C> <C> <C>
HIGH LOW HIGH LOW
1998:
Third Quarter (from 7/31/98) $ 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
</TABLE>
As of April 10, 2000, there were approximately 216 stockholders of
record of our common stock.
The Securities Enforcement and Penny Stock Reform Act of 1990
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure, relating to the market for penny stocks, in connection
with trades in any stock defined as a "penny stock." The Commission recently
adopted regulations that generally define a penny stock to be any equity
security that has a market price of less than $5.00 per share, subject to
certain exceptions. Such exceptions include any equity security listed on
NASDAQ and any equity security issued by an issuer that has (i) net tangible
assets of at least $2,000,000, if such
<PAGE>
issuer has been in continuous operation for three years, (ii) net tangible
assets of at least $5,000,000, if such issuer has been in continuous operation
for less than three years, or (iii) average annual revenue of at least
$6,000,000, if such issuer has been in continuous operation for less than three
years. Unless an exception is available, the regulations require the delivery,
prior to any transaction involving a penny stock, of a disclosure schedule
explaining the penny stock market and the risks associated therewith.
Our common stock is subject to the rules adopted by the Commission
regulating broker-dealer practices in connection with transactions in penny
stocks. Those disclosure rules applicable to penny stocks require a broker-
dealer, prior to a transaction in a penny stock not otherwise exempt from the
rules, to deliver a standardized list disclosure document prepared by the
Commission. That disclosure document advises an investor that investments in
penny stocks can be very risky and that the investor's salesperson or broker is
not an impartial advisor but rather paid to sell the shares. It contains an
explanation and disclosure of the bid and offer prices of the security, any
retail charges added by the dealer to those prices ("markup" or "markdown"), and
the amount of compensation or profit to be paid to or received by the
salesperson in connection with the transaction. The disclosure contains further
admonitions for the investor to exercise caution in connection with an
investment in penny stocks, to independently investigate the security as well as
the salesperson with whom the investor is working, and to understand the risky
nature of an investment in the security. Further, the disclosure includes
information regarding the market for penny stocks, explanations regarding the
influence that market makers may have upon the market for penny stocks and the
risk that one or two dealers may exercise domination over the market for such
security and therefore control and set prices for the security not based upon
competitive forces. The broker-dealer must also provide the customer with
certain other information and must make a special written determination that the
penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. Following the proposed
transaction, the broker must provide the customer with monthly account
statements containing market information about the prices of the securities.
These disclosure requirements may have the effect of reducing the level of
trading activity in the secondary market for a stock that is subject to the
penny stock rules. Many brokers may be unwilling to engage in transactions in
our common stock because of these added disclosure requirements, thereby making
it more difficult for security holders to dispose of their securities.
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.
Recent Sales of Unregistered Securities
<PAGE>
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.
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.
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 preferred stock. The shares of
common stock 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 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.
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.
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.
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.
Between February 2 and March 10, 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.
On February 7, 2000, we issued a warrant to purchase 100,000 shares of
our common stock at exercise prices ranging from $6.25 to $10.00 per share to
one investor in consideration for services rendered. 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.
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.
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.
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 convertible 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 an exercise
price of $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.
Between March 7, 2000 and March 31, 2000, we issued an aggregate of
4,440 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
4,440 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.
Between March 7, 2000 and March 31, 2000, we issued an aggregate of
3,000,000 shares of our common stock 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.
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.
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operations
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
<PAGE>
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 bought (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.
<PAGE>
Results of Operations
The discussion of our historical results set forth below addresses our
historical results of operations and financial condition as shown on our
Consolidated Financial Statements for the year ended December 31, 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. 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.
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, Liabilities and Shareholders' Equity
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.
Between February 2, 2000 and March 10, 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.
<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, debt
or both. 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.
<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.
<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.
<PAGE>
Item 7. Financial Statements
Our consolidated financial statements included in this Report
beginning at page F-1 are incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
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.
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.
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Under the securities laws of the United States, the Company's
directors, its executive officers (and certain other officers) and persons
holding more than 10% of our common stock are required to report their ownership
in the Company's securities and any changes in that ownership to the Securities
and Exchange Commission. Specific due dates for these reports have been
established and the Company is required to report any failure to file by these
dates during fiscal year 1998. To our knowledge, based solely on the Company's
reliance upon the written representations of its directors and officers or
copies of the reports that they have filed with the Commission, all Section
16(a) filing requirements applicable to our officers, directors and 10%
stockholders were satisfied in a timely manner during the fiscal year ended
December 31, 1999, except for the following: Mr. Mathias, Mr. Maurer, Ms. Kim,
Mr. Roberts, Mr. Abell, Mr. Ridley and Mr. Smith were each late in filing their
respective Form 3; Mr. Jesson was late in filing a Form 4 with respect to one
transaction, which was subsequently reported on a Form 5; and Mr. Ragano was
late in filing a Form 4 with respect to two transactions, each of which was
subsequently recorded on a Form 5. In addition, Mr. Mathias, Mr. Maurer, Mr.
Abell, Mr. Jesson and Mr. Ragano each failed to file a required Form 5 with
respect to option grants in 1998 and, instead, reported the transactions on
subsequent Section 16 filings.
<PAGE>
Item 10. Executive Compensation
Summary Compensation Table
The following table presents summary information concerning compensation of
the Chief Executive Officer and each of the other four most highly compensated
executive officers as of December 31, 1999 (together, the "Named Executive
Officers") for the periods indicated for services rendered to the Company and
its subsidiaries.
<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
Chief Operating Officer-- 1998 32,000 15,000(3) -- -- 418,800
ISP Services
Steven R. Jesson(7)........... 1999 116,692 40,000(1) -- -- 195,000
Executive Vice President-- 1998 -- -- -- -- 130,434
ISP Services
</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.
<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.
<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 such 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
<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 terms 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 such stock options to Mr. Maurer, or cancel such
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.
<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.
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table lists the number of shares of our common stock
beneficially owned by:
. each person who owned of record, or was known to own beneficially,
more than five percent (5%) of our outstanding shares of common stock;
. each of our directors, 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) 4.8%
James E. Maurer 703,948(4) 3.4%
Frank P. Ragano 325,128(5) 1.6%
J. Samuel Ridley 75,000(4) *
Robert Smith 75,000(4) *
David H. Roberts 480,079(4) 2.4%
Ned Abell 414,800(4) 2.1%
Steven R. Jesson 207,231(6) 1.0%
Gary L. Brown 1,488,439(7) 7.5%
718 Siesta Key Circle
Sarasota, FL 34242
Network System Technologies, Inc. 1,495,985(8) 7.6%
55 South Market Street
Suite 240
San Jose, CA 95431
Bess Holdings Ltd. 1,830,000(9) 8.5%
c/o Parker Chapin Flattau & Kimpl
1211 Avenue of the Americas
New York, NY 10036
Carlow Investments IV LLC 1,830,000(10) 8.5%
c/o Parker Chapin Flattau & Kimpl
1211 Avenue of the Americas
New York, NY 10036
Leyton Investments, Ltd. 1,830,000(11) 8.5%
c/o Parker Chapin Flattau & Kimpl
1211 Avenue of the Americas
New York, NY 10036
Eugene S. Tuma 1,337,374(12) 6.6%
All directors and executive officers as a group
(9 persons) 3,592,020 15.5%
</TABLE>
- -------------------
* less than one percent
(1) Unless otherwise noted, each stockholder's address is c/o SkyLynx
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 19,804,498 shares outstanding as of
March 22, 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) Consists entirely of shares issuable upon conversion of shares of our
series F convertible preferred stock.
(11) Consists entirely of shares issuable upon conversion of shares of our
series F convertible preferred stock.
(12) 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.
<PAGE>
Item 12. 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
<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.
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K
List of Exhibits
Exhibit No. Title
- ----------- -----
2.1 Agreement and Plan of Reorganization, dated as of August 5, 1997,
by and among SkyLynx Express Holdings, Inc., Network System
Technologies, Inc. and Allied Wireless, Inc. (incorporated by
reference to the same-numbered Exhibit to the Company's
Registration Statement on Form 10-SB, filed with the SEC on July
27, 1998).
2.2 Amendment No. 1, dated as of December 16, 1997, to Agreement and
Plan of Reorganization by and among SkyLynx Express Holdings,
Inc., Network System Technologies, Inc. and Allied Wireless, Inc.
(incorporated by reference to the same-numbered Exhibit to the
Company's Registration Statement on Form 10-SB, filed with the
SEC on July 27, 1998).
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]
3.4 [Reserved]
3.5 Amended Bylaws of the Company (previously filed).
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).
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 (previously filed).
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 certain of the holders of the Company's
Series F Convertible Preferred Stock in connection with the
Company's private placement in November 1999 (previously filed).
4.14 Form of Warrant, dated as of February 11, 2000, issued by the
Company to Wainwright & Co., Inc. (previously filed).
4.15 Form of Warrant, dated as of February 7, 2000, issued by the
Company to Continental Capital & Equity Corporation (previously
filed).
4.16 Form of Warrant, dated as of February 2, 2000, issued by the
Company to Bulk Trade Inc. (previously filed).
4.17 Form of Warrant, dated as of March 10, 2000, issued by the
Company to Eugene S. Tuma (previously filed).
4.18 Amended Certificate of Designation and Rights and Preferences of
the Company's Series F Convertible Preferred Stock (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/A-1, filed
with the SEC on December 6, 1999).*
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, 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)).
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 to reference to the same-numbered
Exhibit by 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 to 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 (previously filed).
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 with the SEC on 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 with the SEC on 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 (previously
filed).
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 (previously filed).
10.26 Amendment No.2 to Financial Services Agreement, dated as of
December 22, 1999, between the Company and H.C. Wainwright & Co.,
Inc. (previously filed).
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, dated as of July 9, 1998, between the
Company and Steven R. Jesson (previously filed).*
10.33 Modification Agreement, dated as of August 26, 1998, between
the Company and Steven R. Jesson (previously filed).*
21.1 Subsidiaries of the Registrant (previously filed).
23.1 Consent of Arthur Andersen LLP (filed herewith).
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule (filed herewith).
- ---------------
* Management contract or compensatory plan or arrangement.
Reports on Form 8-K
The Company filed the following reports on Form 8-K during the
quarter ended December 31, 1999:
1. Amended Form 8-K, filed October 12, 1999, reporting under Item 7
the financial statements of Inficad, Computing and Design, LLC, an acquired
entity.
2. Form 8-K, filed December 20, 1999, reporting under Item 5 the
Company's redomestication in Delaware.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized.
SKYLYNX COMMUNICATIONS, INC.
By: /s/ Jeffery A. Mathias
----------------------
Jeffery A. Mathias
President
Date: April 20, 2000
In accordance with the Exchange Act, this Amendemnt report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------- ------------------------------------- --------------
<S> <C> <C>
/s/ Jeffery A. Mathias President, Chief Executive April 20, 2000
- ------------------------- Officer and Director
Jeffery A. Mathias
/s/ James Maurer Chief Financial Officer, April 20, 2000
- ------------------------- Chief Accounting Officer and Director
James Maurer
/s/ J. Samuel Ridley* Director and Vice Chairman of April 20, 2000
- ------------------------- the Board
J. Samuel Ridley
/s/ Francis P. Ragano* Chairman of the Board April 20, 2000
- -------------------------
Francis P. Ragano
/s/ Robert J. Smith* Director April 20, 2000
- -------------------------
Robert J. Smith
*/s/ James E. Maurer April 20, 2000
- -------------------------
James E. Maurer
Attorney in fact
</TABLE>
<PAGE>
Exhibit Index
Exhibit No. Title
- ----------- -----
2.1 Agreement and Plan of Reorganization, dated as of August 5, 1997,
by and among SkyLynx Express Holdings, Inc., Network System
Technologies, Inc. and Allied Wireless, Inc. (incorporated by
reference to the same-numbered Exhibit to the Company's
Registration Statement on Form 10-SB, filed with the SEC on July
27, 1998).
2.2 Amendment No. 1, dated as of December 16, 1997, to Agreement and
Plan of Reorganization by and among SkyLynx Express Holdings,
Inc., Network System Technologies, Inc. and Allied Wireless, Inc.
(incorporated by reference to the same-numbered Exhibit to the
Company's Registration Statement on Form 10-SB, filed with the
SEC on July 27, 1998).
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]
3.4 [Reserved]
3.5 Amended Bylaws of the Company (previously filed).
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).
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 (previously filed).
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 certain of the holders of the Company's
Series F Convertible Preferred Stock in connection with the
Company's private placement in November 1999. (previously filed)
4.14 Form of Warrant, dated as of February 11, 2000, issued by the
Company to Wainright & Co., Inc. (previsouly filed).
4.15 Form of Warrant, dated as of February 7, 2000, issued by the
Company to Continental Capital & Equity Corporation (previously
filed).
4.16 Form of Warrant, dated as of February 2, 2000, issued by the
Company to Bulk Trade Inc. (previously filed).
4.17 Form of Warrant, dated as of March 10, 2000, issued by the
Company to Eugene S. Tuma (previously filed).
4.18 Amended Certificate of Designation and Rights and Preferences of
the Company's Series F Convertible Preferred Stock (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/A-1, filed
with the SEC on December 9, 1999).*
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, 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)).
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 to reference to the same-numbered
Exhibit by 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 to 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 (previously filed).
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 with the SEC on 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 with the SEC on 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 (previously
filed).
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 (previously filed).
10.26 Amendment No. 2 to Financial Services Agreement, dated as of
December 22, 1999, between the Company and H.C. Wainwright & Co.,
Inc. (previously filed).
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, dated as of July 9, 1998 between the
Company and Steven R. Jesson (previously filed).
10.33 Modification Agreement, dated as of August 26, 1998, between the
Company and Steven R. Jesson (previously filed).
21.1 Subsidiaries of the Registrant (previously filed).
23.1 Consent of Arthur Andersen LLP (filed herewith).
24.1 Power of Attorney (previously filed).
27.1 Financial Data Schedule (filed herewith).
- ---------------
* Management contract or compensatory plan or arrangement.
<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-1
<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-2
<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-3
<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-4
<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-5
<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-6
<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-7
<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-8
<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-9
<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-10
<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-11
<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-12
<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-13
<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-14
<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-15
<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-16
<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-17
<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-18
<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-19
<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-20
<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-21
<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-22
<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-23
<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-24
<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-25
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we herby consent to the
incorporation of our report included in this Form 10-KSB, into the Company's
previously filed Registration Statement File Nos. 333-74487 and 333-92065.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado
April 20, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED FINANCIAL STATEMENTS FOUND AS AN ATTACHMENT TO THE COMPANY'S
FORM 10-KSB/A FOR THE YEAR ENDED DECEMBER 31, 1999, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,947,982
<SECURITIES> 0
<RECEIVABLES> 710,878
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,393,429
<PP&E> 4,436,347
<DEPRECIATION> 870,302
<TOTAL-ASSETS> 16,532,181
<CURRENT-LIABILITIES> 6,191,924
<BONDS> 0
0
7,293,134
<COMMON> 15,194
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 16,532,181
<SALES> 4,726,589
<TOTAL-REVENUES> 0
<CGS> 2,021,293
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 29,234,927
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 446,013
<INCOME-PRETAX> (26,975,644)
<INCOME-TAX> 0
<INCOME-CONTINUING> (26,975,644)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,975,644)
<EPS-BASIC> (3.44)
<EPS-DILUTED> (3.44)
</TABLE>
