UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
CYBERFAST SYSTEMS, INC.
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(Name of Small Business Issuer in its Charter)
FLORIDA 13-5398600
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
777 Yamato Road, Suite 116
Boca Raton, FL 33431
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(Address of principal executive offices)
Issuer's telephone number: (561) 995-6255
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Securities to be registered under Section 12(b) of the Act:
Title of Each Class to be so Registered
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None
Name of Each Exchange on Which
Each Class is to be Registered
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None
Securities to be registered under Section 12(g) of the Act:
CLASS A COMMON STOCK
(Title of Class)
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ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
BRIEF OVERVIEW
Cyberfast Systems, Inc. (referred to as either "Cyberfast" or the
"Company") is an international provider of data communications services
operating primarily between the United States and underserved, underdeveloped or
developing countries. Our network is capable of delivering voice over internet
protocol ("VoIP") services as well as fax, data and video, together known as
Internet Protocol Telephony ("IP Telephony") services.
The Company's principal office is located at 777 Yamato Road, Suite
116, Boca Raton, FL 33431and its telephone number is (561) 995-6255.
HISTORY
We became public in a reverse merger. Pursuant to an Agreement and Plan
of Reorganization dated November 10, 1998 (the "Reorganization"), a
non-operating public shell corporation acquired 100% of the common stock of
Cyberfast Network Systems Corp. and Budget-Calls Corporation, two of our
subsidiaries, in exchange for 97.8% of its stock and changed its name from
Smartfit Foundations, Inc. to Cyberfast Systems, Inc.
The Company's subsidiaries were organized under the laws of Florida as
follows:
Budget-Calls Corporation August 10, 1995
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Cyberfast Network Systems, Inc. August 7, 1996
Boca Data Services, Inc. May 20, 1999
INDUSTRY OVERVIEW
According to industry sources, the global telecommunications market
generates revenues in excess of $250 billion annually.
The past few years have seen a world-wide explosion of communications
over the Internet. The Internet is a worldwide public network enabling transfer
and sharing of data information through a common communications protocol called
Transmission Control Protocol/Internet Protocol. While voice is transported in
the Public Switched Telephone Network ("PSTN") in the form of analog and digital
signals via a two-way point-to-point communication network connecting copper
lines on a global basis, data is transported over the Internet in the form of
data packets over a global computer network.
In 1995, with the invention of a computer telephone that allowed a user
connected to the Internet to speak to another user on the Internet using a
similarly equipped computer, a new industry began. This new industry, referred
to as IP Telephony, is not an industry in itself, but rather a new method of
transport for communications as the world shifts toward the use of a single,
open network for all types of communications.
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IP Telephony represents a new method for worldwide communications. IP
Telephony offers significant advantages over conventional telecommunications
systems including significantly reduced equipment costs, improved bandwidth
efficiency, direct routing of calls, lower costs and improved ease of network
administration and delivery of multi-media services over a single network
infrastructure. IP Telephony combines the low cost global reach of the Internet
and the high quality and security of private Internet Protocol ("IP") based
networks with the public telephone system's ease of access.
The opportunity to make inexpensive calls to international destinations
through the routing of communications (voice, data, and video) over the public
Internet or privately managed networks rather than the PSTN is the dominant
driver of IP Telephony today. This competitive advantage is based on the higher
fees the traditional long-distance service providers are required to charge in
order to manage their networks and by regulation. For every dime the
long-distance carriers collect, about four cents is paid to the regional bell
operating companies at each end of the connection. For international calls, that
amount may be more, depending on the policies of the non-US carriers. In
addition, calls on the PSTN are subject to a variety of taxes and surcharges,
the most important of which are those used to support the Universal Service
Fund, which subsidizes telephone services for rural and low-income users. IP
networks, on the other hand, are statutorily defined as "information services"
and are not presently subject to the same regulations as the traditional
"telecommunications services" providers. While regulation of the IP Telephony
market remains only a debate, it is possible that some form of regulation may
eventually face the industry. Any future regulation of the IP Telephony industry
may have a
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material adverse affect on our business. See "Risk Factors--Possible Regulation
of IP Telephony".
Piper Jaffray Equity Research estimates that:
o In 1998 the total size of the IP Telephony industry was $419.3
million, of which $119.0 million was from services - a 407%
increase in service revenues from 1997;
o In 2003 the total size of the IP Telephony industry will be $14.7
billion, of which $8.6 billion will be from services;
o Revenue for domestic-to-international IP Telephony services will
grow from $86 million in 1998 to over $3.6 billion in 2003;
o Of the estimated 476 million minutes of traffic traveled over IP
Telephony networks in 1998, 57% was for VoIP;
o Of the estimated 81.7 billion minutes of that will travel over IP
Telephony networks in 2003, 63 billion minutes or 77% will come
from VoIP.
Similar predictions of future IP Telephony growth rates are shared by others:
o Hilary Mine, executive VP of Probe Research, Inc., a Cedar Knolls,
N.J.-based market research firm, predicts worldwide IP Telephony
service revenue will zoom to $14 billion in 2005; and
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o London-based telecommunications consultancy Phillips Tarifica Ltd.
(a subsidiary of Phillips Publishing International, Inc. of
Potomac, Md.), predicted last fall that 43 percent of all
international phone traffic would travel over IP networks by 2003.
OUR OPERATIONS
Cyberfast is an international provider of communications services
operating primarily between the United States and underserved, underdeveloped or
developing countries. We lease capacity on private fiber optic and
satellite-based circuits from first-tier telecommunications carriers. These
circuits originate in the United States and terminate in the underserved
countries where we provide service. We then sell wholesale voice and data
services to first-tier and second-tier carriers seeking to route calls to those
underserved locations on a per-minute basis.
Our customers sell VoIP and other IP Telephony services to other
carriers, network operators and corporate customers. Our network allows our
customers to complete their customers' calls in the areas where we provide
service at a lower cost than the traditional long-distance telephone providers.
This is partially due to the very long-term contracts the traditional
long-distance telephone providers have entered into with countries all around
the world at fixed settlement rates.
Our IP network currently provides a lower-cost alternative to the
traditional long distance telephone industry for the delivery of voice
communications as well as providing us with the
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ability to offer any new services that may become available through applications
developed specifically for IP based networks in the future.
The rates our customers charge for IP Telephony services are generally
less than the charges for the same service that the customer would pay to a
primary seller of such services. Our customers' ability to undersell such
primary sellers arises as a result of the use of the Internet and private IP
networks to transmit its voice, fax and video data signals. Currently, the
Federal Communications Commission (the "FCC") does not regulate companies that
provide IP Telephony services as common carriers or telecommunications service
providers nor does it require Internet service providers to pay access charges
to originate or terminate their calls. This competitive advantage and resulting
price differential in the cost of providing service is the basis of our
customers' business. Any regulation that increases our customers' costs of
providing service or reduces the cost to the traditional service providers will
result in pricing pressures on our customers which, in turn, may affect the
price we can competitively charge our customers and have a materially adverse
effect on our business.
Our facilities consist of state-of-the-art telecommunications switching
and routing equipment which enables the reliable delivery of high quality voice
and data signals over IP based circuits. Our domestic facilities are located in
Boca Raton, FL. We have developed proprietary billing software which allows us
to invoice our customers on a weekly basis. Payment is required to be made in
U.S. dollars via wire transfer within 10 business days of invoice. The Company
anticipates it will reduce this time to three business days within 45 days.
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Cyberfast seeks out and identifies underdeveloped countries that are
currently underserved by IP based network providers. Voice communications to
these underserved countries must, for the most part, be completed using one of
the traditional long-distance networks, such as those owned by AT&T,
MCI-WorldCom, and Sprint. These traditional voice networks have long-term
higher-priced settlement contracts with the primary telephone company in each of
these countries, are regulated and charge higher termination fees.
We base our decision to target a specific underdeveloped, underserved country
for service based upon:
o prior relationships of members of our management with persons
involved in the telecommunications industry in that country;
o whether that country has adopted a plan of deregulation of its
telecommunications industry and, if so, the status of such plan;
and
o analysis of current services and prices offered by other data
service providers to those countries.
We then establish a relationship with a local party in the targeted
underserved country that is capable of fulfilling our requirements in that
foreign country. These requirements include that the party is capable of:
o staffing an office 24 hours per day seven days per week;
o maintaining facilities in the foreign locations for housing our
equipment and, if necessary, their equipment;
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o providing the necessary services to maintain all equipment to
assure uninterrupted service;
o negotiating and otherwise dealing with all local authorities at the
specified destinations to assure the continued transmission of
communications on the circuits; and
o obtaining all required permits and/or licenses and otherwise
complying with local law.
Once we are satisfied of the local party's ability to fulfill our
requirements, we enter into an agreement where the local party becomes a
contractor for Cyberfast in the local area we target for service. In this
Registration Statement the local contractor is referred to as our "Local
Partner." However, we use the term Partner for convenience only and such use
does not mean that the contractor is a partner in a legal sense or the
particular agreement is a partnership agreement. We then install our equipment
in our Local Partner's facilities. Our equipment consists of flexible gateway
servers and routers and may also consist of microwave transmission equipment and
repeaters where required. Our equipment is then connected with either our Local
Partner's equipment or the local telephone company's equipment.
Our equipment is capable of transmitting in both directions. However,
there are laws in many of the foreign countries where we provide service which
prohibit or otherwise regulate the outbound flow of communications from these
countries. For this reason, we program our equipment at both the foreign
location and at our domestic facilities to only allow transmissions in one
direction - into the foreign countries.
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Our customers' lease DS-1 or T-1 circuits which terminate in our Boca
Raton office equipment room. These circuits supply us with our customers' data
which we, in turn, route through our network for termination in the foreign
countries where we provide service.
The Cyberfast Network utilizes both terrestrial and satellite based systems to
deliver its enhanced IP Telephony services workdwide
LEASES
CIRCUIT LEASES
We lease fiber optic and/or satellite-based circuits at fixed rates
from first-tier telecommunications carriers which terminate in the foreign
countries where we provide our service. We, in turn, sell access to these
circuits to second-tier carriers on a per-minute basis.
EQUIPMENT LEASES
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We lease state-of-the-art carrier-class equipment manufactured by Cisco
Systems, Inc. ("Cisco") for use in our facilities. This equipment consists of
highly scalable gateway servers, routers and switches capable of reliably
transmitting voice, data and video signals over an IP based network. Our
equipment lease is for a three year term which automatically renews on a yearly
basis unless we provide 90 days notice of our decision not to renew. The lease
provides us with the option of purchasing the equipment for the fair market
value of used, well maintained equipment at the time the lease terminates. We
are required to maintain the equipment at our own expense and have not entered
into any service contract for maintenance. We believe our chief technical
officer is capable of, and able to, maintain the equipment for its proper
operation and in accordance with the provisions of the lease. We bear the risk
of loss during the term of the lease and are required to maintain an insurance
policy for the full replacement value of the equipment naming Cisco Systems
Capital Corporation as loss payee. This Cisco equipment is installed at our Boca
Raton, Florida facilities where it is available to transmit voice and data
traffic for our customers 24-hours per day, 7-days per week.
OFFICE LEASES
We have commitments under a long-term operating lease for our executive
offices in Boca Raton, Florida. We are also a party to a lease in Los Angeles,
California which is prepaid through May 31, 2000 when it expires.
We are currently not a party to any other long-term leases for office
space. See Item 3. "Description of Property."
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CURRENT AGREEMENTS TO PROVIDE SERVICE IN UNDERSERVED, UNDERDEVELOPED OR
DEVELOPING COUNTRIES
We have entered into agreements to provide services to 21 cities in
underserved, underdeveloped, or developing countries. For competitive purposes
we are not disclosing the city, country or general location. All circuits will
be installed in underdeveloped or developing countries which we believe are
underserved.
In June 1999, the first of these circuits became operational and
remained operational for approximately six weeks and generated $460,000 in
revenue. We voluntarily suspended operating this circuit as a result of
political considerations which led to a change of the management of the local
telephone company. We suspended operations of this circuit in order to avoid a
possible repetition of a problem we had in 1998 in a different underserved
country, which problem is disclosed elsewhere in this registration statement.
We are continuing discussions with the new management of the local
telephone company with a view toward reaching an agreement with them. At this
time, we do not know whether or not we will be successful.
In order to assist us in operating our circuits, we entered into an
agreement in May with Royal Dutch Telecom ("KPN"). As part of this agreement,
KPN has provided a fiber optic connection from its facilities in the United
States to its facilities in the Netherlands. Additionally, KPN has provided us
with an earth station located in the Netherlands which will permit us to serve
the Eastern European, Asian, and African countries with which we have reached
agreements to provide service. Currently, our circuits produce no revenue.
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Our objective is to have between two and four customers for each
country we serve. We currently limit the number of customers accessing our
network to optimize the level of quality we can provide. Other networks
frequently oversubscribe their networks resulting in a degradation of service.
Due to the higher quality of service demanded by our customers and required for
transmitting VOIP rather than traditional data traffic, we configure our systems
to provide voice-quality transmissions. Until advancements in technology allow a
comparable level of quality to be achieved over a larger subscriber base, we
will continue limiting the number of customers we serve to this optimal level.
In addition, having a minimum of two customers for each country allows us to
continue realizing revenue should one customer experience an interruption in
service.
We recently reached an agreement in principal to acquire a Nevada
corporation known as Global Telecom and Internet Ventures, Inc. ("Global") which
is based in Denver Colorado. We expect to close the transaction within the next
several days. Assuming consummation of the acquisition, Global will become a
wholly-owned subsidiary of Cyberfast. The merger consideration consists of
180,000 restricted shares of Class A Common Stock. Additionally, we will pay a
fee of 20,000 restricted shares of Class A Common Stock to a broker-dealer which
acted as finder in the transaction.
Global's business consists of providing fax services over the internet,
which compliments our business. Global is currently operating one circuit to an
Eastern European country. Global was recently organized and is not generating
any profits.
REGULATORY MATTERS
UNITED STATES
The use of the Internet to provide telephone service is a recent market
development. Currently, the FCC is considering whether to impose surcharges or
additional regulations upon certain providers of Internet Telephony services. On
April 10, 1998, the FCC issued its report to Congress concerning the
implementation of the universal service provisions of the Telecommunications
Act. In the report, the FCC indicated that it would examine the question of
whether certain forms of phone-to-phone Internet Telephony are information
services or telecommunications services. The FCC noted that it did not have, as
of the date of the report, an adequate record on which to make a
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definitive pronouncement. It further stated that the record suggested that
certain forms of phone-to-phone Internet Telephony appear to have the same
functionality as non-Internet telecommunications services and lack the
characteristics that would render them information services. If the FCC were to
determine that certain services are subject to similar FCC regulation as
telecommunications services, the FCC may require providers of Internet Telephony
services to make universal service contributions, pay access charges or be
subject to traditional common carrier regulation. This may affect the viability
of our customers' businesses and may have a material adverse effect on our
business. In addition, the FCC sets the access charges on traditional telephone
traffic and if it reduces these access charges, the cost of traditional long
distance telephone calls will probably be lowered, thereby decreasing our
customers' pricing advantage in their respective markets. This may put downward
pressure on our pricing model to our customers, reduce our margins and have a
materially adverse effect on our business.
In February 1999, the FCC adopted an order concerning payment of
reciprocal compensation that provides support for a possible finding by the FCC
that providers of Internet Telephony must pay access charges for at least some
subset of Internet Telephony services. If the FCC were to make such a finding,
the payment of access charges could have a material adverse effect on our
business.
To our knowledge, there are currently no domestic and few foreign laws
or regulations that prohibit voice communications over the Internet. State
public utility commissions may retain jurisdiction to regulate the provision of
intrastate Internet Telephony services. A number of countries that currently
prohibit competition in the provision of voice communications have also
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prohibited Internet Telephony. To our knowledge, there are no laws prohibiting
Internet Telephony in the countries where we provide service. Other countries
permit but regulate Internet Telephony. If Congress, the FCC, state regulatory
agencies or foreign governments begin to regulate or increase their regulation
of Internet Telephony, such regulation may have a material and adverse effect on
our business.
FOREIGN CORRUPT PRACTICES ACT
Upon effectiveness of this Registration Statement, we will be subject
to the Foreign Corrupt Practices Act (the "Act"). The Act requires that all
companies that file reports with the SEC:
o must keep reasonably detailed books and records reflecting
transactions and dispositions of assets;
o must maintain a system of internal controls that include
preparation of financial statements in conformity with generally
accepted accounting principles and maintaining accountability for
assets; and
o can not make any kind of payment, whether considered bribery or
not, to foreign government officials for the purpose of obtaining
or retaining business or securing any improper advantage.
The Act applies to companies directly and indirectly through
intermediaries. The Act does contain a "knowledge" requirement for payments to
or by an intermediary. However, the
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Act permits facilitating payments to foreign officials for the purpose of
expediting or securing routine governmental action by a foreign official.
We believe we have fully complied with the Act.
As a result of conducting business in foreign countries where the
customs and business practices are different from the United States, we run the
risk of the interruption of our business for substantial periods of time or even
the termination of our ability to conduct business. Many of the countries where
we conduct business do not have judicial systems that provide the protection
from or expeditious resolution to certain unlawful actions which may be taken
against our company or our Local Partner and, as a result, our business may be
materially adversely affected. For example, at the end of the third quarter of
1998 the Company experienced an interruption in its primary circuit to a foreign
country and its equipment was confiscated. The Company believes that the act of
the foreign country was illegal and is pursuing the return of its equipment and
the restoration of its circuit. As a result of the confiscation, the Company
estimates that it lost approximately $3,000,000 in revenues in 1998.
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RISK FACTORS
Cyberfast's business is subject to a number of significant risks.
Investors should carefully consider the risks described below and any additional
risks contained in subsequent filings with the Securities and Exchange
Commission and in our press releases. If any of the following risks actually
occur, our business, financial condition or results of operations could be
materially adversely affected. In that event, the trading price of our shares
could decline, and you may lose part or all of your investment.
WORKING CAPITAL DEFICIENCY
Because we had no revenues from November 1998 until June 1999, we have
a working capital deficit. Our principal stockholders have provided loans since
June 30, 1999 of $380,000. Until our operations provide positive cash flow, we
will require additional working capital loans.
DOING BUSINESS IN FOREIGN COUNTRIES
The Company operates in underdeveloped or developing countries where
the customs and business practices are different than those in the United
States. The laws and regulations in these countries may either not be adequately
enforced or may be changed without notice resulting in an interruption of our
service or confiscation of our and/or our Local Partner's equipment.
Furthermore, the judicial system in these countries may not provide the
preventive or remedial protections necessary to adequately protect our
interests.
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RELIANCE ON EQUIPMENT
Our success depends on our ability to provide efficient and
uninterrupted, high-quality services. Our systems and operations are vulnerable
to damage or interruption from natural disasters, power loss, telecommunication
failures, physical or electronic break-ins, sabotage, intentional acts of
vandalism and similar events that may or may not be beyond our control. The
occurrence of any or all of these events could have a material adverse effect on
our business.
RELIANCE ON THIRD PARTIES
In each of the foreign countries where we provide service, we establish
a contractual relationship with a Local Partner. This Local Partner is
responsible for complying with local laws and regulation, obtaining the required
licenses and permits, and maintaining and keeping the equipment and circuits
operational in that country. To the extent that our Local Partner does not
fulfill his contractual obligations, our business may be materially adversely
affected.
The Company leases circuits from first-tier telecommunications
carriers. If these carriers are unable to provide or expand their current levels
of service to the Company, our operations could be materially adversely
affected. Although leased lines are usually available from several alternative
suppliers, there can be no assurance that the Company could obtain substitute
services from other providers at reasonable or comparable prices or in a timely
fashion. We are subject to risks relating to potential disruptions in such
telecommunications services. No assurance can be given that significant
interruptions of telecommunications services to the Company will not
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occur in the future. Changes in tariffs, regulations, or polices by any of the
Company's telecommunications providers may adversely affect our ability to offer
our service on a commercially reasonable or profitable terms.
RELIANCE ON A SMALL NUMBER OF CUSTOMERS
The Company sells its services to a limited number of customers. Each
customer generated more than 10% of the revenues of the Company. In 1998, Star
Telecom accounted for more than 50% of all our revenues. We currently operate
under an agreement with our largest customer, IDT, Inc. which has accounted for
all of our 1999 revenues. We are currently negotiating with three additional
customers. Although we believe that there are a number of customers to which we
can provide our services, changing business conditions may adversely affect us
if we lose a major customer.
POSSIBLE REGULATION OF IP TELEPHONY
Our customers use the Internet and private IP networks for the
transmission of IP Telephony services which consists mainly of VoIP. Presently,
the FCC does not regulate companies that provide Internet Telephony services as
common carriers or telecommunications service providers. Notwithstanding the
current state of the rules, the FCC's potential jurisdiction over the Internet
is broad because the Internet relies on wire and radio communications facilities
and services over which this regulatory authority has long-standing authority.
Any regulations that affect the profitability or competitive advantage of our
customers in the marketplace will, in
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turn, affect the prices we can competitively charge for our services and may
result in a material adverse effect on our business.
COMPETITION
Our success is based on our ability to provide our customers a
high-quality lower cost method of providing international long distance services
by carrying voice and data traffic over our leased IP circuits. In recent years,
the price of long distance calls has fallen. The price of long distance calls
may decline to a point where our customers no longer have a price advantage over
these traditional long distance services. Our customers would then have to rely
on factors other than price to differentiate their service, which they may not
be able to do. Any resulting loss of business or reduction in margins for our
customers may, in turn, lead to downward pressure on the price we can
competitively charge for our service and may have a material adverse effect on
our business.
Some major long distance providers, such as AT&T, Deutsche Telecom, MCI
WorldCom, and Qwest Communications, Inc. have entered or plan to enter the
market for carrying voice over the Internet. These companies are larger than we
are and have substantially greater resources than we do. Furthermore, these long
distance providers may in the future plan to offer VoIP services to the
countries where we provide service. We are currently not aware of any
traditional long distance provider's plans to offer VoIP services to the
countries where we currently or plan to provide service to. If these traditional
long distance providers were to offer VoIP services to these countries, we may
not be able to compete successfully.
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NEED TO MANAGE OUR GROWTH
In 1998 the Company experienced substantial growth of its revenues. The
Company plans to continue to aggressively expand its operations. This planned
growth, if it occurs, may place a strain on the Company's administrative,
operational and financial resources. The Company's success will depend, in part,
on its ability to manage its growth and to enhance its operational and financial
controls. In order help manage this growth, the Company has recently recruited a
chief operating officer who will be required to implement financial and other
operational controls. The Company has limited management depth and no chief
financial officer. Its management is increasingly focusing its attention on the
expansion of the Company's by developing the relationships necessary to
successfully deploy additional circuits in underserved countries. If the Company
continues to grow in the future, for which no assurances can be given, it will
need to be able to attract and retain highly experienced executives and
employees capable of providing the necessary support. There can be no assurances
that the Company will be able to successfully manage its future growth.
DEPENDENCE ON MANAGEMENT
The Company's success to date has depended in large part on the skills
and efforts of Edward Stackpole, the Company's president and chief executive
officer. The Company has relied upon Mr. Stackpole to establish relationships
with its customers, service providers, and various parties in the underserved
countries where the Company provides service. If Mr.
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Stackpole were to become unavailable, the business of the Company could be
materially adversely affected.
LIMITED CAPITALIZATION AND OPERATING HISTORY
The Company's subsidiaries commenced operations in August 10, 1995,
August 7, 1996, and May 20, 1999 and financed their growth principally with
revenues from operations. In addition to its limited operating history, the
Company has limited capitalization. Investors should be aware that companies
with limited capitalization and operating history have a high degree of risk.
POSSIBLE FLUCTUATIONS IN OPERATING RESULTS
The Company has a limited operating history. Although revenues and
operating income increased rapidly in 1998, that growth rate may not be
indicative of future growth rates. To the extent that we experience any
interruption in our ability to transmit communications for any reason, the
results of operations for that quarter will be affected. From September 1, 1998
through early June 1999 we had no operational circuits and did not generate any
revenues from operations. However, in December 1998 we generated $836,000 from
the sale of our interest in certain equipment and a circuit. For this reason,
and in view of the Company's limited operating history, the Company believes
that period-to-period comparisons of its past or future operating results may
not be meaningful. Future results of operations may fluctuate significantly
based upon numerous factors, including any foreign or domestic regulation or FCC
ruling, pricing pressures which could lessen the competitive pricing advantage
of our customers and reduce the traffic usage of our network, the
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Company's ability to penetrate new markets and increases in competition. There
can be no assurances that the Company will be profitable on a quarter-to-quarter
basis or at all.
CONTROL BY MANAGEMENT
Edward J Stackpole, the Company's chief executive officer, and his
wife, Itir Stackpole, the Company's vice president, beneficially own
approximately 30.2% of the Company's outstanding Class A Common Stock and 77.3%
of the Company's Class B Common Stock. The Class B Common Stock is identical to
the Class A Common Stock in all respects except that each share of Class B
Common Stock has 10 votes in respect to each share of Class B Common Stock.
Because of the number of shares and voting power attributed to the Class B
Common Stock, the Stackpoles control 75.5% of the total voting power and are
able to control the election of the Company's directors and thereby control the
policies and operations of the Company.
CONTRACTUAL OBLIGATIONS TO MANAGEMENT
Pursuant to employment agreements with the Company's key management
personnel, the Company is obligated to pay an aggregate of 16.6% of its
quarterly net pre-tax income to these persons in addition to their base salaries
and stock options. There is no adjustment provision in the event the Company has
a unprofitable quarter following a profitable quarter. This can have a material
adverse effect on the Company's future results of operations.
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ABSENCE OF INDEPENDENT DIRECTORS
Cyberfast's Board of Directors consists of Edward and Itir Stackpole,
who are its principal shareholders and husband and wife, and Mr. Stackpole's
brother. Additionally, by contract Cyberfast has agreed to use its best efforts
to appoint Alan Goldstein, its Chief Operating Officer, and Bert Perez, its
Chief Technical Officer, to its board of directors. Even if Messrs. Goldstein
and Perez are appointed, Cyberfast will have no independent directors. In order
to list Cyberfast's Class A Common Stock on the Nasdaq Stock Market, it will be
required to appoint two independent directors to its board of directors who must
comprise a majority of the audit committee. At this time, the board of directors
has no committees. Unless and until this occurs, the market for Cyberfast's
Class A Common Stock may be adversely affected.
OUR BUSINESS MAY ENCOUNTER RISKS FROM THE YEAR 2000 WHICH ADVERSELY AFFECT US
The Year 2000 problem is the inability of some software, hardware and
systems to determine the correct century on January 1, 2000. For example,
software with date-sensitive functions that are not Year 2000 compliant may not
be able to determine whether "00" means 1900 or 2000, which may result in
computer failures or the failure of the computer to produce accurate
information. Our business, operating results and financial position could be
materially adversely affected if our computer systems and third party suppliers
are not Year 2000 compliant.
All of our computer hardware and software and other equipment is new,
and we believe it is therefore Year 2000 compliant. We have received
certification from Cisco that all of the equipment we lease from them is Year
2000 compliant.
24
<PAGE>
Because we are dependent upon customers located in the United States and
telecommunication companies located in third world countries, we are also
dependent upon all of these parties being Year 2000 compliant. IDT, our current
customer, recently advised us that it is Year 2000 compliant. We have not
contacted any of the foreign telecommunication companies with which our
equipment connects. Our risk is further complicated by the fact that foreign
telecommunication companies may be dependent upon third parties all of which
operate in an environment that has not had the degree of Year 2000 concern as we
have experienced in the United States.
4,934,802 OF OUR TOTAL OUTSTANDING SHARES ARE RESTRICTED FROM IMMEDIATE RESALE
BUT MAY BE PUBLICLY SOLD IN THE NEAR FUTURE. THIS COULD CAUSE THE MARKET PRICE
OF OUR COMMON STOCK TO DROP SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING WELL
We currently have outstanding restricted shares of Class A Common Stock
and Class B Common Stock. Our shares of Class B Common Stock convert on a
share-for-share basis into shares of Class A Common Stock at the option of the
holders.
Restricted Class A Restricted Class B
Common Stock Common Stock
Total restricted shares outstanding 394,752 4,540,050
Number of restricted shares owned by
officers and directors 265,044(1) 3,507,400
Number of restricted shares available
for sale 129,708 1,032,650
- ------------
(1) Includes 215,044 shares owned by Mr. and Mrs. Stackpole and 50,000 shares
owned by Mr. M. Dowell Stackpole.
Once this registration statement becomes effective, no sales of the
Company's Class A Common Stock
25
<PAGE>
may be made under Rule 144 for a period of 90 days. On the 91st day following
the effective date, Rule 144 will again become available.
Once Rule 144 becomes available, the market price could drop
significantly if our officers, directors or other holders of these restricted
shares sell them or are perceived by the market as intending to sell them.
OUR STOCK PRICE COULD FLUCTUATE DRAMATICALLY WHICH COULD RESULT IN SUBSTANTIAL
LOSSES TO INVESTORS
The trading price of our common stock has been volatile and could
fluctuate dramatically in the future in response to the following factors, some
of which are beyond our control:
o changes in expectations of our future financial performance,
including financial estimates we have made;
o changes in operating and stock price performance of other
telecommunication companies;
o future sales of our common stock;
o regulatory changes or actions taken by foreign governments; and
o or general economic factors.
In the past, the stock market has often experienced significant price and volume
fluctuations. These fluctuations, as well as general economic and political
conditions unrelated to our performance, may adversely affect the price of our
common stock.
26
<PAGE>
LIMITATION OF LIABILITY
The Florida Business Corporation Act provides that a director is not
personally liable for monetary damages to us or any other person for breach of
fiduciary duty, except under very limited circumstances. Such a provision makes
it more difficult to assert a claim and obtain damages from a director in the
event of his non-intentional breach of fiduciary duty.
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
CERTAIN STATEMENTS MADE IN ITEM 1 OF THIS REGISTRATION STATEMENT
"DESCRIPTION OF BUSINESS" INCLUDING THE RISK FACTORS ARE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. THESE FORWARD-LOOKING STATEMENTS INCLUDE OUR BELIEF THAT THERE ARE A
NUMBER OF CUSTOMERS TO WHICH WE CAN PROVIDE OUR SERVICES. THESE STATEMENTS ARE
BASED ON MANAGEMENT'S BELIEFS AND ASSUMPTIONS AND ON INFORMATION CURRENTLY
AVAILABLE TO MANAGEMENT. THESE STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED IN
SUCH FORWARD-LOOKING STATEMENTS. OUR CIRCUITS MAY BE DELAYED OR NOT BECOME
OPERATIONAL AS THE RESULT OF THE UNAVAILABILITY OF EQUIPMENT AND POLITICAL OR
OTHER LOCAL DIFFICULTIES IN THE COUNTRIES WHERE WE EXPECT TO PROVIDE SERVICE.
ADDITIONALLY, WE MAY NOT OBTAIN OTHER CUSTOMERS DUE TO CHANGES IN REGULATIONS OR
ECONOMIC FACTORS WHICH REDUCE THE COMPETITIVE ADVANTAGE OF OUR SERVICE OR OUR
CUSTOMERS' SERVICE.
27
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATION.
The following discussion of our financial condition and results of
operation should be read together with the financial statements and related
notes included in another part of this registration statement. The financial
statements for the years ended December 31, 1997 and 1998 are audited.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 AND 1999.
For the six months ended June 30, 1999 our revenues were $341,668 in
contrast to $6,049,411 for the six months ended June 30, 1998. The difference
stems from the fact that in 1998 we had circuits in operation in a large
developing country for the entire six month period and another circuit in
operation in another large developing country for part of the six months. This
year, we did not generate any revenue until June when our circuit in a small
developing country commenced operations. Our gross profit margin decreased this
year to approximately 38.3 percent from approximately 48.2 percent. The
difference may be attributable to the shorter period of operations. Our general
and administrative costs increased during the period ended June 30, 1999 to
$1,300,998 from $822,187 during the six months ended June 30, 1998 primarily due
to compensation expenses resulting from issuances of Class A Common Stock and
warrants. Depreciation costs were substantially less during the six months ended
June 30, 1999 because we had substantially less equipment and the period of time
from the date of acquisition of the
28
<PAGE>
equipment until the end of the period was less. For the six months ended June
30, 1999, we sustained a loss from operations of $1,136,313 and a net loss after
provision for income tax benefit of $974,313. This amounted to a loss per share
of $.16. This loss included $716,850 resulting from the issuance of Class A
Common Stock. During the quarter ending September 30, 1999, we will incur a
charge of approximately $600,000 resulting from the issuance of 75,000 shares of
Class A Common Stock in August 1999 to a consultant.
YEARS ENDED DECEMBER 31, 1997 AND 1998
For the year ended December 31, 1998, revenues increased by $5,482,529
or approximately 297% over 1997. The increase in revenues reflects our results
in obtaining an agreement in a large developing country. We generated only
limited revenue in the fourth quarter as a result of the expropriation of our
equipment by one country to which we provided service in 1998. In November 1998,
we sold our participation in the equipment and operating rights for the other
country in which we conducted operations in 1998. We received $836,000 which was
recorded as income for the period. Our gross profit margins increased
substantially to 48.2% in 1998 from approximately 37.6% in 1997. Our gross
profit margins increased because of our ability to reduce our costs for leasing
circuits in relation to gross revenues. Moreover, our cost of system
maintenance, while also higher in actual dollars, was proportionately less based
upon our total revenues. System maintenance consists of all costs related to
payments to local partners and to a third party which provides switching
services and equipment maintenance. Our general and administrative costs
increased by $974,410 or approximately 227% compared to 1997. This reflected our
higher
29
<PAGE>
costs in generating more revenues. In 1998, we incurred $996,285 of termination
costs resulting from the seizure of our equipment by a developing country in
September 1998.
Our net income for 1998 was $1,738,179 in contrast to $162,592 in 1997.
Because we were subject to income taxes effective with the closing of the
Reorganization on November 10th, our net income after tax was $1,738,179 in
1998. Our subsidiaries were Subchapter S corporations in 1997 and did not pay
any taxes at the corporate level. Our financial statements show a pro forma tax
computation which reflect how our results of operation would look if we had been
taxed for the entire period as a C corporation. The pro forma tax information
contained in our statement of income is unaudited. On a pro forma basis, net
income after tax was $1,237,179 or $.21 per share based on 5,820,000 shares
outstanding. Notwithstanding the net income provisions, we distributed to Edward
and Itir Stackpole, our principal shareholders, Subchapter S distributions in
1998 of $2,292,045. In 1997, our subsidiaries distributed $162,592 to Mr. and
Mrs. Stackpole.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $408,933 for the six months
ended June 30, 1999 in contrast to net cash provided by operating activities of
$2,823,721 for the six months ended June 30, 1998. This reflects the difference
between the loss in 1999 in contrast to the substantial income in 1998. Net cash
used by investing activities was $121,117 for the six months ended June 30, 1999
in contrast to $288,705 for the same period in 1998. The major component in each
period consisted of the acquisition of equipment. In 1999, there was no net cash
provided by or used by financing activities; for the same period in 1998,
$1,738,965.00 of
30
<PAGE>
cash was used by financing activities consisting primarily of distributions to
our subsidiaries' stockholders under Subchapter S of the Internal Revenue Code.
At the time our subsidiaries were privately owned.
Net cash provided by operating activities in 1998 was $2,587,989 and
$816,829 for the year 1997. Cash provided by investing activities was $129,623
in 1998. In 1997 net cash used in investing activities was $476,722. Net cash
used by financing activities was $2,358,045 in 1998 in contrast to $162,592 in
1997. The primary component in 1998 consisted of $2,292,045 representing
subchapter S distributions.
At June 30, 1999, we had a working capital deficit of approximately
$339,000 and only $8,047 in cash. Since June 30, 1999, the Company's principal
stockholders lent us approximately $700,000. The loans are evidenced by
promissory notes due on demand which bear 9% per annum interest. Until some
numbers of our circuits become operational and commence generating revenue, we
will remain substantially dependent upon loans from our principal stockholders
for working capital.
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
CERTAIN STATEMENTS MADE IN THIS "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND PLAN OF OPERATION" ARE FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
THESE FORWARD-LOOKING STATEMENTS INCLUDE, AMONG OTHERS, OUR ANTICIPATION THAT
OUR PRINCIPAL STOCKHOLDERS WILL SUPPLY WORKING CAPITAL LOANS.
31
<PAGE>
THESE STATEMENTS ARE BASED ON MANAGEMENT'S BELIEFS AND ASSUMPTIONS AND ON
INFORMATION CURRENTLY AVAILABLE TO MANAGEMENT. THESE STATEMENTS ARE SUBJECT TO
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE CONTEMPLATED IN SUCH FORWARD-LOOKING STATEMENTS. OUR PRINCIPAL
STOCKHOLDERS MAY DISCONTINUE MAKING LOANS FOR PERSONAL REASONS.
32
<PAGE>
ITEM 3. DESCRIPTION OF PROPERTY
DOMESTIC LEASES
The Company is a party to a long-term lease for its corporate offices
in Boca Raton, Florida. The Company will also house and maintain its
transmission facilities at this location. The lease expires on June 14, 2004.
The lease payments for 1999 are $25,000; 2000 is $47,000; 2001 is $48,000; 2002
is $49,000; 2003 is $51,000; and 2004 is 25,000.
The Company is also a party to an lease for office space in Los
Angeles, California. The lease is prepaid until May 31, 2000, at which time the
lease expires.
FOREIGN LEASES
The Company is not a party to any lease in any foreign country.
33
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides certain information as of October 31, 1999
concerning the beneficial ownership of the Company's voting stock held by each
director; each person known by us to be the beneficial owner of at least 5% of
the Company's voting stock; and all executive officers and directors as a group.
<TABLE>
<CAPTION>
- ----------------------- ---------------------------------------- -------------------------------- --------------------
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
TITLE OF CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1)(2) VOTING POWER
- ----------------------- ---------------------------------------- -------------------------------- --------------------
<S> <C> <C> <C>
Class A and
Class B Edward J. and Itir Stackpole(3) 5,155,500 75.6%
Common Stock 777 Yamato Road, Suite 1116
Boca Raton, FL 33431
Class A and
Class B Oguz Stackpole 1,091,000 20.9%
Common Stock 30 Garrison Street
Boston, MA 02116
Class A
Common Stock M. Dowell Stackpole(4) 57,000 *
6650 St. Andrews Avenue
Fort Worth, TX 76132
- ----------------------- ---------------------------------------- -------------------------------- --------------------
All directors and executive officers of the
Company as a group (4 persons) (5) 6,713,500 75.7%
* Less than 1% of voting power
- ---------------------------------------------------------------- -------------------------------- --------------------
</TABLE>
34
<PAGE>
(1) This table includes the Class A and the Class B Common Stock. Each
share of Class B Common Stock has 10 votes per shares in relation to
the Class A Common Stock which has one vote per share.
(2) Beneficial ownership exists when a person has either the power to vote
or sell our Common Stock. Unless otherwise indicated, we believe that
all persons named in the table have sole voting and investment power
with respect to all securities beneficially owned by them. A person is
deemed to be the beneficial owner of securities that can be acquired by
such person within 60 days from the date whether upon the exercise of
options or otherwise.
(3) Includes 400,000 shares of Class A Common Stock underlying vested
options.
(4) Includes 7,000 shares of Class A Common Stock held by Mr. M. Dowell
Stackpole's wife and six children, of which he is deemed to be a
benefical owner.
(5) Includes 10,000 shares of Class A Common Stock and 100,000 shares of
Class A Common Stock underlying vested options granted to Alan
Goldstein, the Company's chief operating officer, and Bert Perez, the
Company's chief technical officer and 400,000 shares of Class A Common
Stock underlying vested options granted to Edward J. and Itir
Stackpole.
35
<PAGE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides important information concerning our
directors and executive officers.
<TABLE>
<CAPTION>
- ---------------------------------- ---------------------------------------------------------
NAME POSITION
- ---------------------------------- ---------------------------------------------------------
<S> <C>
Edward J. Stackpole Co-chairman of the Board of Directors and President
(Chief Executive Officer)
- ---------------------------------- ---------------------------------------------------------
Itir Stackpole Co-chairman of the Board of Directors and
Vice President
- ---------------------------------- ---------------------------------------------------------
Alan Goldstein Chief Operating Officer,
Secretary and Treasurer
- ---------------------------------- ---------------------------------------------------------
Bert Perez Chief Technical Officer
- ---------------------------------- ---------------------------------------------------------
M. Dowell Stackpole Director
- ---------------------------------- ---------------------------------------------------------
</TABLE>
Edward J. Stackpole founded our subsidiaries. Commencing in August,
1995, Mr. Stackpole was president of our subsidiaries and, since our
Reorganization in November 1998, has been our president and co-chairman of our
board of directors. For six years prior to that date, Mr. Stackpole was the
general partner of EJS Associates which distributed AT&T equipment in Turkey.
36
<PAGE>
Itir Stackpole co-founded our subsidiaries. Commencing in August 1995,
Mrs. Stackpole was vice president of our subsidiaries and, since our
reorganization in November 1998, has held the office of vice president and is
co-chairman of our board of directors. Mrs. Stackpole was also general partner
of EJS Associates in Turkey from 1989 through August 1995.
Alan Goldstein became our chief operating officer on June 1, 1999. From
1993 through 1999, Mr. Goldstein was employed by Sprint Communications, Inc. in
Fort Lauderdale, Florida. Mr. Goldstein began his career at Sprint as a senior
account executive responsible for developing the South Florida territory. After
receiving numerous top performer awards, he was promoted to branch manager in
1997. As branch manager, Mr. Goldstein developed one of Sprint's top revenue
producing customers and managed a team of sales professionals which comprised
the number two branch in the country.
Bert Perez became our chief technical officer on June 1, 1999. From
1992 through 1999, Mr. Perez was employed by Sprint Communications, Inc. in
South Florida as their data support manager. Mr. Perez has extensive knowledge
of many networking technologies, software platforms, and hardware and was
responsible for designing networking solutions for Sprint customers and
providing technical support to the South Florida sales team.
Mr. M. Dowell Stackpole became a director in December 1998. Mr.
Stackpole is currently employed as an analyst for Taylor & Company, a private
investment firm. Mr.
37
<PAGE>
Stackpole was also employed by Taylor & Company as an analyst from August 1991
through January 1994. For the period of January 1, 1994 through January 1995,
Mr. Stackpole was employed as an analyst at HGK Investments, Ltd., a licensed
broker-dealer. Mr. Stackpole is the brother of Mr. Edward J. Stackpole, our
president and chief executive officer.
38
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
Provided is information with respect to compensation paid by us for
1998 to our chief executive officer and other officers whose compensation
exceeded $100,000 for 1998.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
(a) (b) (c) (e) (i)
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION ($) COMPENSATION ($)
- --------------------------- ---- ------ ---------------- ----------------
($)
---
<S> <C> <C> <C> <C>
Edward J. Stackpole, chief executive 1998 0 0 $1,146,022.50 *
officer
Itir Stackpole, vice president 1998 0 0 $1,146,022.50 *
Ridvan Ali Gurkan, vice president, 1998 0 $345,000** 0
international operations
</TABLE>
* In 1998 our subsidiaries were taxed under Subchapter S of the Internal Revenue
Code. The Edward and Itir Stackpole, as holders of 100% of the stock of
Cyberfast Network Systems, Inc, received the Subchapter S distribution. One-half
is imputed to each to avoid a misleading impression.
** Represents commissions.
On January 1, 1999, Mr. Edward J. Stackpole entered into a three-year
employment agreement with the Company at an annual salary of $300,000 per year
and a quarterly bonus
39
<PAGE>
equal to 5% of the Company's net pre-tax quarterly income. Mr. Stackpole was
also granted 600,000 non-qualified stock options exercisable at $4.00 per share
over a 10-year period which vest in increments of 50,000 options quarterly,
provided that Mr. Stackpole is still employed on the last day of each quarter.
Mr. Stackpole receives an automobile allowance of $2,000 per month and car
insurance of approximately $2,000 per year.
On January 1, 1999 Mrs. Itir Stackpole entered into a three-year
employment agreement with the Company at an annual salary of $250,000 per year
and a quarterly bonus equal to 5% of the Company's net pre-tax quarterly income.
Mrs. Stackpole was also granted 600,000 non qualified options at $4.00 per share
over a 10-year period which vest in increments of 50,000 options quarterly,
provided that Mrs. Stackpole is still employed on the last day of each quarter.
We pay Mrs. Stackpole's automobile insurance of approximately $2,000 per year.
Effective June 1, 1999, Mr. Alan T. Goldstein entered into a three-year
employment agreement with the Company at an annual salary of $100,000 per year.
Mr. Goldstein also receives a quarterly bonus equal to 3.3% of the Company's net
pre-tax quarterly income. He received a signing bonus of 10,000 shares of the
Company's Class A Common Stock, of which 5,000 vested immediately and 5,000
shall vest on December 1, 1999 provided Mr. Goldstein is employed by the Company
on that date. He was granted 300,000 non-qualified options exercisable at $5.00
per share over a 10-year period which vest in increments of 25,000 options
quarterly, provided that Mr. Goldstein is still employed on the last day of each
quarter.
Effective on June 1, 1999, Mr. Bert Perez entered into a three-year
employment agreement with the Company at an annual salary of $100,000 per year.
Mr. Perez also receives a
40
<PAGE>
quarterly bonus equal to 3.3% of the Company's net pre-tax quarterly income. He
received a signing bonus of 10,000 shares of the Company's Class A Common Stock,
of which 5,000 vested immediately and 5,000 shares shall vest on December 1,
1999 provided Mr. Perez is employed by the Company on that date. Mr. Perez was
granted 300,000 non qualified options exercisable at $5.00 per share over a
10-year period which vest in increments of 25,000 options quarterly, provided
that Mr. Perez is still employed on the last day of each quarter.
41
<PAGE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following table describes the shares that we issued to our
management and persons who were beneficial owners of more than five percent of
our common stock as part of the November 1998 Reorganization:
<TABLE>
<CAPTION>
- ----------------------------------------- --------------------------------------------
SHAREHOLDER NAME NUMBER AND CLASS OF SHARES ISSUED
- ----------------------------------------- --------------------------------------------
<S> <C>
Edward J. and Itir Stackpole 251, 044 shares of Class A Common Stock
3,507,400 shares of Class B Common Stock
- ----------------------------------------- --------------------------------------------
Oguz Stackpole(1) 198,800 shares of Class A Common Stock
965,200 shares of Class B Common Stock
- ----------------------------------------- --------------------------------------------
Ali Gurkan(2) 67,450 shares of Class A Common Stock
49,806 shares of Class B Common Stock
- ----------------------------------------- --------------------------------------------
Kenneth Greenberg(3)(4) 70,350 shares of Class A Common Stock
209,950 shares of Class B Common Stock
- ----------------------------------------- --------------------------------------------
</TABLE>
(1) Son of Mr. and Mrs. Stackpole.
(2) Mr. Gurkin was a director at the time of the Reorganization.
(3) Mr. Greenberg was an officer at the time of the Reorganization.
Includes 50,350 shares of Class A Common Stock issued to Greengold
International Corp., of which Mr. Greenberg was an affiliate.
(4) Issued to Greengold International Corp. a corporation of which Mr.
Greenberg is an affiliate.
As of June 30, 1999, we owed Mr. and Mrs. Stackpole $185,669 for
accrued salaries. Since that date, their salaries have continued to accrue. As
cash flow permits, we will repay Mr. and Mrs. Stackpole. Mr. and Mrs. Stackpole
lent the Company approximately $700,000 subsequent to June 30, 1999.
42
<PAGE>
We granted Mr. M. Dowell Stackpole 58,000 shares of Class A Common
Stock on in January 1999 as compensation for joining our board of directors.
From approximately the end of the third quarter of 1998 through the end of the
second quarter of 1999, Mr. Edward J. and Itir Stackpole, our chief executive
officer and vice-president, held as nominees for Cyberfast, approximately
$538,097 in personal accounts. These funds are reflected in the audited
financial statements for the year ended December 31, 1999 as cash equivalents of
Cyberfast. The funds including interest were used subsequently to December 31,
1998 as Cyberfast's working capital.
43
<PAGE>
ITEM 8. DESCRIPTION OF SECURITIES
GENERAL
The authorized capital stock of Cyberfast consists of an aggregate of
50,000,000 shares, composed of (i) 5,000 shares of preferred stock, $100.00 par
value per share, (ii) 40,250,000 shares of Class A Common Stock, $0.01 per
share, and (iii) 4,750,000 shares of Class B Common Stock, $0.01 per share.
CLASS A COMMON STOCK
Holders of Class A Common Stock have one vote per share on each matter
submitted to a vote of the shareholders and a ratable right to the net assets of
Cyberfast upon liquidation. Holders of the Class A Common Stock do not have
preemptive rights to purchase additional shares of Class A common stock or other
subscription rights. The Class A Common Stock carries no conversion rights and
is not subject to redemption or to any sinking fund provisions. All shares of
Class A Common Stock are entitled to share equally in the dividends from legally
available sources as determined by the board of directors, subject to any
preferential dividend rights of the preferred stock. Upon dissolution or
liquidation of Cyberfast, whether voluntary or involuntary, holders of the Class
A Common Stock are entitled to receive assets of Cyberfast for distribution to
the shareholders, subject to any preferential right of the preferred stock. All
outstanding shares of Class A Common Stock are fully paid and non-assessable. As
of the date of this Registration Statement, 1,490,450 shares of Class A Common
Stock are outstanding.
44
<PAGE>
CLASS B COMMON STOCK
The Class B Common Stock and the Class A Common Stock are substantially
identical, except that:
o the holders of the Class B Common Stock have 10 votes per share and
the holders of the Class A Common Stock have one vote per share on
each matter considered by shareholders,
o upon sale, except a gift, of the Class B Common Stock shall
automatically be converted into an equal number of fully-paid and
non-assessable shares of Class A Common Stock, and
o each share of Class B Common Stock is convertible into one share of
Class A Common Stock at the option of the holder at any time.
77.25% of the authorized and outstanding Class B Common Stock is held
by Edward J. and Itir Stackpole. Because of the number of shares and voting
power attributed to the Class B Common Stock, the Stackpoles are able to control
the election of Cyberfast's directors and thereby control the policies and
operations of Cyberfast. Thus, the holders of the Class A Common Stock may be
deprived of an opportunity to sell their shares at a premium over prevailing
market prices to a party interested in effectuating a business combination with
Cyberfast because of the control of the Stackpoles.
PREFERRED STOCK
45
<PAGE>
Preferred stock may be issued from time to time in one or more series.
The board of directors is authorized to determine the rights, preferences,
privileges and restrictions granted to, and imposed upon any series of preferred
stock and to fix the number of such shares
There are no shares of preferred stock outstanding.
46
<PAGE>
PART II
ITEM 1. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICES OF SECURITIES
Cyberfast's common stock trades on the OTCBB under the symbol CYSI.
Prior to trading as CYSI, the Company traded as SXFT during part of the fourth
quarter of 1998. The following table sets forth the prices as reported to
Cyberfast by the OTCBB for the periods indicated. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
- ---------------- ----------------------- ---------------------------- ----------------------------
CYSI HIGH LOW
- ---------------- ----------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
1999 Second Quarter $19.44 $2.38
- ---------------- ----------------------- ---------------------------- ----------------------------
First Quarter $5.25 $2.13
- ---------------- ----------------------- ---------------------------- ----------------------------
- ---------------- ----------------------- ---------------------------- ----------------------------
1998 Fourth Quarter $5.38 $2.25
- ---------------- ----------------------- ---------------------------- ----------------------------
- ---------------- ----------------------- ---------------------------- ----------------------------
SXFT HIGH LOW
- ---------------- ----------------------- ---------------------------- ----------------------------
1998 Fourth Quarter $.05 $.05
- ---------------- ----------------------- ---------------------------- ----------------------------
</TABLE>
As of August 25, 1999, there were approximately 530 beneficial holders
of the Company's common stock.
The Company did not pay dividends on its common stock in 1997 or 1998
and it does not anticipate paying any dividends thereon in the foreseeable
future. Our subsidiaries did make subchapter S distributions to their former
shareholders.
47
<PAGE>
ITEM 2. LEGAL PROCEEDINGS
Not Applicable.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On October 5, 1999 we engaged the firm of Rachlin, Cohen and Holtz, LLP
to audit our financial statements for the fiscal years ended December 31, 1997
and 1998. These financial statements were previously audited by Mr. Robert
Jarkow, CPA and are contained in this registration statement. We expect to
receive a new audit shortly and will file an amendment to this registration
statement.
We recently learned that Mr. Jarkow is not independent and not able to
act as our auditor.
During the past two years, Jr. Jarkow's reports on the financial
statements did not contain an adverse opinion or disclaimer of opinion, and was
not modified as to uncertainty, audit scope, or accounting principal.
The decision to retain new auditors was made by our president and
approved by our board of directors.
There were no disagreements with Mr. Jarkow on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure while he was under engaged by us.
In accordance with Item 304(a)(3) of Regulation SB, we have provided
Mr. Jarkow with this part of our registration statement and a letter requesting
him to furnish a letter to the Securities and Exchange Commission stating
whether he agrees with our disclosure.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the following persons and entities
acquired shares of stock and other securities from us as set forth in the table
below.
<TABLE>
<CAPTION>
AMOUNT OF CONSIDERATION
SHAREHOLDER CLASS OF SECURITIES DATE SOLD SECURITIES SOLD RECEIVED
- ----------- ------------------- --------- --------------- --------
<S> <C> <C> <C> <C>
Edward J. Stackpole Class B 923 shares of
Common Stock 11/10/1998 1,753,700(1) Cyberfast Network
Systems, Inc. and
923 shares of
Budget-calls Corp.
Itir Stackpole Class B 923 shares of
Common Stock 11/10/1998 1,753,700(1) Cyberfast Network
Systems, Inc. and
923 shares of
Budget-calls Corp.
Oguz Stackpole Class B 508 shares of
Common Stock 11/10/1998 965,200(1) Cyberfast Network
Systems, Inc. and
508 shares of
Budget-calls Corp.
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
AMOUNT OF CONSIDERATION
SHAREHOLDER CLASS OF SECURITIES DATE SOLD SECURITIES SOLD RECEIVED
- ----------- ------------------- --------- --------------- --------
<S> <C> <C> <C> <C>
Greengold International Class B 221 shares of
Corp. Common Stock 11/10/1998 209,950(1) Cyberfast
Network Systems,
Inc.
Ali Gurkan Class B 71 shares of
Common Stock 11/10/1998 67,450(1) Cyberfast Network
Systems, Inc.
Edward J. Stackpole Class A Services rendered
Common Stock 11/10/1998 125,522(1)
Itir Stackpole Class A Services rendered
Common Stock 11/10/1998 125,522(2)
Oguz Stackpole Class A Services rendered
Common Stock 11/10/1998 198,800(2)
Greengold International Class A Services rendered
Corp. Common Stock 11/10/1998 50,350(2)
Ali Gurkan Class A Services rendered
Common Stock 11/10/1998 49,806(2)
Kenneth Greenberg Class A Services rendered
Common Stock 11/10/1998 20,000(3)
Peter Goldstein Class A Services rendered
Common Stock 11/10/1998 20,000(3)
Jeffrey Gerstein Class A Services rendered
Common Stock 11/10/1998 4,800(3)
Robert Weinberg Class A Services rendered
Common Stock 11/10/1998 10,000(3)
Marjorie Weinberg Trust Class A Services rendered
Common Stock 11/10/1998 28,200(3)
Bridgestone Capital Group, Class A Services rendered
LLC Common Stock 11/10/1998 127,900(3)
Kading Companies, S.A. Class A Services rendered
</TABLE>
49
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
S.A. Common Stock 11/10/1998 17,000(3)
Robert Koester Class A Services rendered
Common Stock 11/10/1998 3,500(3)
David Rakiec Class A Services rendered
Common Stock 11/10/1998 3,500(3)
Olympic Capital Group, Class A Services rendered
Inc. and Designees Common Stock 11/10/1998 115,735(3)
Cosmo A. Palmieri Class A Services rendered
Common Stock 11/10/1998 41,100(3)
M. Dowell Stackpole Class A 1/1/1999 58,000(3) Inducement to join the
Common Stock board of directors
Douglas Blackwell Class A 1/6/1999 7,500(3)(4) Services rendered
Common Stock
Advantage Marketing and Class A 4/5/1999 50,000(3) Promissory note
Capital, Inc. Common Stock
European Network Group Class A 4/7/1999 20,000(3) Fee
Society Common Stock
Alan T. Goldstein Class A Signing bonus pursuant
Common Stock 06/01/1999 10,000(3) to an employment
agreement with the
Company
Bert Perez Class A Signing bonus
Common Stock 06/01/1999 10,000(3) pursuant to an
employment agreement
with the Company
Boru Enterprises, Inc. Class A 8/13/1999
Common Stock 75,000(3) Services rendered
</TABLE>
50
<PAGE>
(1) The issuance of the 4,750,000 shares of Class B Common Stock to the
shareholders of Cyberfast Network Systems, Inc. and Budget-Calls Corporation was
exempt under Section 4(2) of the Securities Act of 1933 as a non-public
offering. The Class B Common Stock was sold to five persons that exchanged their
shares of Cyberfast Network Systems, Inc. for shares of Cyberfast Systems, Inc.
Each of these person executed appropriate investment letters and had access to
information concerning Cyberfast so that he could fend for himself.
(2) The issuance of 550,000 shares of Class A Common Stock to the management of
Cyberfast Network Systems, Inc. for services rendered was exempt under Section
3(b) of the Securities Act of 1933 and Rule 504 promulgated thereunder.
(3) The sale of shares of Class A Common Stock was exempt under Section 4(2) of
the Securities Act. Each person acquired the shares for investment and had
access to information concerning Cyberfast.
(4) The table does not include 10,000 shares issuable to Mr. Blackwell as a fee
as of June 30, 1999. The shares have not been issued as of the date of this
registration statement.
51
<PAGE>
ITEM 5. INDEX OF EXHIBITS
2. Plan of Reorganization*
3. Articles of Incorporation*
3.1 Articles of Amendment to the Articles of Incorporation of Smartfit
Foundations, Inc.*
3.2 Amendment to the Articles of Incorporation of Cyberfast Systems, Inc.*
3.3 Bylaws*
10 Cisco Equipment Lease*
11 Statement regarding computation of per share earnings**
16 Form of letter to Mr. Robert Jarkow send pursuant to Item 304(a)(3) of
Regulation SB.
21 Subsidiaries*
27 Financial Data Schedule**
- ----------
* Previously filed
** To be filed by amendment
52
<PAGE>
SIGNATURE
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated: November 3, 1999 Cyberfast Systems, Inc.
By: /s/ Edward J. Stackpole
---------------------------------------------
Edward J. Stackpole, Chief Executive Officer
53
<PAGE>
CYBERFAST SYSTEMS, INC. AND SUBSIDIARIES
Table of Contents
Independent Auditor's Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE>
ROBERT JARKOW
CERTIFIED PUBLIC ACCOUNTANT
3111 North Andrews Avenue
Fort Lauderdale, Florida 33309
(954) 630-9070
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Cyberfast Systems, Inc. and Subsidiaries
I have audited the accompanying consolidated balance sheets of Cyberfast
Systems, Inc. and Subsidiaries as of December 31, 1998 and June 30, 1998 and the
related consolidated statements of operations, shareholders' equity and cash
flows for the years ended December 31, 1998 and 1997, and the six months ended
June 30, 1998. These consolidated financial statements are the responsibility of
the Company's management. My responsibility is to express an opinion on these
consolidated financial statements based on my audits.
I conducted my audits in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. I believe that my audits provide
a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Cyberfast Systems, Inc. and Subsidiaries as of December 31, 1998 and June 30,
1998, and the results of its consolidated operations and cash flows for the
years ended December 31, 1998 and 1997, and six months ended June 30, 1998 in
conformity with generally accepted accounting principles.
The accompany consolidated balance sheet as of June 30, l999 and the
related consolidated statements of operations, equity, and cash flows for the
six months ended June 30, 1999 were not audited by me and, accordingly, I do not
express an opinion on them.
/s/ Robert Jarkow
------------------
Robert Jarkow
June 25, 1999 as to the audits
August 30, 1999 as to the unaudited
F-2
<PAGE>
CYBERFAST SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30,1999 and 1998 and December 31,1998
June 30, December 31,
------------------------
1999 1998 1998
---------- ---------- ----------
UNAUDITED
ASSETS
Current Assets
Cash & equivalents ................ $ 8,047 $ 974,581 $ 538,097
Accounts receivable ............... 68,424 127,110 --
Prepaid expenses .................. -- 86,650 --
Investment ........................ -- 36,708 --
Total current assets ............ 76,471 1,225,049 538,097
Equipment ............................ 256,304 1,033,883 135,187
Less: accumulated depeciation ..... 8,815 341,895 --
Net ............................... 247,489 691,988 135,187
Other ................................ -- 103,358 --
$ 323,960 $2,020,395 $ 673,284
========== ========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable .................. $ 332,463 $ 820,925 $ 196,794
Income tax payable ................ 83,000 -- 245,000
Customer deposits ................. -- 773,000 65,530
----------- ----------- -----------
Total current liabilities ..... 415,463 1,593,925 507,324
----------- ----------- -----------
Shareholders' Equity
Common stock-$.01 par value,
45,000,000 shares authorized,
5,975,500 and 5,820,000, issued
and outstanding at June 30,1999,
and December 31, 1998 and June 30,
1998, respectively 59,755 58,200 58,200
Additional paid-in capital ....... 715,295 424,470 --
Retained earnings (Deficit) ...... (866,553) (56,200) 107,760
----------- ----------- -----------
Total shareholders' equity
(Deficit) (91,503) 426,470 165,960
----------- ----------- -----------
$ 323,960 $ 2,020,395 $ 673,284
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CYBERFAST SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998 and 1997 and for the Six
Months ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31
1999 1998 1998 1997
----------- ----------- ----------- -----------
UNAUDITED
<S> <C> <C> <C> <C>
Revenues .................... $ 341,668 $ 6,049,411 $ 8,258,441 $ 2,775,912
----------- ----------- ----------- -----------
Expenses
Carriers ................. 131,023 1,360,236 1,444,890 1,046,534
System maintenance ....... 37,155 1,532,148 1,838,285 683,601
General and administrative 1,300,988 822,187 1,738,694 764,284
Depreciation ............. 8,815 171,405 257,108 118,901
Termination costs ........ -- -- 996,285 --
----------- ----------- ----------- -----------
Total expenses ......... 1,477,981 3,885,976 6,275,262 2,613,320
----------- ----------- ----------- -----------
Income (loss) from operations
and before income tax
(benefit) ................. (1,136,313) 2,163,435 1,983,179 162,592
Income Tax expense (benefit) (162,000) -- 245,000 --
----------- ----------- ----------- -----------
Net Income (loss) ...... ($ 974,313) $2,163,435 $1,738,179 $ 162,592
=========== =========== =========== ===========
Basic earning (loss) per
common share .............. ($0 16) $ 0.37 $ 0.30 $ 0.03
=========== =========== =========== ===========
Average number of common
shares outstanding ........ 5,921,523 5,820,000 5,820,000 5,820,000
=========== =========== =========== ===========
</TABLE>
Proforma Tax (Unaudited):
The Proforma Tax is computed as if Cyberfast Systems, Inc. and
Subsidiaries were taxed for the entire periods as a conventional
Corporation under the Internal Revenue Code.
Income from operations
before income tax ...... $2,163,435 $1,983,179 $ 162,592
Provision for Income Tax 841,000 746,000 52,000
---------- ---------- ----------
Net Income ............. $1,322,435 $1,237,179 $ 110,592
========== ========== ==========
Basic earnings per share ... $ 0.23 $ 0.21 $ 0.02
========== ========== ==========
Outstanding number of shares 5,820,000 5,820,000 5,820,000
========== ========== ==========
The accompanying notes are an integral part of these financial statements
F-4
<PAGE>
CYBERFAST SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31,1998 and 1997
and for the Six Months ended June 30,1999
Additional Retained
Common Paid-In Earnings
Stock Capital (Deficit)
----- ------- ---------
Balance December 31,1996 $58,200 $0 ($56,200)
Net income - - 162,592
Distribution to shareholders - - (162,592)
------- -------- --------
Balance December 31,1997 58,200 0 (56,200)
Cost to acquire public entity - - (66,000)
Acquired assets - 783,826 -
Net income - - 1,738,179
Distribution to shareholders-net - (783,826) (1,508,219)
------- -------- --------
Balance December 31, 1998 58,200 0 107,760
Stock issued for services 1,555 715,295 -
Net (Loss) - - (974,313)
------- -------- --------
Balance June 30, 1999 (Unaudited) $59,755 $715,295 ($866,553)
======= ======== =========
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CYBERFAST SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years
Ended December 31, 1998 and 1997
and for the Six Months ended June 30,1999 and 1998
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
------------------------- -----------------------
1999 1998 1998 1997
---------- ---------- ----------- ---------
UNAUDITED
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss) ($974,313) $2,163,435 $1,738,179 $162,592
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities
Depreciation 8,815 171,405 257,108 118,901
Stock issued for services 716,850 - - -
Increase in accounts receivable (68,424) (127,110) - -
Increase (decrease) in customer deposits, net (65,530) 464,000 352,815 330,402
Increase (decrease) in income tax payable (162,000) - 245,000 -
Increase (decrease) in accounts payable 135,669 615,991 (5,113) 204,934
--------- ---------- --------- --------
Total adjustments 565,380 1,124,286 849,810 654,237
--------- ---------- --------- --------
Net cash provided (used) by operating activities (408,933) 3,287,721 2,587,989 816,829
--------- ---------- --------- --------
Cash flows from investing activities
Purchase of property and equipment (121,117) - (125,187) (221,912)
(Increase) decrease in shareholder loan receivable - 161,810 161,810 (161,810)
(Increase) decrease in investment - 36,292 73,000 (73,000)
(Increase) decrease in deposit - - 20,000 (20,000)
(Increase) decrease in other - (166,981) - -
--------- ---------- --------- --------
Net cash provided (used) by investing activities (121,117) 31,121 129,623 (476,722)
--------- ---------- --------- --------
Cash flows from financing activities
Expenditure for public entity - - (66,000) -
Distributions to shareholders - (2,522,791) (2,292,045) (162,592)
--------- ---------- --------- --------
Net cash (used) by financing activities - (2,522,791) (2,358,045) (162,592)
--------- ---------- --------- --------
Increase (decreases) in cash (530,050) 796,051 359,567 177,515
Cash & equivalents-beginning 538,097 178,530 178,530 1,015
--------- ---------- --------- --------
Cash & equivalents-end $8,047 $974,581 $538,097 $178,530
========= ========== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CYBERFAST SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The information at June 30, 1999 is unaudited
Note 1. Public Entity
On October 1, 1998 an inactive public shell corporation was acquired by
two privately held operating companies and changed its name to Cyberfast
Systems, Inc. The owners of the private companies received 84.6% of Cyberfast
Systems, Inc. in exchange for 100% of their stock in the private companies. The
transaction was accounted for as a reverse acquisition, which is a capital
transaction and not a business combination. Accordingly, the recorded assets,
liabilities, and operations of the private companies were carried forward at
their historical amounts. Equity has been restated to give effect to the
transaction for all periods.
Note 2. Summary of Significant Accounting Policies
Nature of Operations
The Company operates long distance data and voice communication services
between the United States and foreign countries. All transmissions originate in
the United States. Invoicing to customers is done weekly and payment is made in
U.S. dollars via wire transfer within ten business days.
Principles of Consolidation
The consolidated financial statements include the Company and all
subsidiaries. All intercompany accounts and transactions have been eliminated in
the consolidation.
Use of Estimates
Use of estimates and assumptions by management is required in the
preparation of financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates and
assumptions.
Foreign Currency Transactions
All assets, liabilities, and expenses of foreign transactions are
translated into U. S. dollars at the exchange rate prevailing at the time of the
transaction.
Cash Equivalents
Cash equivalents at December 31, 1998 and 1997 consist of certificates of
deposit purchased with an original maturity of less than three months.
F-7
<PAGE>
CYBERFAST SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The information at June 30, 1999 is unaudited
Note 2. Summary of Significant Accounting Policies (continued)
Equipment
Equipment is recorded at cost. Depreciation is computed using the
straight-line method over the five year estimated useful lives of the assets.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25 Accounting for Stock Issued to Employees and related interpretations in
accounting for its employee stock option. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123 Accounting for Stock-Based Compensation.
Earnings Per Share
Earnings (loss) per share is calculated by dividing net income (loss) by
the average number of shares outstanding during the period.
Diluted loss per share are not disclosed because they would have an
antidilutive effect.
Reclassifications
Certain items have been reclassified to conform to the current year's
presentation.
Note 3. Commitments and Other Matters
Major Risk-The Company operates in foreign countries where the customs
and business practices are different from the United States. Due to these
practices, the interruption of business for periods of time, which could be
substantial, is a real possibility. These interruptions could have a material
effect on the Company.
At the end of the third quarter of 1998, the Company experienced an
interruption in its primary circuit and its equipment was confiscated. The
Company expensed the equipment having a net book value of $596,285 to
termination costs. The Company believes that the act of the foreign country was
illegal and is pursuing the return of its equipment and the restoration of its
circuit. Revenue recorded during 1998 related to the confiscated equipment was
approximately $7,000,000. Revenue lost during 1998 as a result of the
confiscation is estimated to be approximately $3,000,000.
Self Insurance-The Company is self insured for business interruption.
F-8
<PAGE>
CYBERFAST SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The information at June 30, 1999 is unaudited
Note 3. Commitments and Other Matters (continued)
Major Customers and Suppliers-The Company sells its services to a limited
number of customers. Each customer generated more than 10% of the revenues of
the Company. One customer accounted for more than 50% of all revenue. At June
30, 1999, the Company had only one customer.
The Company leased its long distance lines from various suppliers at
fixed rates under long term contracts. Because of the above mentioned
confiscation, at December 31, 1998, all long distance line leases were
terminated, at a cost of $400,000 - included in termination costs. In 1999, the
Company negotiated new month to month contracts.
Long-term equipment leases-The Company has entered into numerous
long-term equipment leases. The leases expire in March 2002. Monthly payments
are $8,718. Lease expense was $23,956 for the six months ended June 30, 1999.
Domestic Long-Term Operating Leases-The Company has commitments under
long-term operating leases for office space. Lease terms are from 2 to 5 years.
The following summarizes the future minimum lease payments under all
noncancelable operating lease obligations: for 1999 is $65,000; 2000 is $67,000;
2001 is $48,000; 2002 is $49,000; 2003 is $51,000; and 2004 is $25,000.
Employment agreements-Effective in 1999, the Company entered into four
employment agreements. All agreements expire in the beginning of 2002. The
agreements require total annual salaries of $750,000, 16.6% pre tax income
salary bonus paid quarterly, 1,200,000 stock options which were granted at $4
per share (the market value at the date the agreements were executed), and
600,000 stock options which were granted at $5 per share (the market value at
date of grant was $4). The stock option vest quarterly over 3 years and expire
after 10 years.
Year 2000 Compliance-The Company is currently evaluating its computer
systems and has not determined if it is year 2000 compliant. The Company
anticipates the evaluation being completed by the end of the third quarter of
1999.
F-9
<PAGE>
CYBERFAST SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The information at June 30, 1999 is unaudited
Note 4. Income Tax
Prior to the reverse acquisition, the privately held companies were S
Corporations under the Internal Revenue Code. Accordingly, they were not
responsible for payment of Income Taxes. Due to this, the effective tax rate for
1998 was only 12.3%.
If the privately held companies were conventional corporations under the
Internal Revenue Code, management is of the opinion that all distributions would
have been paid as salary, and accordingly, there would have been no taxable
income.
At June 30, 1999 and December 31, 1998, there are no items that give rise
to deferred income taxes.
Note 5. Shareholders' Equity
The Company had ownership of equipment paid for by a major customer. The
assets had been recorded at cost and as additional paid-in-capital. Such assets
were confiscated (Note 3).
There are 5,000,000 authorized shares of $100 par value preferred stock.
No shares have been issued.
There are two classes of common stock: Class A Stock, authorized
40,250,000 shares, and Class B Stock, authorized 4,750,000 shares. The two
classes are identical except that Class A has 1 vote per share and Class B has
10 votes per share. At December 31, 1998, there were 1,070,000 Class A and
4,750,000 Class B shares outstanding. At June 30, 1999, there were 1,435,450
Class A and 4,540,050 Class B shares outstanding.
The Company issued 155,500 Class A shares for services, in the amount of
$716,850, for the six months ended June 30, 1999.
Note 6. Stock Options and Warrants
The Company has granted stock options and warrants to purchase shares of
the Company's Class A common stock to key employees, who are responsible for the
direction and management of the Company, and a non-employee consultant. At June
30, 1999, stock options for 1,830,000 Class A shares of common stock were
outstanding.
F-10
<PAGE>
CYBERFAST SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The information at June 30, 1999 is unaudited
Note 6. Stock Options and Warrants (continued)
Information relating to stock options and warrants during 1999 is as follows:
Number Average Price
of shares per share Total
----------------------------------
Shares under option at June 30, 1999 1,800,000 $4.33 $7,794,000
Shares under warrants at June 30, 1999 30,000 $8.75 262,500
Vested 200,000 $4.00 800,000
Exercised None
Forfeited 20,000 $5.00 100,000
Proforma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its stock options and warrants under the fair value method of that
Statement. The fair value for these option and warrants was estimated at the
dates of grant using a Black-Scholes option pricing model with the following
assumptions for 1999: (1) risk free interest rate of 5.5%, (2) dividend yield of
0%, (3) volatility factor of 120%, and (4) expected life of 10 years for stock
options and 18 months for the warrants.
Had the Company elected the fair value methodology for determining
compensation expense, the Company's net loss for the six months ended June 30,
1999, as reported in the accompanying consolidated financial statements, would
have been increased by $467,000 and the additional loss per share would have
increased by $.08.
Note 7. Liquidity
The two major stockholders, who are also officers of the Company, have
committed to fund the cash needs of the Company, including the deferral of the
payment of their compensation, until operations are self sustaining.
F-11
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
16 Form of letter to Mr. Robert Jarkow sent pursuant to Item 304(a)(3) of
Regulation SB.
EXHIBIT 16
November 2, 1999
VIA FEDERAL EXPRESS
Mr. Robert Jarkow, CPA
3111 North Andrews Avenue
Fort Lauderdale, FL 33309
Dear Mr. Jarkow:
Pursuant to Item 304(a)(3) of Regulation SB, please see the attached
page from the Form 10-SB which shall be filed with the Securities and Exchange
Commission. The attachment contains the disclosure for Part II, Item 3 entitled
"Changes in and disagreements with accountants on accounting and financial
disclosure." In accordance with Item 304(a)(3), we request that you furnish a
letter to the Securities and Exchange Commission stating whether you agree with
this disclosure. Your letter should be sent to the Securities and Exchange
Commission, Division of Corporation Finance, Office of Small Business, Attention
Mr. Richard K. Wulff, and should reference Cyberfast Systems, Inc., File No.
0-27263.
Very truly yours yours,
Edward Stackpole, President
ES/eb
Enclosure
cc: Mr. Richard K. Wulff, Chief, Office of Small Business
