SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
|X| Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended June 30, 2003
|_| Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from __________ to __________.
Commission file number 0-27849
SKYFRAMES, INC.
A Utah Corporation
(Exact name of small business issuer in its charter)
Utah 00-001748413
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
555 Anton Boulevard, Suite 1200, Costa Mesa California 92626
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 957-1000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.10
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES |X| NO |_|
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in part III of this Form 10-K
or any amendment to this Form 10-K. |_|
State issuer's revenues for its most recent fiscal year: $53,925
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of October 24, 2003 was: $10,551,560.
The number of shares outstanding of the issuer's classes of Common Stock
as of October 24, 2003: Common Stock, $.10 Par Value 15,003,956 Shares
Transitional Small Business Disclosure Format YES |_| NO |X|
TABLE OF CONTENTS
PART I Page
Item 1. Description of Business 1
Item 2. Description of Properties 3
Item 3. Legal Proceedings 4
Item 4. Submission of Matters to a Vote of Security Holders 4
PART II
Item 5. Market Information 5
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 7. Financial Statements 14
Item 8. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure 39
Item 8A. Disclosure Controls and Procedures 39
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 40
Item 10. Executive Compensation 41
Item 11. Security Ownership of Certain Beneficial Owners and Management 44
Item 12. Certain Relationships and Related Transactions 45
Item 13. Exhibits, Lists and Reports on Form 8-K 45
Item 14. Principal Accountant Fees and Services 46
PART I
Item 1. DESCRIPTION OF BUSINESS
When used in this Form 10-KSB, the words "expects," "anticipates,"
"estimates", "believes, "projects, "plans", "forecasts" and similar expressions
are intended to identify forward-looking statements. These statements regarding
financial and operating performance and results and other statements that are
not historical facts. Such statements are subject to risks and uncertainties,
including those set forth below under "Risks and Uncertainties," that could
cause actual results to differ materially from those projected. These
forward-looking statements speak only as of the date hereof and you are
cautioned not to place undue reliance on these statements. Skyframes expressly
disclaims any obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained herein to reflect any
change in the Company's expectations with regard thereto or any change in
events, conditions or circumstances on which any statement is based. This
discussion should be read together with the financial statements and other
financial information included in this Form 10-KSB. You should refer to and
carefully review the information in future documents the Company files with the
Securities and Exchange Commission. These forward-looking statements are made in
reliance upon the safe harbor provision of The Private Securities Litigation
Reform Act of 1995.
Background
Basic Energy, Inc. (the "Company") was originally organized on June 4,
1926 in the State of Utah under the name The M.M. Lead Company to pursue and
develop mining operations. On February 28, 1979, the Company changed its name to
M.M. Lead Company and again changed its name to Basic Energy, Inc., on February
22, 1980. The Company was unsuccessful in its pursuit of mining ventures and was
dormant. The Company then focused its efforts on seeking, investigating, and if
warranted, acquiring an interest in a business opportunity. On January 28, 2003,
the Company acquired SkyFrames, Inc., a Texas corporation ("Skyframes Texas")
pursuant to an Exchange Agreement (the "Agreement"), dated as of January 28,
2003. The Company acquired all of the outstanding shares of Common Stock of
Skyframes Texas, in exchange for 8,500,000 shares of the Company's Common Stock.
In addition, the Company issued 150,000 shares for cash received by the Company
at $.50 per share (all numbers give effect to a 1 for 100 reverse stock split).
Following the acquisition the name of the Company was changed to Skyframes, Inc.
All references in this report to Skyframes are to the combined entity.
Our principal executive offices are located at 555 Anton Boulevard, Suite
1200, Costa Mesa, California 92626 and our telephone number at that location is
(714) 957-1000. Information about our company is also available at our website
at www.skyframes.com. The contents of our website are not incorporated by
reference in this Annual Report on Form 10-KSB. We are a reporting company and
have filed reports with or furnished to the Securities and Exchange Commission,
such as our Annual Reports on Form 10-KSB, Quarterly Reports on Form 10-QSB,
Current Reports on Form 8-K and amendments to those reports.
The SEC maintains an Internet site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Securities and Exchange Commission.
The public also may read and copy these filings at the SEC's Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information about this
Public Reference Room is available by calling 1-800-SEC-0330.
General
Skyframes uses satellite technology to provide high-speed broadband data
transmission services. Our primary business consists of diverse path
connectivity for government and business. Government and business have become
dependent on the Internet and private intranet, typically accessed through the
terrestrial telephone system. In the event of an outage in terrestrial services
due to natural disasters or equipment malfunctions, our Diverse Path system can
provide a back up access to ensure connectivity. As of June 30, 2003, we had
five total Internet service provider type customers with a subscriber base of
250 users.
The Diverse Path system consists of three major components: the satellite,
the Skyframes uplink center in Riverside County, California and the remote
site gateway which is installed at the customer's location. This remote
1
site gateway consists of a 1.2 meter send/receive satellite antenna, a
specially-developed, rack mountable windows NT PC with a PCI satellite modem
card, a satellite modulator, a transmitter power source network card and
proprietary software. Each remote site gateway has a static Internet protocol
address. Uplink speeds of 128K to 1megabit and downlink speeds of two to four
megabits per second can be achieved. The remote site gateway is leased or
purchased by each customer. Customers pay a monthly standby fee and an
additional hourly fee for actual usage.
Skyframes entered into a satellite service agreement with Clear Channel
Satellite Services in October 2002, under which Clear Channel provides
transponder and satellite time on a pre-emptive basis. Clear Channel's satellite
AMC-4 gives coverage of the Americas. Skyframes pays to Clear Channel the
greater of 75% of revenues collected from customers or approximately $5,800 per
month. Clear Channel has the exclusive right to acquire Skyframes for a 24-month
period commencing after Skyframes has been operating for 18 months, for one
times gross annual sales or fair market value, whichever is greater. Skyframes
has the option to convert to the provision of services on a non-preemptible
basis on terms to be negotiated.
In October 2002, Skyframes entered into a private line service order with
Intelsat Global Sales & Marketing Ltd. whereby Intelsat provides bandwith,
antenna hosting and collocation services to Skyframes. Intelsat is providing
such services on an on-going basis to Skyframes.
Skyframes also intends to market its systems for use as a primary system,
either in remote areas where telephone service is expensive or unreliable, or to
users that desire more secure (non-interceptable) data communications.
The Riverside County teleport includes routers and communications
equipment owned by Skyframes, but the physical space for our equipment and the
uplink is rented from Intelsat.
Marketing and Employees
Marketing is performed by outside contract employees and the officers and
directors not all of whom are full time. As of fiscal year end 2003, Skyframes
had only a limited number of customers and is in the early stage of market
development. Currently, Mr. France, our Chief Executive Officer, is our only
full time employee. We have no clerical or administrative employees other than
the officers and directors, but we intend to hire two clerical and
administrative employees and a customer service employee when we have sufficient
revenues and capital.
Technology
Our technology consists of specific hardware configurations designed by us
as well as off-the-shelf and custom software. We own the copyright on the custom
software. Our technology enables connection time of four megabits per second,
which is four times faster than ISDN. In addition, our technology enables a
broadband connection wherever there is an alternating current power source,
making it ideal for remote locations or as a backup to fiber optic or copper
telephone lines. Shiron Corporation manufactures the platform used by Skyframes.
The rest of our technology is provided by off-the-shelf suppliers.
Communications Satellites and Future Expansion
Understanding all the uses of satellite is important because Skyframes can
expand its business into other areas served by satellite transmissions, such as
private television networks and VOip or secure data links.
Communications satellites constitute an attractive solution in
telecommunications as they allow for immediate access to information resources,
both regionally and globally. Satellite communications are currently used
predominantly for digital circuits for data communications, television
transmission, and for those areas with high traffic or where line-of-sight
microwave is impractical. Current applications for communication satellites
include voice, audio and video entertainment (including direct-to-home
television and digital audio broadcasting services), image (facsimile), video
teleconferencing, interactive video, e-mail, and global Internet. Satellite
communication systems avoid the need for terrestrial infrastructure, and shorten
the time of establishing communications in rural areas. Satellite systems have
important features that fiber optics lack: mobility (mobile users cannot be
connected
2
to the fiber network directly), flexibility (once a terrestrial infrastructure
is built, it is extremely expensive to restructure it), and rural and remote
connections (it is still not cost-effective to deploy high-capacity fiber
networks in areas with low-density traffic and difficult topography).
Geostationary satellites compete with expanding terrestrial and fiber-optic
networks for point-to-point transmission of domestic, regional, and
international telecommunication services. Two of the most dynamic sectors for
communication satellites include broadcasting direct-to-home and mobile
satellite communications. The market for domestic direct broadcast satellite TV,
or high-powered, multi-channel satellite television beamed directly to the home,
is expected to increase in the near future. Also, non-geostationary satellites
in low- and medium-earth orbits will be increasingly used to provide personal,
portable and mobile telephony.
Regulation
Our activities require a license from the Federal Communication
Commission, but we are currently operating under the license of the teleport in
Riverside County. We applied for and received a license under our own name in
2003 from the FCC to operate our own hub ground station. Currently, we rent the
antenna array from Allen Communications and Intelesat Global Sales & Marketing
Ltd.
Compliance with Enviromental Laws
Our manufacturing is outsourced. To our knowledge, federal, state or local
environmental laws do not effect our operations and we have not spent any funds
to comply with any such laws.
Competition
We compete in the business segment of Internet broadband. There are many
competitors in this marketplace but no one competitor has a significant share of
our rural target market. Skyframe's Diverse Path services and platform products
will compete on the basis of lower cost and the efficiency of the payload being
transmitted (less than $500 per month) than existing competitors such as
Tachyon, Inc., Immeon Networks, LLC, StarBand Communications, Inc. and Verestar,
Inc. This higher performance configuration, (Vsat - 384 kbps Upload and 2048
Download speeds) is embodied in software and hardware configurations designed by
SkyFrames. We believe our configuration approach along with our new VOS
technology with onboard switching (VOS - minimum 1.5 mbps Up and Download
speeds. This product is proprietary and currently under a patent pending
application), which significantly improves performance by a factor of an
estimated five times over our competitors. Our service for remote areas is
reaching areas of North America, such as Alaska and Mexico, previously not
serviced or poorly serviced by our competitors. We have established a price list
for this remote service, which is publicized on our web site at www.
SkyFrames.com.
Legal Proceedings
Skyframes is not a party to any pending legal proceeding.
Additional Financing
We may need to raise additional funds to meet operating requirements in
the future. We currently have an Investment Banking Agreement with Ocean Drive
Capital, LLC to raise additional funds through the private placement of our
stock. If we raise additional funds through issuance of equity related or debt
securities, such securities may have rights to our common stock, such as
warrants or options. Shareholders may experience additional dilution from
exercise of these equity instruments. We cannot be certain that additional
financing will be available when required or at all. (See `Liquidity and Capital
Resources' for further discussion)
Item 2. DESCRIPTION OF PROPERTY
We rent approximately 900 square feet of modern office space at 555 Anton
Boulevard, Costa Mesa, California for approximately $1,750 per month, increasing
yearly to approximately $1,850 in the final year of the lease. The lease expires
in September 2005 and is guaranteed by two of our investors. We also have rented
928 square feet at
3
5025 Gavilan Way, Suite 51, Oceanside, California for our engineering and
customer service center for $1,142 per month, increasing after one year to
$1,189 per month. The lease expires in September 2004 and is guaranteed by an
investor. Our uplink center is located at a teleport in Riverside County,
California, and is rented from Intelsat. We pay $5,100 per month for the
bandwidth and rack space. All of our facilities are in good condition.
Management considers these facilities to be adequate for its requirements for
the immediate future.
Item 3. LEGAL PROCEEDINGS
No legal proceedings are threatened or pending against the Company or any
of its officers or directors. Further, none of the Company's officers or
directors or affiliates of the Company are parties against the Company or have
any material interests that are adverse to the Company's interests.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 2003.
4
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
On September 24, 2001, the NASD approved the Company for listing on the
NASD Over-The-Counter Bulletin Board. The Company's shares are listed under the
symbol "BEGI." On February 18, 2003, the symbol was changed to "SKYU" and
trading commenced on the OTCBB market. There is no major established trading
market for the Company's shares and there is no assurance that a trading market
will develop for the Company's shares beyond the OTCBB, or if developed, that it
can be sustained. The following table sets forth for each quarter for the last
two fiscal years, the range of the high and low sales prices of the Company's
common stock as quoted by various market makers and reflects inter-dealer
prices, without retail markup, markdown, or commission, and may not represent
actual transactions. The following prices reflect the 1 for 100 stock split that
was effected on January 28, 2003.
Fiscal Year Ended June 30, 2003:
High Low
------ ------
First Quarter $60.00 $ 2.00
Second Quarter $50.00 $ 3.00
Third Quarter $ 3.00 $ 0.75
Fourth Quarter $ 2.25 $ 1.15
Fiscal Year Ended June 30, 2002:
High Low
------ ------
First Quarter $ 0 $ 0
Second Quarter $ 0 $ 0
Third Quarter $ 0 $ 0
Fourth Quarter $11.00 $ 1.00
(b) Holders
As of June 30, 2003, there were approximately 200 holders of Company
common stock.
(c) Dividends
The Company has not paid any dividends on its common stock. The Company
currently intends to retain any earnings for use in its business, and therefore
does not anticipate paying cash dividends in the foreseeable future. The
Company's ability to pay dividends is subject to limitations imposed by Utah law
as well as our earnings, financial condition, capital requirements and other
factors deemed relevant by our board of directors.
(d) Sale of Unregistered Securities
During the last fiscal year we sold securities that were not registered
under the Securities Act of 1933. Of these sales, the following transactions
were not reported in our previously filed quarterly reports:
In August 2002, the Company issued 6,000,000 (pre-split) shares of its
common stock for computers and equipment and repayment of expenses of $46,063.
This transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In January, 2003, the Company acquired Skyframes Texas, pursuant to an
Exchange Agreement. The
5
Company acquired all of the outstanding shares of Common Stock of Skyframes
Texas, in exchange for 8,500,000 shares of the Company's Common Stock. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In January 2003, the Company issued 150,000 shares of common stock to an
investor at a share price of $0.50 per share. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
In February 2003, the Company issued 500,000 shares of common stock to the
Company's Chief Executive Officer for employee services valued at $250,000. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In February 2003, the Company issued 40,000 shares of common stock to an
investor at a share price of $0.50 per share. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
In February 2003, the Company granted 10,000 options to purchase common
stock at an exercise price of $0.10 per share as part of an employment
agreement. The options vest in February 2004 and will be exercisable for five
years following vesting. This transaction was exempt from registration pursuant
to Section 4(2) of the Securities Act of 1933.
In March 2003, the Company granted 100,000 options to purchase common
stock at an exercise price of $1.00 per share for consulting services. The
options vested immediately and are exercisable for two years. This transaction
was exempt from registration pursuant to Section 4(2) of the Securities Act of
1933.
In March 2003, the Company issued 900,000 shares of common stock as part
of a settlement agreement. This transaction was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933.
In May 2003, the Company granted a warrant to purchase 300,000 shares of
common stock at $1.45 per shares for consulting services. The warrant vested
immediately and are exercisable for three years. This transaction was exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933.
In May 2003, the Company issued 500,000 shares of its common stock as
collateral valued at $695,000. This transaction was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933.
In June 2003, the Company executed a one-year $150,000 senior convertible
promissory note payable to Ocean Drive Holdings LLC, an accredited investor,
maturing in June 2004 and convertible into common stock at $0.50 per share.
Additionally, the Company sold to Ocean Drive Holdings LLC a warrant to purchase
150,000 shares of the Company's common stock at $2.07 per share for cash of
$98,274. The warrant vests immediately and is exercisable for five years. These
transactions were exempt from registration pursuant to Regulation D promulgated
under the Securities Act of 1933.
In June 2003, the Company issued 50,000 shares of common stock to an
investor for $50,000. This transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
From January through June 2003, the Company issued 1,948,000 shares of
common stock to various consultants for services provided. The fair market value
of this common stock was $1,950,750 or a weighted average of $1.00 per share.
These transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
6
(e) Securities Authorized for Issuance under Equity Incentive Plans
Set forth in the table below is information regarding awards made through
compensation plans or arrangements through June 30, 2003, the most recently
completed fiscal year.
-------------------------------------------------------------------------------------------------------------
Number of securities
remaining available for
future issuance under
Number of securities to Weighted average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
Plan Category warrants and rights warrants and rights column 2)
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
Equity Compensation Plans
Approved by Security Holders N/A N/A N/A
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
Equity Compensation Plans
Not Approved by Security
Holders 0 N/A(1) 755,803(2)(3)
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
Note 1 - There are no options, warrants or rights issued under the 2003 Advisor
Compensation Plan.
Note 2 - Subsequent to the June 30, 2003 fiscal year end, 480,000 that were
issued pursuant to the 2003 Advisor Compensation Plan were returned to the
Company.
Note 3 - Does not include shares available under the 2003 Consultant Stock Plan
adopted subsequent to June 30, 2003.
In February 2003, the Board of Directors approved the 2003 Advisor
Compensation Plan and registered 3,000,000 shares under the 2003 Advisor
Compensation Plan on an S-8 registration statement. The plan authorizes the
issuance of stock awards to consultants and advisors of the Company. The number
of shares available for grant at June 30, 2003 was 755,803.
In September 2003, the Board of Directors approved the 2003 Consultant
Stock Plan and reserved 1,000,000 shares for issuance under the 2003 Consultant
Plan. As of the date of this filing, no shares have been issued under the 2003
Consultant Plan.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Safe Harbor Statement
This Form 10-KSB and other reports and statements filed by us with the
Securities and Exchange Commission include certain forward-looking statements.
For this purpose any statements contained in this Form 10-KSB that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, words such as "may," "will," "expect,"
"believe," "anticipate," "estimate" or "continue" or comparable terminology are
intended to identify forward-looking statements. These statements by their
nature involve substantial risks and uncertainties, and actual results may
differ materially depending on a variety of factors including, but not limited
to, the absence of significant revenues or long-term financial resources,
technical issues relating to our obtaining satellite time, our ability to
provide timely customer service and shipment of equipment given that we are
short on working capital, and compliance of our customers with contractual
terms. Except as required by law, we undertake no obligation to announce
publicly revisions we make to these forward-looking statements to reflect the
effect of events or circumstances that may arise after the date of this report.
All written and oral forward-looking statements made subsequent to the date of
this report and attributable to us or
7
persons acting on our behalf are expressly qualified in their entirety by this
section.
Management Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The Company is an early stage provider of low-cost high-speed secure
Internet broadband services. SkyFramesdelivers broadband speeds to rural
locations that enable applications to be delivered in a manner that were
previously unattainable. This reliable technology platform delivers speeds equal
to or greater than terrestrial broadband in these various rural areas. There are
over 20,000 communities in the US alone that would gain significant benefit from
SkyFrames services. This market continues to grow due to past events such as the
destruction of the World Trade Center and unforeseen man-made or natural
disasters that destroy communications infrastructure. Skyframes presents a
viable redundancy or alternate solution to traditional broadband platforms
available to rural areas. Applications for the Company's product and services
include: Corporate data networks, distance learning centers, disaster recovery,
government municipalities applications, information distribution, rural
telecommunications initiatives, and backup terrestrial data support
infrastructure. Beginning in March 2003 and over the next quarter through June
2003 sales revenue have begun developing. Recent sales development activity in
Mexico, Alaska and the joint development efforts overseas for the military
should continue to produce new awareness of the SkyFrames product offering,
yielding continued similar sales growth over the next 18 months.
The Company provides two main product offerings to deliver these services.
The first is VSAT (Very Small Aperture Terminal) systems, which can be deployed
immediately to areas where there is little or no connectivity. The Company's
VSAT system is an ideal system for Internet access for rural communities. This
product will also be used in business continuity and disaster recovery
situations, providing a diverse path backup system. Management believes this
system is very competitive and provides a quality offering above some existing
or legacy systems offered currently in the marketplace. Our proprietary software
allows the implementation of bandwidth on demand protocol with Demand Assigned
Multiple Access and static IP addressing. SkyFrames's advanced satellite product
called VOS (Virtual Onboard Switching) was designed to provide a secure
intelligent routing and switching firmware design that interoperates cohesively
with international standards for uplink and downlink equipment as well as
various terrestrial IP networks. This technology implements a unique deployment
of digital video broadcast technology for the creation of a mesh Internet
backbone with very low latency. This highly efficient systems major feature is
that it is extremely secure and operates in its own closed environment, thus
providing a true private network with no public switches. Both products allow
for the creating of broadband wireless signals in rural areas.
These products and the continued subscriber base developed by each user on
the system installed will generate reoccurring revenue base for the Company. A
typical installed site pays monthly user fees for access to the system. Sales
are generated by a direct sales force and through VARs (Value Added Resellers).
In the fourth quarter, the Company has begun to see this reoccurring revenue
from these products and management believes a good selling effort is under way.
Through June 2003, we entered into a number of contracts representing
approximately $200,000 in potential orders. These orders resulted in revenues of
$53,925 for the year ending June 30, 2003.
In April 2003, Skyframes sold a wireless broadband system to the town of
Coffman Cove, Alaska for rural connectivity. Installation took place in the
beginning of June, 2003 and management believes the installation was successful
considering the remote location. Skyframes has begun to sell to some of the
other 400 rural communities in Alaska which are in need of broadband
connectivity. In May 2003, Skyframes entered into an agreement with NetWorth
Inc., a value-added integrator specializing in disaster recovery systems.
NetWorth will sell Skyframes VSAT solutions to the business continuity market
and utilize mobile broadband units. NetWorth initially will focus in Florida
where natural disasters can shut down communications systems for days. In June
2003, SkyFrames received research validation and bench testing from Lawrence
Livermore Laboratories, one of the most respected research facilities in the
world. Skyframes management believes its product may be used for specific
project application of science and technology for a number of national security
issues. In May 2003, SkyFrames had a successful installation of Satellite
Broadband and WiFi services in the rural community of Golden Valley, Arizona.
SkyFrames and Arizona High Speed Access, an ISP that provides broadband
connectivity services for rural
8
locations in Arizona, are creating wireless signals in areas that previously had
no broadband connectivity. The SkyFrames service is cost-effective and reliable
compared to the offerings from other telecommunications companies.
Our future sales are difficult to predict because we are in our initial
phase of operations and capital raising activity. The Company has not yet
developed commercial credit lines and depends solely on capital to further
increase its sales levels. There are many factors that could impact our ability
to perform, but our limited history makes the level of future revenues extremely
difficult to predict. We could have technical problems; personnel problems and
we do have continuing liquidity problems as discussed below. One or more of our
customers could fail to perform, and this would adversely impact our results of
operations.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosures of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates, including those
related to reserves, impairment of long-lived assets and estimates of costs to
complete contracts. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions; however, we believe that our estimates, including
those for the above-described items, are reasonable.
Results of Start-up Operations for the year-end of June 30, 2003.
The statement of operations for the Company does not reflect any
significant revenue in the March 2003 quarter due to the start-up of selling
activity. However, in the subsequent quarter through the June 2003 year-end,
revenues improved substantially. There is no prior sales history for the Company
prior to the March 2003 period as the Company had no operations or revenues
prior to the acquisition of SkyFrames, Inc., a Texas
Year Ending
June 30, 2003
-------------
Revenues $53,925
The Company has entered into a contract with Clear Channel as its
satellite link provider. This contract is on a revenue share basis and we
believe provides a solid financial model on which to project margin. However,
non-cash item charges associated with the startup operation exceeded the sales
revenue. A number of factors will drive costs in the future as well as revenues;
ratios to revenue should not fluctuate appreciably. The primary expense
associated with providing these services, after the hardware installation, will
be the ongoing satellite broadband monitoring service. This expense will be
directly proportional to the number of users on the system.
Year Ended
June 30, 2003
-------------
General & Administrative expenses $4,487,025
Selling Expenses $ 6,972
In the year-end June 30, 2003, general and administrative expenses
increased substantially as the Company activity increased. The principal
increase was due to addition to the Company's management, use of outside
consultants, and the sales ramp up activity in some remote locations. We paid
substantially all of our start up costs for services by the issuance of common
stock valued at $3,330,750, post stock split share values, during the year-ended
June 30, 2003. The increase in general and administrative costs is expected to
continue as more
9
customers are added. However, these expenses (except for the expenses accrued
for stock compensation, which was more related to start up expenses) should
become proportionate to revenue and not adversely effect margins in the future.
Staff increases will be expense as a percentage of sales and administration,
order entry, quality assurance and customer service support.
Liquidity and Capital Resources
Management and shareholders are currently funding the Company's financial
requirements with advances of $134,649 and private placements of equity of
$145,000 with non-related parties, through June 30, 2003 and by accruing
expenses. On June 16, 2003 the Company entered in to an investment banking
agreement with Ocean Drive Capital, LLC. This agreement details the plan for
raising on a private basis up to $5 million. This relationship should help the
company in meeting its future capital requirements upon a successful placement.
On June 16, 2003, Ocean Drive Capital began funding a series of bridge loans
beginning with $150,000 and a commitment for another $250,000 to assist the
company in meeting its short-term needs beginning in August 2003. Both bridge
loans accrue interest at a per annum rate of 8% per year, have maturity dates
one year from the date of the promissory notes and are convertible into shares
of our common stock at a conversion price of $0.50 per share. Given the recent
increase of the selling activity, pending orders and the increasing operating
expenses, the Company will require this additional capital. Management intends
to continue to seek the funding necessary to meet all the capital and operating
requirements. However, there is no guarantee that the Company will be able to
raise the necessary capital. We are also investigating the possibility of
accounts receivable financing. There can be no assurance that our efforts to
obtain financing will be successful or that proceeds raised from the sale of our
securities or other financing activates will be sufficient to fund the operating
activities or service any indebtedness as a result of the capital raising
activities. If the funds received are insufficient, then the Company's ability
to continue as a going concern could be adversely affected.
Economic Conditions and Trends
Management believes current economic conditions and the capital markets
generally will impact the timing and the results of any private sale of
securities or other financing activities. The Company is dependent on timely
financing to support product sales flow and customer deliveries. Accordingly,
management has kept overhead down and requires customers to provide a (50%)
fifty percent down payment with each order. However, the remaining payment (50%)
is carried until the product is delivered. The results are a 30 to 45 day carry
time before the Company receives the balance of its payments. This negatively
impacts accounts payables timing. This concern for long term financing may have
an adverse effect on the Company's performance, if not resolved in the near
future. Management believes it can work through the short-term issues for some
period of time. However, future sales levels, if substantial, will increase
pressure on the need for a long term funding solution.
We are a development stage company as that term is defined in paragraphs 8
and 9 of Statement of Finacial Accounting Standards ("SFAS") No. 7. Our
activities to date have been limited to seeking capital; seeking supply
contracts and development of a business market for our products and services.
Our auditors have included an explanatory paragraph in their report on our
financial statements, relating to the uncertainty of our business as a going
concern, due to our lack of operating history, lack of profitable operations and
working capital deficit. We do not believe that conventional financing, such as
bank loans, is available to us due to these factors. Management believes that it
will be able to raise the required funds for operations from one or more future
offerings, and to be able to affect our business plan. However, Management
believes that Skyframes's ability to raise significant amounts of financing will
be dependent on favorable capital markets and also on the continuing development
of resellers and distribution centers as well as other risks inherent in the
business may affect the outcome of Management's plans.
New Accounting Standards
In November, 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Guarantees of Indebtedness of Others," ("FIN 45"). FIN 45
requires us to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in the issuance of the guarantee. FIN 45
is effective for guarantees issued or modified after December
10
31, 2002. The disclosure requirements effective for the year ending December 31,
2002 expand the disclosures required by a guarantor about its obligations under
a guarantee. The adoption of the disclosure requirements of this statement did
not impact our financial position, results of operations or cash flows.
In December 2002, Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure," ("SFAS
148") was issued. SFAS 148 amends Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") to provide
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on the reported results. The provisions of SFAS 148 are effective for the
financial statements for fiscal years ending after December 15, 2002 and interim
periods beginning after December 15, 2002. The adoption of the disclosure
requirements of this statement did not impact our financial position, results of
operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS No. 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. It is to be implemented by reporting the cumulative effect
of a change in an accounting principle for financial instruments created before
the issuance date of SFAS No. 150 and still existing at the beginning of the
interim period of adoption. Restatement is not permitted. We do not expect the
adoption of SFAS No. 150 to have a material impact upon our financial position,
cash flows or results of operations.
Factors Affecting Business, Operating Results and Financial Condition
An investment in our securities is very speculative and involves a high
degree of risk. You should carefully consider the following risk factors, along
with the other matters referred to in this Annual Report and in other documents
we file with the Securities and Exchange Commission, before you decide to buy
our securities. If you decide to buy our securities, you should be able to
afford a complete loss of your investment.
We are a recently formed business with very little operating history, therefore
you have no basis on which to determine if we can be successful.
In January 2003 we merged with Skyframes, Inc., a Texas corporation. Prior
to that, we had been dormant. We have a very short history of operations, and we
only recently began marketing our products and services. We are not certain that
our products and services will generate significant revenues. Because of our
short operating history, you will have no basis upon which to accurately
forecast our future operations, including sales, or to judge our ability to
develop our business.
Because we have only recently have been earning revenues, the success of
our business requires continued funding. If we cannot raise the money we need to
support our operations until we earn significant revenues, we may be required to
curtail or to cease our operations and you could lose your entire investment.
We are subject to the risks and uncertainties inherent in new businesses. If we
fail to accurately forecast our capital needs or if our product does not earn
significant revenues our business could fail.
We are subject to the risks and uncertainties inherent in new businesses,
including the following, including the following:
o Our projected capital needs may be inaccurate, and we may not have
enough money to develop our business as planned;
11
o We may experience unanticipated development or marketing expenses,
which may make it difficult to develop our business;
o We may not earn enough revenues from the sales of our products to
cover the costs of operating our business
If we are unsuccessful in our efforts to develop our business and
if the product we provide does not produce revenues as we project, we are not
likely to ever become profitable and we may be required to curtail some or all
of our operations.
We are dependent for our success on a few employees. The loss of one or more of
these employees could have an adverse effect on our operations.
Our future success will depend, to a significant degree, on the continued
services of our Chief Executive Officer, Jim France and our ability to attract,
motivate and retain highly qualified and talented contract personnel. The loss
of the services of Mr. France would have a material adverse effect on our
business and operations.
We depend on satellite transmission. Satellite failure could have a substantial
negative effect on our business operations.
We use a single satellite to provide satellite Internet/Intranet services.
There is risk associated with this dependence. There are two types of possible
failures to the satellite: a failure of the individual transponder that is used
and a failure of the entire satellite. If there is a failure of a transponder,
the satellite operator is contractually obligated to move us to another
transponder. This would create a minimum interruption to customers, likely less
than 24 hours. If the satellite itself completely fails, we will have to move
our services to another satellite. Our transmissions conform to industry
standards so there are several possible alternative satellites. Our current
satellite provider engages in quarterly reviews of available like-satellite
space and is ready to contract for that space if needed. If the entire satellite
were to fail, a one to five day outage of services might occur depending on the
availability of other satellites. Additionally, a repointing of the receiving
dishes on the ground would likely be required. The repointing of the receiving
dishes on the ground would cost us approximately $300 per customer. In the event
of any service disruption due to satellite failure, our customers would be
credited for the dollar value of the amount of time they are without the
satellite Internet service. Such credits could be up to $200.00 per day per
customer depending on the level of service subscribed. In the event of a
satellite failure, we could also be subject to loss-of-business claims, due to
the reliance by business customers on the satellite Internet services we
provide. A sustained disruption in satellite service could materially and
negatively impact the value of our business and could force us to discontinue
operations.
We have no assurance of market acceptance of our products and services. If we
are unable to raise market awareness of our products and services, we will not
be able to obtain many customers, which would materially impact our business.
We are at an early stage of market development and our earnings depend
primarily upon market acceptance of our products and services. There can be no
assurance that our development efforts will progress further with respect to any
potential new services or that they will be successfully completed. In addition,
there can be no assurance that our current or our potential new services will
achieve customer acceptance.
There can be no assurance that our services will be successfully marketed.
In addition to our own direct sales effort, we use value-added resellers and
distributors to market our satellite products and services. There is no
assurance that any distributor or other reseller will be successful in marketing
our products.
Our auditors have rendered a Going Concern Emphasis Opinion on our Financial
Statements
Our auditors have expressed concern as to our ability to continue as a
going concern. If our business is ultimately unsuccessful, the assets on our
balance sheet could be worth significantly less than their carrying value and
the amount available for distribution to stockholders on liquidation would
likely be insignificant.
12
We have not paid cash dividends and it is unlikely that we will pay cash
dividends in the foreseeable future.
We plan to use all of our earnings, to the extent we have earnings, to
fund our operations. We do not plan to pay any cash dividends in the foreseeable
future. We cannot guarantee that we will, at any time, generate sufficient
surplus cash that would be available for distribution as a dividend to the
holders of our Common Stock. You should not expect to receive dividends on our
Common Stock.
We have the ability to issue additional shares of our Common Stock without
asking for shareholder approval, which could cause your investment to be
diluted.
Our Articles of Incorporation currently authorize the Board of Directors
to issue up to 20,000,000 shares of Common Stock. The power of the Board of
Directors to issue shares of Common Stock or warrants or options to purchase
shares of Common Stock is generally not subject to shareholder approval.
Accordingly, any additional issuance of our Common Stock may have the effect of
diluting your investment.
We may raise additional capital through a securities offering that could dilute
your ownership interest.
We require working capital to fund our business. If we raise additional
funds through the issuance of equity, equity-related or convertible debt
securities, those securities may have rights, preferences or privileges senior
to those of the holders of our Common Stock. The issuance of additional Common
Stock or securities convertible into Common Stock by our management will also
have the effect off further diluting the proportionate equity interest and
voting power of holders of our Common Stock.
The liquidity of our common stock could be impaired.
Our common stock does not meet the listing requirements for any trading
market other than the OTC Bulletin Board or the pink sheets. Consequently, the
liquidity of our securities could be impaired, not only in the number of
securities which could be bought and sold, but also through delays in the timing
of transactions, reduction in security analysts' and the news media's coverage
of us and lower prices for our securities than might otherwise be attained.
13
Item 7. FINANCIAL STATEMENTS
SKYFRAMES, INC.
(Formerly Basic Energy, Inc.)
[A Development Stage Company]
FINANCIAL STATEMENTS
JUNE 30, 2003
14
SKYFRAMES, INC.
(Formerly Basic Energy, Inc.)
[A Development Stage Company]
CONTENTS
PAGE
----
-- Independent Auditors' Report 16
-- Balance Sheet, June 30, 2003 17
-- Statements of Operations, for the year ended June 30,
2003 and for the periods from inception on May 24, 2002
through June 30, 2002 and 2003 18
-- Statement of Stockholders' Equity (Deficit), from
inception on May 24, 2002 through June 30, 2003 19 - 21
-- Statements of Cash Flows, for the year ended June 30,
2003 and for the periods from inception on May 24, 2002
through June 30, 2002 and 2003 22 - 23
-- Notes to Financial Statements 24 - 39
15
INDEPENDENT AUDITORS' REPORT
Board of Directors
SKYFRAMES, INC.
Costa Mesa, California
We have audited the accompanying balance sheet of Skyframes, Inc. (formerly
Basic Energy, Inc.) [a development stage company] at June 30, 2003 and the
related statements of operations, stockholders' equity (deficit) and cash flows
for the year ended June 30, 2003 and for the periods from inception on May 24,
2002 through June 30, 2002 and 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements audited by us present fairly, in all
material respects, the financial position of Skyframes, Inc. (formerly Basic
Energy, Inc.) [a development stage company] as of June 30, 2003 and the results
of its operations and its cash flows for the year ended June 30, 2003 and for
the periods from inception on May 24, 2002 through June 30, 2002 and 2003, in
conformity with generally accepted accounting principles in the United States of
America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 7 to the financial
statements, the Company was only recently formed and has not yet been successful
in establishing profitable operations. Further, the Company has current
liabilities in excess of current assets. These factors raise substantial doubt
about the ability of the Company to continue as a going concern. Management's
plans in regards to these matters are also described in Note 7. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
PRITCHETT, SILER & HARDY, P.C.
November 4, 2003
Salt Lake City, Utah
16
SKYFRAMES, INC.
(Formerly Basic Energy, Inc.)
[A Development Stage Company]
BALANCE SHEET
ASSETS
June 30,
2003
-----------
CURRENT ASSETS:
Cash $ 22,905
Accounts receivable 24,925
Deferred loan costs 13,750
-----------
Total Current Assets 61,580
PROPERTY AND EQUIPMENT, net 3,916
OTHER ASSETS:
Deposits 8,950
-----------
$ 74,446
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 163,689
Accounts payable - related party 134,649
Customer deposits and unearned revenue 23,330
Accrued payroll and related expenses 39,825
Accrued interest 955
Notes payable, net 26,250
-----------
Total Current Liabilities 388,698
-----------
STOCKHOLDERS' EQUITY (DEFICIT) [Restated]:
Common stock, $.10 par value,
20,000,000 shares authorized,
14,392,679 shares issued and
outstanding 1,439,268
Capital in excess of par value 4,822,494
Deficit accumulated during the
development stage (6,576,014)
-----------
Total Stockholders' Equity (Deficit) (314,252)
-----------
$ 74,446
===========
The accompanying notes are an integral part of this financial statement.
17
SKYFRAMES, INC.
(Formerly Basic Energy, Inc.)
[A Development Stage Company]
STATEMENTS OF OPERATIONS
From Inception on
For the May 24, 2002 Through June 30,
Year Ended -----------------------------
June 30, 2003 2002 2003
------------- ----------- -----------
REVENUES:
Subscription services $ 4,525 $ -- $ 4,525
Equipment sales 49,400 -- 49,400
----------- ----------- -----------
Total Revenues 53,925 -- 53,925
EXPENSES:
Cost of equipment sales 38,614 -- 38,614
Selling 6,972 -- 6,972
General and administrative 4,487,025 86,271 4,573,296
----------- ----------- -----------
Total Expenses 4,532,611 86,271 4,618,882
----------- ----------- -----------
LOSS BEFORE OTHER INCOME (EXPENSE) (4,478,686) (86,271) (4,564,957)
OTHER INCOME (EXPENSE):
Loss on settlement of potential claims (1,350,000) -- (1,350,000)
Loss on extinguishment of debt (651,000) -- (651,000)
Interest expense (10,057) -- (10,057)
----------- ----------- -----------
Total Other Income (Expense) (2,011,057) -- (2,011,057)
----------- ----------- -----------
LOSS BEFORE INCOME TAXES (6,489,743) (86,271) (6,576,014)
CURRENT TAX EXPENSE -- -- --
DEFERRED TAX EXPENSE -- -- --
----------- ----------- -----------
NET LOSS $(6,489,743) $ (86,271) $(6,576,014)
=========== =========== ===========
LOSS PER COMMON SHARE $ (.65) $ (.03) $ (.70)
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
18
SKYFRAMES, INC.
(Formerly Basic Energy, Inc.)
[A Development Stage Company]
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FROM THE DATE OF INCEPTION ON MAY 24, 2002
THROUGH JUNE 30, 2003
[Restated]
Deficit
Accumulated
Common Stock Capital in During the
---------------------------- Excess of Development
Shares Amount Par Value Stage
----------- ----------- ----------- -----------
BALANCE, May 24, 2002 -- $ -- $ -- $ --
Issued 2,500,000 shares of common stock for
payment of organization costs of $5,000, or
$.002 per share, May 2002 2,500,000 250,000 (245,000) --
Net loss for the period ended June 30, 2002 -- -- -- (86,271)
----------- ----------- ----------- -----------
BALANCE, June 30, 2002 2,500,000 250,000 (245,000) (86,271)
Issued 6,000,000 shares of common stock for computers
and related equipment of $0 and for repayment of
expenses of $46,063 paid by a related party or
approximately $.0077 per share, August 2002 6,000,000 600,000 (553,937) --
Effect of recapitalization accounted for as a
reverse purchase with SkyFrames, Inc.,
January 2003 84,679 8,468 (51,569) --
Issued 2,878,000 shares of common stock for
cash of $75,000 and services rendered valued
at $1,364,000, or $.50 per share, January 2003 2,878,000 287,800 1,151,200 --
Issued 500,000 shares of common stock for
services rendered valued at $250,000, or $.50
per share, February 2003 500,000 50,000 200,000 --
Granted 10,000 options to purchase common
stock for employee services rendered valued at
$4,000, February 2003 -- -- 4,000 --
Issued 425,000 shares of common stock for cash
of $20,000 and services rendered valued at
$192,500, or $.50 per share, February 2003 425,000 42,500 170,000 --
Issued 40,000 shares of common stock for
services rendered valued at $76,000, or $1.90
per share, March 2003 40,000 4,000 72,000 --
[Continued]
19
SKYFRAMES, INC.
(Formerly Basic Energy, Inc.)
[A Development Stage Company]
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FROM THE DATE OF INCEPTION ON MAY 24, 2002
THROUGH JUNE 30, 2003
[Restated]
[Continued]
Deficit
Accumulated
Common Stock Capital in During the
---------------------------- Excess of Development
Shares Amount Par Value Stage
----------- ----------- ----------- -----------
Issued 40,000 shares of common stock for
services rendered valued at $64,000, or $1.60
per share, March 2003 40,000 4,000 60,000 --
Issued 200,000 shares of common stock for
services rendered valued at $240,000, or $1.20
per share, March 2003 200,000 20,000 220,000 --
Issued 150,000 shares of common stock for
services rendered valued at $217,500, or $1.45
per share, March 2003 150,000 15,000 202,500 --
Granted 100,000 options to purchase common
stock for services rendered valued at $144,590,
March 2003 -- -- 144,590 --
Issued 900,000 shares of common stock as a
settlement valued at $1,350,000, or $1.50 per
share, March 2003 900,000 90,000 1,260,000 --
Issued 140,000 shares of common stock for
services rendered valued at $175,000, or $1.25
per share, April and May 2003 140,000 14,000 161,000 --
Issued 500,000 shares of common stock as
collateral valued at $695,000, or $1.39 per
share, May 2003 500,000 50,000 645,000 --
Issued 250,000 shares of common stock for
services rendered valued at $347,500, or $1.39
per share, May 2003 250,000 25,000 322,500 --
Granted 300,000 warrants to purchase common
stock for services rendered valued at $434,460,
May 2003 -- -- 434,460 --
[Continued]
20
SKYFRAMES, INC.
(Formerly Basic Energy, Inc.)
[A Development Stage Company]
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FROM THE DATE OF INCEPTION ON MAY 24, 2002
THROUGH JUNE 30, 2003
[Restated]
[Continued]
Deficit
Accumulated
Common Stock Capital in During the
---------------------------- Excess of Development
Shares Amount Par Value Stage
----------- ----------- ----------- -----------
Issued 135,000 shares of common stock for
services rendered valued at $209,250, or $1.55
per share, May 2003 135,000 13,500 195,750 --
Issued 100,000 shares of common stock for
services rendered valued at $195,000, or $1.95
per share, June 2003 100,000 10,000 185,000 --
Sold 150,000 warrants to purchase common stock
for cash of $98,274, June 2003 -- -- 98,274 --
Beneficial conversion feature of note payable
recorded at $51,726, June 2003 -- -- 51,726 --
Issued 50,000 shares of common stock for cash
of $50,000, or $1.00 per share, June 2003 50,000 5,000 45,000 --
Cancelled 500,000 shares of common stock which
had been returned to the Company, June 2003 (500,000) (50,000) 50,000 --
Net loss for the year ended June 30, 2003 -- -- -- (6,489,743)
---------- ----------- ----------- -----------
BALANCE, June 30, 2003 14,392,679 $ 1,439,268 $ 4,822,494 $(6,576,014)
========== =========== =========== ===========
The accompanying notes are an integral part of this financial statement.
21
SKYFRAMES, INC.
(Formerly Basic Energy, Inc.)
[A Development Stage Company]
STATEMENTS OF CASH FLOWS
From Inception on
For the May 24, 2002 Through June 30,
Year Ended -----------------------------
June 30, 2003 2002 2003
------------- ----------- -----------
Cash Flows from Operating Activities:
Net loss $(6,489,743) $ (86,271) $(6,576,014)
Adjustments to reconcile net loss to net cash
used by operating activities:
Amortization of discounts on note payable 6,250 -- 6,250
Depreciation 1,209 -- 1,209
Loss on settlement of potential claims 1,350,000 -- 1,350,000
Loss on extinguishment of debt 651,000 -- 651,000
Non-cash expenses paid by issuing common stock 46,063 5,000 51,063
Non-cash services paid by issuing common stock 3,330,750 -- 3,330,750
Non-cash services paid by granting options/warrants 583,050 -- 583,050
Changes in assets and liabilities:
(Increase) in accounts receivable (24,925) -- (24,925)
(Increase) in deferred loan costs (13,750) -- (13,750)
(Increase) in deposits (8,950) -- (8,950)
Increase in accounts payable 120,588 -- 120,588
Increase in accounts payable - related party 96,086 38,563 134,649
Increase in customer deposits and unearned
revenue 23,330 -- 23,330
Increase in accrued payroll and related expenses (2,883) 42,708 39,825
Increase in accrued interest 955 -- 955
----------- ----------- -----------
Net Cash (Used) by Operating Activities (330,970) -- (330,970)
----------- ----------- -----------
Cash Flows from Investing Activities:
Payments for property and equipment (5,125) -- (5,125)
----------- ----------- -----------
Net Cash (Used) by Investing Activities (5,125) -- (5,125)
----------- ----------- -----------
Cash Flows from Financing Activities:
Proceeds allocated to beneficial conversion feature
of note payable 51,726 -- 51,726
Proceeds from notes payable 69,000 -- 69,000
Payments on notes payable (5,000) -- (5,000)
Proceeds from sale of warrants 98,274 -- 98,274
Proceeds from issuance of common stock 145,000 -- 145,000
----------- ----------- -----------
Net Cash Provided by Financing Activities 359,000 -- 359,000
----------- ----------- -----------
Net Increase (Decrease) in Cash 22,905 -- 22,905
Cash at Beginning of Period -- -- --
----------- ----------- -----------
Cash at End of Period $ 22,905 $ -- $ 22,905
----------- ----------- -----------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ -- $ -- $ --
Income taxes $ -- $ -- $ --
The accompanying notes are an integral part of these financial statements.
22
SKYFRAMES, INC.
(Formerly Basic Energy, Inc.)
[A Development Stage Company]
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the year ended June 30, 2003:
The Company acquired SkyFrames, Inc. ("SFI") pursuant to an Exchange
Agreement which has been accounted for as a recapitalization of SFI in a
manner similar to a reverse purchase [See Note 2]. Prior to the
recapitalization of SFI, the Company had 84,679 shares of common stock
previously outstanding. An additional 8,500,000 shares of common stock
were issued in the acquisition. At the time of the acquisition, the
Company had no assets and had liabilities of $43,101 consisting only of
accounts payable.
The Company issued 4,708,000 shares of common stock for services rendered
valued at $3,330,750.
The Company granted 110,000 options and 300,000 warrants for services
rendered valued at $583,050.
The Company issued 900,000 shares of common stock valued at $1,350,000 to
settle potential claims against the Company.
The Company issued 500,000 shares of common stock valued at $695,000 as
collateral on a $44,000 note payable. The Company later defaulted on the
note and the creditor accepted the 500,000 shares of common stock as
payment in full, resulting in a loss on extinguishment of debt of
$651,000.
The Company sold a $150,000 convertible note payable for cash of $51,726
and recorded a discount of $98,274. The Company also recorded a discount
of $51,726 for the beneficial conversion feature of the note payable.
Through June 30, 2003, the Company had expensed a total of $6,250 of the
discounts.
The Company issued 6,000,000 shares of common stock for computers and
related equipment with a carryover basis of $0 and as repayment of
expenses totaling $46,063 which had been paid by a related party on behalf
of the Company.
The Company's former President contributed 500,000 shares of common stock
back to the Company for cancellation.
For the period from inception on May 24, 2002 through June 30, 2002: The
Company issued 2,500,000 shares of common stock as payment of organization
costs of $5,000.
The accompanying notes are an integral part of these financial statements.
23
SKYFRAMES, INC.
(Formerly Basic Energy, Inc.)
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Skyframes, Inc. ("the Company") was organized under the
laws of the State of Utah on June 4, 1926 as M. M. Lead Company. In 1980,
the Company changed its name to Basic Energy, Inc. In March 2003, the
Company changed its name to Skyframes, Inc.
SkyFrames, Inc. ("SFI") was organized under the laws of the State of Texas
on May 24, 2002 as CyberVillage, Inc. In July 2002, SFI changed its name
to SkyFrames, Inc. On January 28, 2003, the Company acquired SFI pursuant
to an Exchange Agreement and SFI was dissolved in the acquisition. The
acquisition of SFI has been accounted for as a recapitalization of SFI in
a manner similar to a reverse purchase [See Note 2].
The Company provides high-speed information access via satellites. The
Company has not yet generated significant revenues from its planned
principal operations and is considered a development stage company as
defined in Statement of Financial Accounting Standards No. 7. The Company
has, at the present time, not paid any dividends and any dividends that
may be paid in the future will depend upon the financial requirements of
the Company and other relevant factors.
Fiscal Year - The Company's fiscal year-end is June 30th.
Cash and Cash Equivalents - The Company considers all highly liquid debt
investments purchased with a maturity of three months or less to be cash
equivalents.
Accounts and Loans Receivable - The Company records accounts and loans
receivable at the lower of cost or fair value. The Company determines the
lower of cost or fair value of non-mortgage loans on an individual asset
basis. The Company recognizes interest income on an account receivable
based on the stated interest rate for past-due accounts over the period
that the account is past due. The Company recognizes interest income on a
loan receivable based on the stated interest rate over the term of the
loan. The Company accumulates and defers fees and costs associated with
establishing a receivable to be amortized over the estimated life of the
related receivable. The Company estimates allowances for doubtful accounts
and loan losses based on the aged receivable balances and historical
losses. The Company records interest income on delinquent accounts and
loans receivable only when payment is received. The Company first applies
payments received on delinquent accounts and loans receivable to eliminate
the outstanding principal. The Company charges off uncollectible accounts
and loans receivable when management estimates no possibility of
collecting the related receivable. The Company considers accounts and
loans receivable to be past due or delinquent based on contractual terms.
Inventory - Inventory is carried at the lower of cost or market using the
first-in, first-out (FIFO) method.
24
SKYFRAMES, INC.
(Formerly Basic Energy, Inc.)
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Continued]
Property and Equipment - Property and equipment are stated at cost or at
the shareholder's carryover basis. Expenditures for major renewals and
betterments that extend the useful lives of property and equipment are
capitalized upon being placed in service. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets of
three to five years. In accordance with Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", the Company periodically reviews its property and
equipment for impairment.
Website Costs - The Company has adopted the provisions of Emerging Issues
Task Force 00-2, "Accounting for Web Site Development Costs." Costs
incurred in the planning stage of a website are expensed as research and
development while costs incurred in the development stage are capitalized
and amortized over the life of the asset, estimated to be three years. As
of June 30, 2003, the Company has capitalized a total of $1,075 of website
costs. The Company did not incur any planning costs and did not record any
research and development costs for the year ended June 30, 2003 and for
the period from inception on May 24, 2002 through June 30, 2002.
Revenue Recognition - Revenue from subscription services is recognized in
the period when the related services are provided. Revenue from equipment
sales is recognized when the related equipment is installed and accepted
by the customer.
Organization Costs - Organization costs, which reflect amounts expended to
organize the Company, were expensed as incurred.
Advertising Costs - Advertising costs, except for costs associated with
direct-response advertising, are charged to operations when incurred. The
costs of direct-response advertising are capitalized and amortized over
the period during which future benefits are expected to be received. For
the year ended June 30, 2003 and for the period from inception on May 24,
2002 through June 30, 2002, respectively, advertising costs amounted to
$6,972 and $0.
Stock-Based Compensation - The Company has one stock-based compensation
plan [See Note 5]. The Company accounts for its plan under the recognition
and measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations.
The following table illustrates the effect on net income and loss per
share if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", to the Company's stock-based employee
compensation.
25
SKYFRAMES, INC.
(Formerly Basic Energy, Inc.)
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Continued]
From Inception on
For the May 24, 2002 Through June 30,
Year Ended -----------------------------
June 30, 2003 2002 2003
------------- ----------- -----------
Net loss, as reported $(6,489,743) $ (86,271) $(6,576,014)
Add: Stock-based employee
compensation expense
included in reported net income 4,000 -- 4,000
Deduct: Total stock-based
employee compensation
expense determined under fair
value based method (5,000) -- (5,000)
----------- ----------- -----------
Pro forma net loss $(6,490,743) $ (86,271) $(6,577,014)
----------- ----------- -----------
Loss per common share,
as reported $ (.65) $ (.03) $ (.70)
Loss per common share,
pro forma $ (.65) $ (.03) $ (.70)
Debt Extinguishment - The Company accounts for extinguishment of debt in
accordance with Statement of Financial Accounting Standards No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections". SFAS No. 145 rescinds the
requirement that gains and losses from extinguishment of debt be
classified as an extraordinary item.
Income Taxes - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" [See Note 6].
Loss Per Share - The computation of loss per share is based on the
weighted average number of shares outstanding during the period presented
in accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" [See Note 8].
Accounting Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the
disclosures of contingent assets and liabilities at the date of the
financial statements, and the reported amount of revenues and expenses
during the reported period. Actual results could differ from those
estimated.
26
SKYFRAMES, INC.
(Formerly Basic Energy, Inc.)
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Continued]
Recently Enacted Accounting Standards - Statement of Financial Accounting
Standards ("SFAS") No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities", SFAS No. 147, "Acquisitions of Certain Financial
Institutions - an Amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9", SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement
No. 123", SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities", and SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity", were recently issued. SFAS No. 146, 147, 149 and 150 have no
current applicability to the Company or their effect on the financial
statements would not have been significant. The Company has adopted SFAS
No. 148 and has applied it to the year ended June 30, 2003.
Reclassification - The financial statements for periods prior to June 30,
2003 have been reclassified to conform to the headings and classifications
used in the June 30, 2003 financial statements.
Restatement - The financial statements have been restated for all periods
presented to reflect the recapitalization of SkyFrames, Inc. [See Note 2]
and to reflect a 1-for-100 reverse stock split effected by the Company on
January 28, 2003 [See Notes 2 and 5].
NOTE 2 - EXCHANGE AGREEMENT
On January 28, 2003, the Company signed an Exchange Agreement with
SkyFrames, Inc. ("SFI"). The agreement called for the Company to issue
8,500,000 post-split shares of its common stock to the former shareholders
of SFI for all 85,000 outstanding shares of SFI's common stock. The
agreement also called for the Company to effect a 1-for-100 reverse stock
split just prior to the acquisition. After the reverse split and just
prior to the acquisition, the Company had 84,679 shares of common stock
outstanding. The acquisition closed on January 28, 2003 and has been
accounted for as a recapitalization of SFI in a manner similar to a
reverse purchase. Accordingly, the equity transactions have been restated
to reflect the recapitalization of SFI and the operations of the Company
prior to the date of acquisition have been eliminated. The financial
statements reflect the operations of SFI from its inception.
27
SKYFRAMES, INC.
(Formerly Basic Energy, Inc.)
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment recorded at cost or
carryover basis, less accumulated depreciation as of:
June 30,
2003
-------
Computers and related equipment $ --
Office equipment 1,900
Software 2,150
Website 1,075
-------
5,125
Less: accumulated depreciation (1,209)
-------
$ 3,916
-------
Depreciation expense for the year ended June 30, 2003 and for the period
from inception on May 24, 2002 through June 30, 2002 amounted to $1,209 and
$0, respectively.
NOTE 4 - NOTES PAYABLE
Notes payable consist of the following at:
June 30,
2003
-------
One-year 8% $150,000 senior convertible promissory note
payable to Ocean Drive Holdings LLC maturing in June 2004
convertible with accrued interest at the creditor's option
into common stock at $.50 per share, net of discounts of
$143,750 $ 6,250
Six-month unsecured 5% note payable to Keyvan Samini, an
individual, maturing in August 2003 20,000
-------
$26,250
-------
In June 2003, the Company sold the $150,000 convertible note payable for
$51,726 and recorded a discount of $98,274. Due to the beneficial
conversion feature of the note, the Company recorded an additional
discount of $51,726. Both discounts are being amortized over the term of
the note. For the year ended June 30, 2003 and for the period from
inception on May 24, 2002 through June 30, 2002, respectively, the Company
amortized $6,250 and $0 of the discounts.
28
SKYFRAMES, INC.
(Formerly Basic Energy, Inc.)
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - NOTES PAYABLE [Continued]
For the year ended June 30, 2003 and for the period from inception on May
24, 2002 through June 30, 2002, respectively, interest expense amounted to
$10,057 and $0.
NOTE 5 - CAPITAL STOCK, OPTIONS AND WARRANTS
Common Stock - In May 2002, in connection with its organization, the
Company issued 2,500,000 shares of its previously authorized but unissued
common stock. The shares were issued as payment of organization costs of
$5,000 (or $.002 per share).
In August 2002, the Company issued 6,000,000 shares of its previously
authorized but unissued common stock. The shares were issued for computers
ad related equipment recorded at the shareholder's carryover basis of $0
and as repayment of expenses of $46,063 which had been paid by a related
party (or approximately $.0077). This issuance resulted in a change in
control of the Company.
In January 2003, the Company entered into an Exchange Agreement with
SkyFrames, Inc. which has been accounted for as a recapitalization of
SkyFrames, Inc. [See Note 2].
In January 2003, the Company issued 2,878,000 shares of its previously
authorized but unissued common stock. The shares were issued for cash of
$75,000 and for consulting services valued at $1,364,000 (or $.50 per
share).
In February 2003, the Company issued 500,000 shares of its previously
authorized but unissued common stock to the Company's Chief Executive
Officer. The shares were issued for employee services valued at $250,000
(or $.50 per share).
In February 2003, the Company issued 425,000 shares of its previously
authorized but unissued common stock. The shares were issued for cash of
$20,000 and for consulting services valued at $192,500 (or $.50 per
share).
In March 2003, the Company issued 40,000 shares of its previously
authorized but unissued common stock as part of a consulting agreement
with thestockpage.com Inc. [See Note 10]. The shares were issued for
consulting services valued at $76,000 (or $1.90 per share).
In March 2003, the Company issued 40,000 shares of its previously
authorized but unissued common stock as part of a consulting agreement
with Client Services International LLC [See Note 12]. The shares were
issued for consulting services valued at $64,000 (or $1.60 per share).
In March 2003, the Company issued 200,000 shares of its previously
authorized but unissued common stock. The shares were issued for
consulting services valued at $240,000 (or $1.20 per share).
In March 2003, the Company issued 150,000 shares of its previously
authorized but unissued common stock. The shares were issued for
consulting services valued at $217,500 (or $1.45 per share).
29
SKYFRAMES, INC.
(Formerly Basic Energy, Inc.)
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - CAPITAL STOCK, OPTIONS AND WARRANTS [Continued]
In March 2003, the Company issued 900,000 shares of its previously
authorized but unissued common stock. The shares were issued as a
settlement valued at $1,350,000 (or $1.50 per share) [See Note 9].
In April and May 2003, the Company issued 140,000 shares of its previously
authorized but unissued common stock. The shares were issued for
consulting services valued at $175,000 (or $1.25 per share).
In May 2003, the Company issued 500,000 shares of its previously
authorized but unissued common stock. The shares were issued as collateral
valued at $695,000 (or $1.39 per share) [See Note 9].
In May 2003, the Company issued 250,000 shares of its previously
authorized but unissued common stock. The shares were issued for
consulting services valued at $347,500 (or $1.39 per share).
In May 2003, the Company issued 135,000 shares of its previously
authorized but unissued common stock of which 100,000 shares were issued
as part of an investment banking agreement with Ocean Drive Capital, LLC
[See Note 10]. The shares were issued for consulting services valued at
$209,250 (or $1.55 per share).
In June 2003, the Company issued 100,000 shares of its previously
authorized but unissued common stock. The shares were issued for
consulting services valued at $195,000 (or $1.95 per share).
In June 2003, the Company issued 50,000 shares of its previously
authorized but unissued common stock. The shares were issued for cash of
$50,000 (or $1.00 per share).
Cancellation - In June 2003, the Company's former President contributed
500,000 shares of common stock back to the Company for cancellation.
Stock Split - On January 28, 2003, the Company effected a 1-for-100
reverse stock split. The financial statements for all periods presented
have been restated to reflect the stock split.
Advisor Compensation Plan - In February 2003, the Company's Board of
Directors adopted the Advisor Compensation Plan ("AC Plan"). The AC Plan
provides for issuing up to 3,000,000 shares of common stock to employees,
directors, consultants and advisors. At June 30, 2003, total shares
available to be issued under the AC Plan amounted to 755,803.
Stock Options - In February 2003, the Company granted 10,000 options to
purchase common stock at $.10 per share as part of an Employment Agreement
[See Note 9]. The options will vest in February 2004 and will be
exercisable for five years following vesting. The Company recorded
compensation of $4,000 for the intrinsic value of the options.
30
SKYFRAMES, INC.
(Formerly Basic Energy, Inc.)
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - CAPITAL STOCK, OPTIONS AND WARRANTS [Continued]
In March 2003, the Company granted 100,000 options to purchase common
stock at $1.00 per share for consulting services valued at $144,590. The
options vested immediately and are exercisable for two years.
Stock Warrants - In May 2003, the Company granted 300,000 warrants to
purchase common stock at $1.45 per share as part of an engagement
agreement with Grant Bettingen, Inc. [See Note 10] for consulting services
valued at $434,460. The warrants vested immediately and are exercisable
for three years.
In June 2003, the Company sold 150,000 warrants to purchase common stock
at $2.07 per share for cash of $98,274. The warrants vested immediately
and are exercisable for five years.
A summary of the status of the options and warrants is presented below.
From Inception on
For the May 24, 2002 Through June 30,
Year Ended -------------------------------------------------
June 30, 2003 2002 2003
-------------------- ---------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- -------- -------- ------- --------
Outstanding at beginning of
period -- $ -- -- $ -- -- $ --
Granted 560,000 1.51 -- -- 560,000 1.51
Exercised -- -- -- -- -- --
Forfeited -- -- -- -- -- --
Expired -- -- -- -- -- --
------- -------- -------- -------- ------- --------
Outstanding at end of period 560,000 $ 1.51 -- $ -- 560,000 $ 1.51
------- -------- -------- -------- ------- --------
Weighted average fair value
of options granted during
the period 560,000 $ 1.65 -- $ -- 560,000 $ 1.65
------- -------- -------- -------- ------- --------
The fair value of each option and warrant granted is estimated on the date
granted using the Black-Scholes option pricing model, with the following
assumptions for grants on February 1, 2003: risk-free interest rate of
3.02%, expected dividend yield of zero, expected lives of five years and
expected volatility of 375%. The following assumptions were used for
grants on March 21, 2003: risk-free interest rate of 1.80%, expected
dividend yield of zero, expected lives of two years and expected
volatility of 414%. The following assumptions were used for grants on May
19, 2003: risk-free interest rate of 1.66%, expected dividend yield of
zero, expected lives of three years and expected volatility of 372%. The
following assumptions were used for grants on June 16, 2003: risk-free
interest rate of 2.14%, expected dividend yield of zero, expected lives of
five years and expected volatility of 355%.
31
SKYFRAMES, INC.
(Formerly Basic Energy, Inc.)
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - CAPITAL STOCK, OPTIONS AND WARRANTS [Continued]
A summary of the status of the options and warrants outstanding at June
30, 2003 is presented below:
Options and Warrants Outstanding Options and Warrants Exercisable
------------------------------------ --------------------------------
Range of Weighted-Average Weighted-Average Weighted-Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
-------- ----------- ---------------- ---------------- ----------- ----------------
$ .10 10,000 5.6 years $ .10 -- $ --
$1.00 100,000 1.7 years 1.00 100,000 1.00
$1.45 300,000 2.9 years 1.45 300,000 1.45
$2.07 150,000 5.0 years 2.07 150,000 2.07
----------- --------- ------ --------- -----
560,000 3.3 years $ 1.51 550,000 $1.54
NOTE 6 - INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
SFAS No. 109 requires the Company to provide a net deferred tax asset or
liability equal to the expected future tax benefit or expense of temporary
reporting differences between book and tax accounting methods and any
available operating loss or tax credit carryforwards. At June 30, 2003,
the Company has available unused operating loss carryforwards of
approximately $5,910,000, which may be applied against future taxable
income and which expire in various years through 2023.
At June 30, 2003, the total of all deferred tax assets was approximately
$2,213,000 and the total of all deferred tax liabilities was approximately
$0. The amount of and ultimate realization of the benefits from the
deferred tax assets for income tax purposes is dependent, in part, upon
the tax laws in effect, the future earnings of the Company, and other
future events, the effects of which cannot be determined. Because of the
uncertainty surrounding the realization of the loss carryforwards, the
Company has established a valuation allowance of approximately $2,213,000.
The net change in the valuation allowance was approximately $2,196,000
during the year ended June 30, 2003.
The temporary differences gave rise to the following deferred tax asset
(liability):
June 30,
2003
----------
Excess of tax over financial
accounting depreciation $ 1,122
Accrued compensation 7,162
Net operating loss carryover 2,204,388
32
SKYFRAMES, INC.
(Formerly Basic Energy, Inc.)
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - INCOME TAXES [Continued]
The components of federal income tax expense from continuing operations
consisted of the following for the year ended:
June 30,
2003
-----------
Current income tax expense:
Federal $ --
State --
-----------
Net current tax expense $ --
-----------
Deferred tax expense (benefit) resulted from:
Excess of tax over financial
accounting depreciation $ 712
Accrued compensation 7,872
Net operating loss carryover (2,204,388)
Valuation allowance 2,195,804
-----------
Net deferred tax expense $ --
-----------
Deferred income tax expense results primarily from the reversal of
temporary timing differences between tax and financial statement income.
The reconciliation of income tax from continuing operations computed at
the U.S. federal statutory tax rate to the Company's effective rate is as
follows for the year ended:
June 30,
2003
-------
Computed tax at the expected
federal statutory rate 34.00%
State income taxes, net of federal benefit 3.30
Compensation due to issue of options (3.35)
Other (.12)
Valuation allowance (33.83)
-------
Effective income tax rates 0.00%
-------
33
SKYFRAMES, INC.
(Formerly Basic Energy, Inc.)
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - GOING CONCERN
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles in the United States of
America, which contemplate continuation of the Company as a going concern.
However, the Company was only recently formed and has not yet been
successful in establishing profitable operations. Further, the Company has
current liabilities in excess of current assets. These factors raise
substantial doubt about the ability of the Company to continue as a going
concern. In this regard, management is proposing to raise any necessary
additional funds not provided by operations through loans or through
additional sales of its common stock. There is no assurance that the
Company will be successful in raising this additional capital or in
achieving profitable operations. The financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
NOTE 8 - LOSS PER SHARE
The following data shows the amounts used in computing loss per share:
From Inception on
For the May 24, 2002 Through June 30,
Year Ended -------------------------------
June 30, 2003 2002 2003
------------- ------------ ------------
Loss available to common
shareholders (numerator) $ (6,489,743) $ (86,271) $ (6,576,014)
------------ ------------ ------------
Weighted average number
of common shares outstanding
used in loss per share during
the period (denominator) 10,023,397 2,500,000 9,330,945
------------ ------------ ------------
At June 30, 2003, the Company had 110,000 outstanding options, 450,000
outstanding warrants and notes payable convertible into 301,000 shares of
common stock which were not used in the computation of dilutive loss per
share because their effect would be anti-dilutive. Dilutive loss per share
was not presented, as the Company had no common stock equivalent shares
for all periods presented that would affect the computation of diluted
loss per share.
34
SKYFRAMES, INC.
(Formerly Basic Energy, Inc.)
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - RELATED PARTY TRANSACTIONS
Accounts Payable - At June 30, 2003, officers and shareholders of the
Company were owed a total of $134,649 for expenses which they paid on
behalf of the Company and accrued amounts owed to them.
Note Payable and Loss of Extinguishment of Debt - In May 2003, the Company
issued 500,000 shares of common stock to Bricap, LLC, an entity controlled
by the Company's former President. The shares were issued as collateral
valued at $695,000 [See Note 5] on a $44,000 no-interest unsecured demand
note payable. In June 2003, the Company defaulted on the note and Bricap,
LLC accepted the 500,000 shares of common stock, which had been previously
issued, as payment in full, resulting in a loss on extinguishment of debt
of $651,000.
Stock Issuances - In August 2002, the Company issued 6,000,000 shares of
common stock for computers and equipment with a carryover basis of $0 and
as repayment of expenses of $46,063 which had been paid by a related party
[See Note 5].
In February 2003, the Company issued 500,000 shares of common stock to the
Company's Chief Executive Officer for employee services valued at $250,000
[See Note 5].
Employment Agreement - In February 2003, the Company signed a one-year
Employment Agreement with the Company's Chief Executive Officer. The
agreement calls for the Company to pay a base salary of $5,000 per month,
issue 500,000 shares of common stock vesting at 25,000 shares per month
and grant 10,000 options to purchase common stock at $.10 per share
exercisable for five years [See Note 5]. Upon completion of $500,000 in
funding, the agreement provides for the salary to increase to $10,000 per
month and for issuance of an additional 250,000 shares of common stock.
The agreement also provides for three years of extensions. In February
2003, the Company's Board of Directors amended the agreement so that all
500,000 shares of common stock initially issued to the Company's Chief
Executive Officer vested immediately. In June 2003, the Company's Board of
Directors amended the agreement to increase the Company's Chief Executive
Officer's salary to $10,000 per month effective June 1, 3003.
Director Fees - In April 2003, the Company's Board of Directors determined
that each director should receive $1,000 for each Board meeting attended;
however, this policy has not yet been put into effect.
35
SKYFRAMES, INC.
(Formerly Basic Energy, Inc.)
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - RELATED PARTY TRANSACTIONS [Continued]
Settlement of Potential Claims - In March 2003, the Company issued 900,000
shares of common stock to Bricap, LLC, an entity controlled by the
Company's former President. The shares were issued as a settlement valued
at $1,350,000 [See Note 5] for potential claims against the Company
related to the technology used by the Company in its operations.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Exchange Agreement / Release and Settlement Agreement - On August 3, 2002,
SkyFrames, Inc. ("SFI") signed an Exchange Agreement with Helsinki Capital
Partners, Inc. (Helsinki"). The agreement called for Helsinki to issue
8,500,000 shares of Helsinki's common stock to the former shareholders of
SFI for all 85,000 outstanding shares of SFI's common stock. The
acquisition closed on August 31, 2002; however, the acquisition was
subsequently rescinded. On January 28, 2003, SFI signed a Release and
Settlement Agreement with Helsinki. The rescission agreement called for
the former shareholders of SFI to return the 8,500,000 shares of
Helsinki's common stock and to receive back their 85,000 shares of SFI's
common stock. The financial statements have been restated to reflect the
acquisition as having been rescinded.
Satellite Service Agreement / Purchase Option - In October 2002, the
Company signed a Satellite Service Agreement with Clear Channel Satellite
Services ("CCSS") to purchase preemptible satellite bandwidth and power on
a month-to-month basis. The Company paid a $6,000 refundable deposit and
rental payments are 75% of gross revenues derived from use of the CCSS
satellite with monthly minimums of $5,820. The agreement also grants CCSS
the exclusive right to acquire the Company for 24 months after 18 months
operations at the greater of gross annual revenues or fair market value.
The agreement grants the Company first right of refusal to convert to a
non-preemptible status. The agreement also sets minimum prices the Company
can charge for its services and calls for a 3% increase in monthly fees at
each anniversary of the agreement.
Office Leases - In September 2002, the Company signed a one-year lease for
office space in San Juan Capistrano, California beginning October 1, 2002.
The Company paid a $700 refundable deposit and rental payments were $600
per month. The lease was renewable for one additional year. In April 2003,
the lease was cancelled.
In September 2002, the Company signed a 31-month lease for office space in
Costa Mesa, California beginning March 1, 2003. The Company paid a $1,836
refundable security deposit and rental payments are initially $1,751 per
month increasing each September 30th and reaching $1,836 per month during
the third year. Minimum future lease payments under this lease for the
years ended June 30, 2004, 2005 and 2006 are $21,390, $21,903 and $5,508,
respectively.
In October 2002, the Company signed a two-year lease for office space in
Oceanside, California beginning October 1, 2002. The Company paid a $1,114
refundable deposit and rental payments are $1,142 per month during the
first year and $1,189 per month during the second year. Minimum future
lease payments under this lease for the years ended June 30, 2004 and 2005
are $14,127 and $3,567, respectively.
36
SKYFRAMES, INC.
(Formerly Basic Energy, Inc.)
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - COMMITMENTS AND CONTINGENCIES [Continued]
Engagement Agreement - In May 2003, the Company signed a six-month
Engagement Agreement with Grant Bettingen, Inc. The Company granted
300,000 warrants to purchase common stock at $1.45 per share exercisable
for three years [See Note 5]. The Company also pays $1,500 per month and
will pay 10% of the proceeds from any joint venture or acquisition
negotiated by Grant Bettingen. The agreement can be extended up to six
additional months.
Investment Banking Agreement - In May 2003, the Company signed a
three-month Investment Banking Agreement with Ocean Drive Capital, LLC
("Ocean"). The Company issued 100,000 shares of common stock to Ocean [See
Note 5] and Ocean was to receive 10% of any funds raised for the Company.
If Ocean had been able to raise at least $2,000,000 by the end of the
initial term, then the agreement was to renew for an additional
three-month term.
Consulting Agreements - In March 2003, the Company signed a six-month
consulting agreement with thestockpage.com Inc. The Company issued 40,000
shares of common stock [See Note 5] and will pay 5% of any funds provided
through the efforts of thestockpage.com Inc.
In June 2003, the Company signed a six-month consulting agreement with
Trilogy Capital Partners, Inc. The agreement called for the Company to
grant 180,000 performance-based warrants to purchase common stock at $.01
per share exercisable for five years with 90,000 vesting if the Company's
stock price reaches $3.00 per share and 90,000 if the Company's stock
price reaches $4.00 per share. The agreement also called for the Company
to pay $5,000 per month for consulting services. Following the initial
six-month term, the agreement was continue on a month-to-month basis. The
agreement was cancelled prior to the issuance of any warrants.
NOTE 11 - CONCENTRATIONS
Accounts Receivable - A significant percent of the Company's accounts
receivable at June 30, 2003 were owed by only two customers. The following
table lists the percent of the receivables owed by those customers that
accounted for 10% or more of the total accounts receivable at June 30,
2003:
Customer A 58%
Customer B 40%
The Company has estimated that no allowance for doubtful accounts was
needed at June 30, 2003.
37
SKYFRAMES, INC.
(Formerly Basic Energy, Inc.)
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - CONCENTRATIONS [Continued]
Revenues - During the year ended June 30, 2003, a significant percent of
the Company's total sales were made to only four customers. The following
table lists the percent of the sales made to those customers that
accounted for 10% or more of the total revenues for the year ended June
30, 2003:
Customer A 52%
Customer B 18%
Customer C 17%
Customer D 10%
The loss of these significant customers could adversely affect the
Company's business and financial condition.
NOTE 12 - SUBSEQUENT EVENTS
Contract - In July 2003, the Company signed a one-year contract which
calls for the Company to issue 100,000 shares of common stock in exchange
for consulting services.
Consulting Agreements - In July 2003, the Company signed a nine-month
Consulting Agreement with Client Services International LLC. The agreement
covers 40,000 shares of common stock which were issued in March 2003 [See
Note 5] and calls for the Company to make seven payments of $5,000 in
exchange for consulting services.
In August 2003, the Company signed a one-year agreement with The Research
Works, Inc. The agreement calls for the Company to issue enough shares of
common stock to be worth $80,000 in exchange for consulting services.
In November 2003, the Company signed a three-year Consulting Agreement
with Kevin Woodbridge. The agreement calls for the Company to pay $3,000
per month plus 6% of any funds provided through the efforts of Kevin
Woodbridge.
Stock Issuances - In July 2003, the Company issued 154,500 shares of
common stock for consulting services.
In September 2003, the Company issued 10,000 shares of common stock to a
vendor.
Senior Convertible Promissory Grid Note and Warrants - In August 2003, the
Company signed a $250,000 Senior Convertible Promissory Grid Note payable
to Ocean Drive SF Associates LLC. The note is due August 5, 2004, bears
interest at 8% per annum and is convertible at $.50 per share. As part of
the sale of the note, Company also granted 250,000 warrants to purchase
common stock exercisable for five years. Of the 250,000 warrants, 200,000
are exercisable at $1.15 per share and 50,000 are exercisable at $1.20 per
share.
38
SKYFRAMES, INC.
(Formerly Basic Energy, Inc.)
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - SUBSEQUENT EVENTS [Continued]
Conditional Employment Compensation - In September 2003, the Company's
Board of Directors determined that the required funding had been obtained
by the Company for the Company's Chief Executive Officer to receive
250,000 additional shares of common stock per his employment agreement
[See Note 9].
Assignment - In October 2003, a related party assigned the exclusive right
to use patent-pending virtual onboard switching technology to the Company
in exchange for $1,000.
STOCK COMPENSATION PLAN - In September 2003, the Company's Board of
Directors approved a stock compensation plan and reserved 1,000,000 shares
of common stock to be issued under the plan.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Registrant's former independent accountants Bierwolf Nilson & Associates,
("BNA") were dismissed on May 12, 2003. The report by BNA on the financial
statements of the Registrant dated July 29, 2002, including balance sheets as of
June 30, 2002 and 2000 and the statements of operations, cash flows and
statement of stockholders' equity for the years ended June 30, 2002 and 2001 and
the period since inception (June 4, 1926) to June 30, 2002 did not contain an
adverse opinion or a disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope or accounting principles. During the period covered by
the financial statements through the date of resignation of the former
accountant, there were no disagreements with the former accountant on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure. On May 12, 2003 the Registrant engaged Pritchett,
Siler & Hardy, P.C. as its new independent accountants. Prior to the engagement
of Pritchett, Siler & Hardy, P.C., the Registrant did not consult with
Pritchett, Siler & Hardy, P.C., on the application of accounting principles to
any specific transaction nor the type of audit opinion that might be rendered on
the Registrant's financial statements. BNA was provided by the disclosure set
forth above and provided the Registrant with a letter to the effect that it did
not disagree with the above statements as far as they related to BNA. A copy of
BNA's letter was filed as an exhibit to our Current Report on Form 8-K dated May
12, 2003 and incorporated by reference as an exhibit to this report.
Pritchett, Siler & Hardy, P.C., is the company's accounting firm for the fiscal
year 2003 appointed by the Board of Directors for the current year audit on May
12, 2003.
As of June 30, 2003, no formal Audit Committee has been appointed.
The Board of Directors has recently engaged counsel to assist in the
establishment certain policies and procedures for all management and employees
to adhere to for providing a code of ethics by all employees will be held
accountable expected to adhere to. This will be directly related to performance
guidelines by which future pay levels, bonuses or any compensation will be
earned.
Item 8A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Regulations under
the Securities Exchange of
39
1934 require public companies to maintain "disclosure controls and procedures,"
which are defined to mean a company's controls and other procedures that are
designed to ensure that information required to be disclosed in the reports that
it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Commission's rules and forms. Our Chief Executive Officer ("CEO"), President and
our Chief Financial Officer ("CFO") carried out an evaluation of the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on those evaluations, as of the Evaluation
Date, our CEO, President and CFO believe:
(i) that our disclosure controls and procedures are designed to
ensure that information required to be disclosed by us in the reports we file
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms and that
such information is accumulated and communicated to our management, including
the CEO, President and CFO, as appropriate to allow timely decisions regarding
required disclosure; and
(ii) that our disclosure controls and procedures have been
ineffective to provide timely information to management, delaying the Company's
first annual report since the completion of a recent reverse merger.
(b) Changes in Internal Controls. There were no significant changes in our
internal controls or, to our knowledge, in other factors that could
significantly affect our internal controls subsequent to the evaluation date.
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The members of the Board of Directors of Skyframes serve until the next
annual meeting of stockholders, or until their successors have been elected and
qualified. The officers are appointed by and serve at the pleasure of the Board
of Directors. The following are the directors, executive officers and key
employees of Skyframes.
Chester L. Noblett, Jr. 56 Chairman, Director
James France 55 Chief Executive and Financial
Officer, Secretary and Director
William Sarpalius 55 Director
There are no family relationships among any of our directors or officers.
None of our directors or executive officers has, during the past five
years,
o had any bankruptcy petition filed by or against any business of
which such person was a general partner or executive officer, either
at the time of bankruptcy or within two years prior to that time,
o been convicted in a criminal proceeding and none of our directors or
executive officers is subject to a pending criminal proceeding,
o been subject to any order, judgment, or decree not subsequently
reversed, suspended or vacated of any court of competent
jurisdiction, permanently or temporarily enjoining, barring,
suspending or otherwise limiting his involvement in any type of
business, securities, futures, commodities or banking activities, or
o been found by a court of competent jurisdiction (in a civil action),
the Securities and Exchange Commission or the Commodity Futures
Trading Commission to have violated a federal or state securities or
commodities law, and the judgment has not been reversed, suspended,
or vacated.
40
Chester L. Noblett, Jr. has been Chairman since January 2003. He was chief
operating officer of eSat, Inc. from June 1997 until December 1999, and became
Chairman in April 1999, Director in June 1997 and Chief Financial Officer in
September 2000. He resigned from all of these positions at eSat in January 2002.
From 1990 to 1996, Mr. Noblett served as the chief executive officer for Tradom
International, a subsidiary of Asahi Shouian, Inc., an international food
brokerage company. From 1975 to 1990, Mr. Noblett was chief executive officer of
C. Noblett & Associates, a food brokerage company. Mr. Noblett is also president
and a director of Cyber Village Network, a computer software company. Mr.
Noblett received a B.S. degree in Business Administration from the University of
Southern California in 1971.
James France has been President, Chief Financial Officer and Secretary of
the Company since February 1, 2003. He has been CEO and managing partner of FIIC
R&D since August 2000. FIIC R&D integrates its statistical research for the
insurance industry into a web-based retrieval system. From October 1999 to April
2000 he was President and Director of ixposure, Inc. In June 1998, Mr. France
was recruited as acting CEO and Director to restructure Fastlane Footwear, Inc.,
a public company, engaged in manufacturing of licensed NASCAR products, and held
that position in May 1999. Under his guidance, Fastlane restructured Fastlane's
financial obligations and recovered $1.2 million allegedly misappropriated by
prior management. Fastlane filed for protection under Chapter 11 of the Federal
Bankruptcy Code 18 months after Mr. France left Fastlane. From 1996 to June
1999, Mr. France was Managing Partner of CVG, Inc., engaged in consulting for
bank financing, bridge funding, licensing, mergers and acquisitions and
workouts. From 1987 to 1996, Mr. France served as President of Scriptel Holding,
Inc., a public entity, engaged in manufacturing of flat panel displays and other
electronics. Mr. France served as Chief Financial Officer of Arrow Molded
Plastics from 1985 to 1987, and founder and President of General Advertising,
Inc., an advertising agency in Columbus Ohio.
Mr. Sarpalius was elected to the Board of Directors on April 29, 2003. Mr
Sarpalius has been the President and Chief Executive Officer of Advantage
Associates, a bipartisan firm specializing in consulting clients with
governmental, political and international affairs. Mr. Sarpalius served as Chief
Executive Officer of LobbyFor Me, Inc. which publishes the HillZoo.com web site
and other political web sites. Mr. Sarpalius was appointed to a senior position
in the U.S. Department of Agriculture by President Clinton in 1995. From January
1988 to January 1995, Mr. Sarpalius was a U.S. Congressman representing the 13th
Congressional District of Texas. From 1981 to 1989, he was a Texas State
Senator. He was a staff assistant and teacher at the Cal Farley Boys Ranch from
1972 to 1978. Mr. Sarpalius was the President of the Texas Future Farmers of
America from 1967 to 1968. He received a BA from Texas Tech University and an MA
from West Texas State University.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires our
executive officers and directors, and persons who own more than ten percent of
our Common Stock to file reports of ownership and change in ownership with the
Securities and Exchange Commission and the exchange on which the Common Stock is
listed for trading. Executive officers, directors and more than ten percent
stockholders are required by regulations promulgated under the Exchange Act to
furnish us with copies of all Section 16(a) reports filed. Based solely on our
review of copies of the Section 16(a) reports filed for the fiscal year ended
June 30, 2003, each of James W. France, Chester L. Noblett and William Sarpalius
did not file Form 5's for the year ended June 30, 2003.
Item 10. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation, including incentive
stock option plan and non-plan compensation awarded to, earned by or paid to the
Skyframes President and Chief Executive Officer for all services rendered in all
capacities to us for each of the last three fiscal years. The remuneration
described in the table does not include the cost to Skyframes of benefits which
may be furnished to the named executive officers, including premiums for health
insurance and other benefits provided to such individual that are extended in
connection with the conduct of Skyframes's business. The value of such benefits
cannot be precisely determined, but the executive officers named below did not
receive such other compensation in the years set forth below. No other officer
or
41
director had a salary of over $100,000 during fiscal year 2003.
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
--------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------- -------------------------- --------------------
Other Restricted
Annual Stock Securities LTIP All Other
Name and Principal Salary Bonus Compensation Awards Underlying Payout Compensation
Position Year ($) ($) ($) ($) Options/SARs ($) ($)
------------------ ---- ---------- ----- ------------ ---------- ------------ ------ ------------
James W. France, 2003 120,000(1) 0 0 $250,000(2) 10,000(3) 0 0
Chief Executive 2002 0 0 0 0 0 0 0
Officer 2001 0 0 0 0 0 0 0
Jay W. Gibson 2002 13,811(4)
Former President and 2001 20,997(4)
Chairman of the Board
Note 1 - Mr. France has an employment agreement effective February 1, 2003
providing for a salary of $60,000 per year which was increased to $120,000 in
June 2003.
Note 2 - Mr. France owned 500,000 restricted shares of common stock which was
worth $250,000 on the date of issuance based on a fair market value of $0.50 and
$675,000 based on a closing price of $1.35 on June 30, 2003. Dividends will not
be paid on the restricted stock.
Note 3 - Mr. France receives annually an option to purchase 10,000 shares of
common stock at an exercise price of $0.10.
Note 4 - In January 2002, Mr. Gibson was awarded 138,115 restricted common
shares. In January 2001, Mr. Gibson was awarded 115,130 restricted shares.
Stock Options
The following tables set forth certain information concerning the granting
and exercise of stock options during the last completed fiscal year by each of
the named executive officers and the fiscal year-end value of unexercised
options on an aggregated basis:
42
--------------------------------------------------------------------------------------------------------------------
Option/SAR Grants for Last
Fiscal Year-Individual Grants(1)
--------------------------------------------------------------------------------------------------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise Price
Name Granted (#) Fiscal Year ($/sh) Expiration Date
--------------------------------------------------------------------------------------------------------------------
James W. France 10,000 100% $0.10 2/1/09
Chester C. Noblett, Jr. -- -- -- --
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
Aggregated Option/SAR Exercises in Last Fiscal Year
And FY-End Option/SAR Values(1)
--------------------------------------------------------------------------------------------------------------------
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)(2)
---------------------------------------
Shares Acquired Value Realized Unexercisable/ Unexercisable/
Name On Exercise (#) ($) Exercisable Exercisable
--------------------------------------------------------------------------------------------------------------------
James W. France -0- -0- 10,000/0 $12,500/$0
Chester C. Noblett, Jr. -0- -0- 0/0 $0/$0
--------------------------------------------------------------------------------------------------------------------
Equity Compensation Plans
As of June 30, 2003, 2,244,197 shares had been issued under the Company's
2003 Advisor Plan which was adopted by the Board of Directors in February, 2003.
On September 11, 2003, the Company adopted the 2003 Consultant Stock Plan and
reserved 1,000,000 shares of the Company's common stock under the 2003
Consultant Stock Plan. As of the date of this filing, there have been no shares
issued under the 2003 Consultant Stock Plan.
Board of Directors Fees
Members of the Board of Directors are planned to be paid $1,000 per Board
of Directors meetings attended.
Employment Contract
In February 2003, we entered into an employment agreement with James W.
France to employ him as President and Chief Executive Officer. The agreement is
for a one-year term, through January 31, 2004 and provides for an annual base
salary of $60,000. Additionally, the agreement provides for a grant to Mr.
France of 500,000 restricted shares of the Company's common stock payable at a
rate of 25,000 shares a month. Pursuant to the agreement, Mr. France will also
receive an additional 250,000 shares and an increased salary of $120,000 upon
completion of a financing of more than $500,000. Additionally, Mr. France shall
receive for each year during the term of the agreement, an option to purchase
10,000 shares of common stock at an exercise price of $0.10 per share. In
February 2003, the Company's Board of Directors amended the agreement so that
all 500,000 shares of common stock initially issued to Mr. France vested
immediately. The agreement also provides for three years of extensions. As of
the date of filing this Annual Report, Mr. France's salary is accruing monthly.
43
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information relating to the beneficial
ownership of Company common stock known to us as of November 19, 2003 by (i)
each person known by Skyframes to be the beneficial owner of more than 5% of the
outstanding shares of common stock,(ii) each of Skyframes's directors and
executive officers and (iii) (iii) all directors and executive officers as a
group.
The percentage ownership is calculated using 15,003,956 shares of the
Company's common stock that were outstanding as of October 24, 2003. Unless
otherwise noted below, Skyframes believes that all persons named in the table
have sole voting and investment power with respect to all shares of common stock
beneficially owned by them. Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission. For purposes hereof, a
person is deemed to be the beneficial owner of securities that can be acquired
by such person within 60 days from the date hereof upon the exercise of warrants
or options or the conversion of convertible securities. Each beneficial owner's
percentage ownership is determined by assuming that any warrants, options or
convertible securities that are held by such person (but not those held by any
other person) and which are exercisable within 60 days from the date hereof,
have been exercised. Unless otherwise specified, the address of each listed
below is c/o Skyframes, Inc., 555 Anton Boulevard, Suite 1200, Costa Mesa,
California 92626.
Number of Shares Percentage of Shares
Name and Address Beneficially Owned Beneficially Owned
---------------- ------------------ ------------------
Chester A. Noblett, Jr. Chairman(1) 2,500,000 16.7%
James W. France CEO 580,000 3.9%
William Sarpalius Director 200,000 1.3%
Gilbert Fin , CTO 1,200,000 8.0%
5025 Gavilan Way
Oceanside, California 92057
BriCap Financial LLC 1,400,000 9.3%
24351 Pasto Road, Suite B
Dana Point, California 92629
Jehu Hand 1,300,000 8.7%
24351 Pasto Road, Suite B
Dana Point, California 92629
Scott Cooper 900,000 6.0%
Kimberly Peterson 820,000 5.4%
24351 Pasto Road, Suite B
Dana Point, California 92629
All Officers and
Directors as a group (4 persons) 4,430,000(1) 29.4%
(1) Includes 2,500,000 shares which is controlled by Mr. Noblett as Chairman
of the North Texas and Southern Oklahoma Teachers Security Trust.
44
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In August 2002, the Company issued 6,000,000 shares of common stock for
computers and equipment and as repayment of expenses of $46,063 which had been
paid by a related party.
Pursuant to an Agreement and Plan of Reorganization dated January 28, 2003
Skyframes, a Delaware corporation formerly known as Basic Energy Corporation
("Skyframes") acquired all of the outstanding membership interests of SkyFrames,
Inc., a Texas corporation, in exchange for 8,500,000 shares of Skyframes Common
Stock. In addition, Skyframes issued 150,000 shares for cash received at $0.50
per share. Immediately prior to the transaction the Company effectuated a 1 for
100 reverse stock split of the Company's shares of common stock and as of
October 24, , 2003 there were 15,003,956 shares outstanding. The terms of the
acquisition were determined between the parties. Prior to the acquisition,
Skyframes Inc. and Basic Energy had no affiliation or relationship.
In February 2003, the Company signed a one-year employment agreement with the
Company's Chief Executive Officer. The agreement calls for the Company to pay a
base salary of $5,000 per month, issue 500,000 shares of common stock vesting at
25,000 shares per month and grant a 10,000 option to purchase common stock at
$0.10 per share exercisable for five years. Upon completion of $500,000 in
funding, the agreement provides for the salary to increase to $10,000 per month
and for issuance of an additional 250,000 shares of common stock. The agreement
also provides for three years of extensions. In February 2003, the Company's
Board of Directors amended the agreement so that all 500,000 shares of common
stock initially issued to the Company's Chief Executive Officer vested
immediately. In June 2003, the Company's Board of Directors amended the
agreement to increase the Company's Executive Officer's salary to $10,000 per
month effective June 1, 2003.
In March 2003, the Company issued 900,000 shares of common stock to Bricap, LLC,
an entity controlled by the Company's former President. The shares were issued
as a settlement for potential claims against the Company related to the
technology used by the Company in its operations.
In May 2003, the Company issued 500,000 shares of common stock to Bricap, LLC,
an entity controlled by the Company's former President. The shares were issued
as collateral on a $44,000 no-interest unsecured demand note payable. In June
2003, the Company defaulted on the note and Bricap, LLC accepted the 500,000
shares of common stock, which had been previously issued, as payment in full.
At June 30, 2003, officers and shareholders of the Company were owed a total of
$134,649 for expenses which they paid on behalf of the Company and accrued
amounts owed to them.
PART IV
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits of the Company are included herein.
2.1 Exchange Agreement, dated January 28, 2003, between the registrant and
Skyframes, Inc., a Texas corporation filed herewith.
3.1 Articles of Incorporation, incorporated by reference to Registration
Statement on Form 10-SB (File No. 0-27849), dated as of October 27, 1999.
3.2 Certificate of Amendment to Articles of Incorporation, dated January 20,
1979, incorporated by reference to Registration Statement on Form 10-SB
(File No. 0-27849), dated as of October 27, 1999.
3.3 Certificate of Amendment to Articles of Incorporation, dated August 11,
1979, incorporated by reference to Registration Statement on Form 10-SB
(File No. 0-27849), dated as of October 27, 1999.
3.4 Bylaws, dated June 4, 1926, incorporated by reference to Registration
Statement on Form 10-SB (File No. 0-27849), dated as of October 27, 1999.
45
10.1 Sublease Agreement, dated September 5, 2002, by and among the registrant,
Hoffski & Pisano, CPAs, A Professional Corporation & Herrington
Management, Inc., filed herewith.
10.2 Satellite Service Agreement, dated October 7, 2002, by and between the
registrant and Clear Channel Satellite Services, filed herewith.
10.3 Consulting Agreement, dated November 1, 2002, by and between Allen
Holdings, Inc. and Skyframes, Inc., filed herewith.
10.4 Employment Agreement, dated February 1, 2003, by and between the
registrant and James W. France, filed herewith.
10.5 Release and Settlement Agreement, dated March 30, 2003, by and between the
registrant and Bricap, LLC, filed herewith.
10.6 Securities Purchase Agreement, dated June 16, 2003, by and between the
registrant and Ocean Drive Holdings LLC, filed herewith.
10.7 Senior Convertible Promissory Note, dated June 16, 2003, by and between
the registrant and Ocean Drive Holdings LLC, filed herewith.
10.8 Stock Purchase Warrant, dated June 16, 2003, by and between the registrant
and Ocean Drive Holdings, LLC, filed herewith.
10.9 Registration Rights Agreement, dated June 16, 2003, by and between the
registrant and Ocean Drive Holdings, LLC, filed herewith.
10.10 Agreement for the Assignment of Patent Rights, dated October 15, 2003, by
and between the registrant and Skyframes, Inc., a Texas corporation, filed
herewith.
16 Letter from Bierwolf Nilson & Associates, incorporated by reference to
Exhibit 16 of the registrant's Current Report on Form 8-K (File Number
000-27849) filed with the Commission on May 15, 2003.
22. Information Statement on Schedule 14C, incorporated by reference to
Schedule 14C (File No. 000-27849) filed with the Commission on March 5,
2003.
31.1 Certification of James. W. France pursuant to Securities Exchange Act
rules 13a-14(a) and 15d-14(a), filed herewith.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act, of 2002, filed herewith.
(b) Reports on Form 8-K.
On May 15, 2003 the registrant filed a Form 8-K to disclose the registrant
had changed its auditors.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth fees billed to us by our auditors during
the fiscal year ended June 30, 2003 for: (i) services rendered for the audit of
our annual financial statements and the review of our quarterly financial
46
statements, (ii) services by our auditor that are reasonably related to the
performance of the audit or review of our financial statements and that are not
reported as Audit Fees, (iii) services rendered in connection with tax
compliance, tax advice and tax planning, and (iv) all other fees for services
rendered. "Audit Related Fees" consisted of consulting regarding accounting
issues. "All Other Fees" consisted of fees related to the issuance of consents
for our S-8 Registration Statement and this Annual Report. During the fiscal
year ended June 30, 2003, the Company retained Pritchett, Siler & Hardy, P.C. as
independent auditors and paid the following fees for services rendered:
Audit Fees Audit Related Fees Tax Fees All Other Fees
---------- ------------------ -------- --------------
$4,110 $0 $0 $295
The by-laws of the corporation allow for up to (5) members to the Board.
The company plans call for filling two board seat vacancies with outside
individuals. These individuals will be required to serve on committees such as
the audit and compensation committees for the years 2004 and 2005 respectfully.
Currently, due to the present composition of the Company and its status as a
development stage company, the Company has not appointed an audit committee. As
such, the Board of Directors as a whole approved the engagement of retained
Pritchett, Siler & Hardy, P.C. as independent auditors.
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned; hereunto duly authorized on November 25, 2003.
SKYFRAMES, INC.
By: /s/ James W. France
------------------------------------
James W. France
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities on November 25, 2003.
By: /s/ James W. France President, Chief Executive Officer,
------------------------------- Chief Financial Officer and Director
James W. France (principal executive officer and
principal accounting and financial
officer)
By: /s/ Chester C. Noblett, Jr. Chairman
-------------------------------
Chester C. Noblett, Jr.
By: /s/ William Sarpalius Director
-------------------------------
William Sarpaulis
48