UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington. D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the three months ended June 30, 1999
OR
[ ] 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 1-12835
WORLD CALLNET, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2468002
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Brecon House, Meridian Gate, 207 Marsh Wall, London E14 9YT
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code) 0171 335 8300
Securities registered under Section 12 (b) of the Exchange Act: None
Securities registered under Section 12 (g) of the Exchange Act:
Common Stock, Par Value $.001
--------------------------------------------------------------------
(Title of Class)
Check whether the registrant (1) 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 __
As of July 31, 1999 there were 7,933,833 shares of registrant's common
stock outstanding.
Transitional Small Business Disclosure Format (Check One): Yes __ No X
<PAGE>
REGISTRANT'S DISCLAIMER STATEMENT RE: PRIVATE SECURITIES LITIGATION REFORM ACT
AND OTHER MATTERS
The statements in this Report on Form 10-QSB and in other filings by
World CallNet, Inc. (the "Company") with the Securities and Exchange Commission,
or in press releases issued by the Company that are not based on historical
information are considered forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including statements regarding the
Company's projections, hopes, expectations, intentions, beliefs or strategies
regarding the future. Forward-looking statements include, but expectations are
not limited to, plans discussed the Company's Form 10-K for the period ended
September 30, 1998, in the section entitled "Description of Business" regarding
(i) the Company's plans to market products in Europe, North America, South
America and Asia, (ii) the Company's belief that offering free Internet access
will capture customers for CallNet PLC, (iii) the Company's belief that it may
acquire other companies engaged in Internet related businesses, (iv) the
Company's expectation that the acquisition by the Company of the remaining 85%
of CallNet Plc can be acquired by the end of fiscal year 1999, (v) the Company's
belief that the majority of its future revenues will be derived from its
ownership of CallNet PLC, which earns a share of interconnect toll revenues from
companies that provide telephone service to their customers, (vi) the Company's
belief that CallNet Plc will meet the quarterly telephone toll minute targets
set forth in its agreement with Cable & Wireless Communications, Plc ("Cable &
Wireless Communications"), (vii) the Company's belief that its products and
services will appeal to the many segments of the Internet market, and (vii)
statements in the Management's Discussion and Analysis or Plan of Operation
section of this report regarding (a) the projection that the Company's working
capital will be adequate until mid 1999, (b) the projection that additional
capital from bridge notes and/or sale of equity securities will be necessary,
(c) the expectation that product manufacturing and distribution costs will be
borne by joint venture partners, (d) the estimate of research / development and
plant expenditures for the next twelve months, (e) the expectation that
telephone toll revenues derived from ownership of CallNet PLC will be the
primary source of internal liquidity and product sales will be a secondary
source of internal liquidity, and (f) the belief that Year 2000 issues will not
have a material impact on the Company.
It is possible that the Company's projections, hopes, expectations,
intentions, beliefs, plans or strategies regarding the future and hopes outlined
above may not be achieved due to factors and circumstances discussed elsewhere
in this Form 10-QSB. See Part 1, Item 2, "Management's Discussion and Analysis
or Plan of Operation."
World CallNet, Inc. is not affiliated with, sponsored by or endorsed by
any of the following companies who have similar trade names, trademarks or
service marks: Worldcall Communications International, Inc.; Computer Calling
Technologies, Inc.; AT&T Corp.; Worldnet Communications, Inc.; Luckman
Interactive, Inc.; Allnet Communications Services, Inc.; West Coast
Telecommunications, Inc.; and Worldnet Communications, Inc.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Financial information required by Item 301(b) of Regulation S-B can be
found on the page following Item 2 below. The financial information contained
herein for the three months and nine months ended June 30, 1999 is unaudited but
includes all adjustments that the Company considers necessary for a fair
presentation of the results for such periods. The financial information should
be read in conjunction with the financial statements for the year ended
September 30, 1998 included in the Company's Annual Report on Form 10-KSB.
Operating results for the nine months ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the entire year ended
September 30, 1999.
Item 2. Management's Discussion and Analysis or Plan of Operation.
During 1998, the Company sold all of its interests in oil and gas
royalty properties for cash and, after repayment of debt and accounts payable,
became a publicly traded shell. In October 1998, the Company completed the
acquisition of World Wide Communication (Holdings) Ltd. ("WWCH") in a
transaction accounted for as a reverse acquisition. As a result, the Company
became the successor to the business and financial operations of WWCH, including
its fiscal yearend of September 30. WWCH was incorporated in January 1998 and
during the period from incorporation through June 30, 1999 had been involved
primarily in capital formation activities, refinement of its business strategy
and development of relationships with industry partners. In January 1999, the
Company changed its name to World CallNet, Inc.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception the Company has not generated any internal
liquidity from any source. The Company's principal external source of capital
for developing its products and services has been the placement of bridge notes
payable. In November and December 1998, the Company completed the private
placement of $1,150,000 in bridge notes that are due on December 1, 1999 or
earlier under certain circumstances, including the raising of $3.5 million or
more of additional capital. In April 1999, the Company completed the private
placement of $550,000 of bridge notes that are due on October 9, 1999 or earlier
under circumstances similar to the aforementioned placement. Additional
placements of bridge notes or the sale of equity securities to fund operating
expenses will be necessary until the Company's revenues from operations provide
sufficient cash flow.
The Company's plan of operation for the next twelve months includes the
ongoing operation of its Internet service and the continued development,
manufacturing and marketing of its Internet products such as Mail TV and its
proprietary keyboard. The Company will require substantial capital to implement
its business plan, which is discussed further in Note 2 to the Financial
Statements. While substantially all development costs will be borne by the
Company, it is expected that all of the costs of manufacturing and distribution
of these products will be borne by joint venture partners, such as Zilog, OEM
television manufacturers and other third parties seeking to acquire new
microchip technology developed by the Company.
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As of June 30, 1999, the Company's working capital had been fully
expended to pay its operating costs and administrative expenses. To meet these
obligations during the period since June 30, 1999, the Company has received a
cash advance of $350,000 from an Australian-based company, which has agreed in
principle to purchase shares of the Company's common stock for cash and other
consideration. The terms of the proposed transaction have not been finalized and
as of the date of this report the parties have not signed a definitive
agreement. The Company expects to satisfy its working capital requirements, and
to meet other obligations for the remainder of fiscal 1999 and 2000 from the
sale of debt or equity securities.
The Company has estimated that MailTV research and development costs
will be approximately $250,000 during the next twelve months. Expenditures for
plant and/or significant capital equipment are estimated at $500,000 during the
next twelve months.
If deemed appropriate by the Board of Directors, the Company will issue
shares of its capital stock to acquire assets, customers and other entities that
appear to be viable business opportunities.
The Company expects that its primary source of internal liquidity in
the future will be revenues from telephone toll charges earned under the terms
of agreements that CallNet Plc, an affiliated entity, has with Cable and
Wireless Communications ("CWC"). The agreement with CWC entitles CallNet Plc, a
provider of Internet access, to receive 50% of the interconnect toll revenues
(after deducting certain access charges paid to telecommunications providers
such as British Telecom) CWC charges its customers for calls to CallNet Plc. The
Company owns fifteen percent (15%) of the capital stock of CallNet Plc and plans
to acquire the remaining eighty-five percent (85%) of the capital stock of
CallNet Plc.
The agreement with CWC provides that this revenue sharing arrangement
is based on CallNet Plc meeting quarterly targets commencing with the period
beginning March 1, 1999. The initial quarterly target is 10 million minutes with
the quarterly target commencing on June 1, 1999 increasing to 30 million
minutes. If a quarterly target is not met, Callnet Plc will be required to make
certain repayments to CWC based on the difference between the target minutes and
the actual minutes. The repayment requirement ranges from 10% of the quarterly
payment made to CallNet Plc for achieving 90% and above of the target revenues
to 100% of the quarterly payment made to CallNet Plc for achieving less than 50%
of the target revenues. CallNet Plc has thus far exceeded the target minutes for
the quarterly periods that began in March and June 1999.
The fundamental business strategy is to direct telephone usage to the
CallNet Plc telecommunications network from new Internet and existing customers.
The Company's products are designed to facilitate new Internet access. Sale of
these products is expected to be a secondary source of revenues for the Company.
YEAR 2000 READINESS
The Year 2000 presents concerns for business and consumer computing.
Aside from the well-known problems with the use of certain 2-digit date formats
as the year changes from 1999 to 2000, the Year 2000 is a special case leap
year, and dates such as 9/9/99 were used by certain organizations for special
functions. This could result in system failures or miscalculations causing
disruption of operations, including among others, a temporary inability to
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process transactions, send invoices or engage in similar normal business
activities. The problem exists for many kinds of software and hardware,
including mainframes, mini-computers, PC's and embedded systems.
The Company is continuing to test its products and classify its tested
products into the following categories of compliance: "compliant," "compliant
with minor issues," and "not compliant." All of the Company's significant
products tested are either "compliant" or "compliant with minor issues," as
defined. The Company has purchased all of its information systems during the
later part of 1998 with a full awareness of Year 2000 issues. While the Company
received no written assurance from such vendors that such systems were year 2000
compliant, computer system hardware and software were carefully reviewed by the
Company-employed computer technicians and software engineers before being
purchased and placed in service.
Software developed by the Company for Internet access relies on the
systems employed by CallNet Plc, an affiliated entity that provides Internet
service to the Company on an exclusive basis. CallNet Plc was incorporated in
1998 and under the direction and supervision of the Company's information
systems technicians has followed the same procedures and timetables for
purchasing and placing its information systems in service.
The Company believes that purchasing information technology from
vendors such as Intel and Microsoft basically eliminates remediation costs on
systems not fully Year 2000 compliant. World CallNet's policy is to make future
and current versions of its core products Year 2000 "compliant."
The Year 2000 issue also affects the Company's internal systems,
including information technology (IT) and non-IT systems. World CallNet is
assessing the readiness of its systems for handling the Year 2000, and has
started the remediation and certification process. Contingency plans are being
developed in parallel with the testing and remediation efforts.
As noted above, World CallNet has addressed the Year 2000 issue with
its largest suppliers of services, CallNet Plc, and is evaluating its third
party distribution and supply chain to understand their ability to continue
providing services and products throughout the change to the year 2000. World
CallNet is monitoring key vendors, product manufacturers, distributors, and
direct resellers to avoid any business interruptions in the year 2000. For
critical third parties with known issues, contingency plans will be developed.
The Company is also reviewing its facilities and infrastructure. Remediation
efforts are under way and certain contingency plans are in development. In a
worst case scenario, these unknown third party variables could have a material
and adverse effect on the Company's ability to conduct its business.
The Company believes that the Internet as a whole is subject to overall
systems failure arising from Year 2000 matters due to the open and interactive
nature of the Internet. The Internet is a loose and open network that may have
many non-compliant participants who could corrupt the entire system. The Company
believes that this risk does not apply to the Company to any greater extent that
any other Internet Company.
While Year 2000 issues present a potential risk to World CallNet's
internal systems, distribution and supply chain, and facilities, the Company is
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minimizing risk with a worldwide effort. World CallNet is performing an
extensive assessment and is in the process of testing and remediating mission
critical components. The current plan is to have the majority of these
components resolved by June 1999, with the remaining components resolved by
September 1999. Management currently believes that all critical systems will be
ready by the Year 2000. The level of expenditures for information systems, both
historically and budgeted for the next year, are basically unaffected by Year
2000 issues. Therefore, the Company believes that the cost to address the Year
2000 issues is not material. The impact of the Year 2000 on future World CallNet
revenue is difficult to discern but is a risk to be considered in evaluating
future growth of the Company.
RESULTS OF OPERATIONS
The results of operations for purposes of this discussion include only
the financial results of WWCH, the surviving business operation in a transaction
that was treated as a reverse acquisition. The Company's financial statements
report only the business operations and assets of WWCH. Financial information
and related discussions contained in reports previously filed by the Company are
not comparable with the disclosures included herein.
Revenues of approximately $38,886 and $157,363 for the three and nine
months ended June 30, 1999, respectively, were derived from telephone
interconnect tolls and license fees related to the Company's MailTV software
chip.
For the three and nine months ended June 30, 1999 the Company's costs
and expenses consisted primarily of general and administrative expenses. Such
expenses included salaries and other administrative expenses incurred in
connection with capital formation and development of its business plan. These
expenses are reflected on the statement of operations as charges to general and
administrative expense.
Interest expense of $194,762 is related to $1,700,000 of notes payable
from transactions completed in April 1999, December and November 1998 and bear
interest at 10% per annum. Included in interest expense is $132,507 of
amortization of note discount attributable to common stock purchase warrants
issued to the note holders. The Company is obligated to make monthly interest
payments to holders of these notes.
CAUTIONARY FACTORS
The success of the Company's plan of operation may be adversely
affected by several principal factors.
NEED FOR ADDITIONAL CAPITAL
The Company needs a substantial amount of capital to achieve its
business plan. Conditions in financial markets influence investors' attitudes
and willingness to invest in a particular industry issuer or type of security.
If the Company is unable to obtain additional capital through private or public
placement of its debt or equity securities, asset based or bank financing, or
through ventures with industry partners, its ability to achieve its business
objectives could be substantially impaired.
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COMPETITION
The online services and Internet markets are highly competitive. The
Company believes that existing competitors, which include, among others,
commercial online services such as America OnLine and Dixon's FreeServe,
Internet-based services, including, among others, the Microsoft Network, and
Internet service providers, including various national and local independent
Internet service providers as well as long distance and regional telephone
companies, including, among others, British Telecommunications and Cable &
Wireless Communications and various other regional telephone operating
companies, are likely to enhance their service offerings. In addition, new
competitors, including Internet directory services and various media and
telecommunications companies, have entered or announced plans to enter the
online services and Internet markets, resulting in greater competition for the
Company. Many of the direct competitors and possible future competitors referred
to above have significantly greater financial, technical, marketing and
personnel resources than the Company. These factors may have a material adverse
effect on the Company's financial condition and operating results. In addition,
in response to increased competition, the Company may adopt additional
strategies designed to continue the growth in its subscriber base, such as new
marketing programs and promotional offers and implementation of new pricing
programs. Such strategies may result in an increase in costs as a percentage of
revenue.
The business of providing Internet access services is new, extremely
competitive, rapidly evolving and subject to rapid technological change. World
CallNet expects that such competition will intensify significantly in the near
future. A large number of companies are developing or have introduced devices
and technologies to facilitate access to the Internet via a television. Such
competitors include suppliers of low-cost Internet technologies. Set top boxes
and devices are proposed or under development, as well as video game devices
that provide Internet access. In addition, manufacturers of television sets have
announced plans to introduce Internet access and Web browsing capabilities into
their products through set-top boxes.
Personal computer manufacturers are introducing Personal Communications
Systems that offer full-fledged television viewing combined with Internet
access. Operators of cable television systems also plan to offer Internet access
in conjunction with cable service. World CallNet also competes with Internet
service providers and commercial online services. There can be no assurance that
World CallNet's competitors will not develop Internet access products and
services that are superior to, and priced competitively with those or World
CallNet, thereby achieving greater market acceptance than MailTV. Many of World
CallNet's competitors, as well as potential competitors, have longer operating
histories, greater name recognition, larger installed customer bases and
significantly greater financial, technical and marketing resources than World
CallNet.
SUBSCRIBER ATTRITION RATES
World CallNet will devote considerable financial and human resources to
attract subscribers to its service; however, due to circumstances that may or
may not be beyond the control of the Company, these subscribers may discontinue
their affiliation with the Company. As a result of subscriber attrition, the
revenues generated from Internet usage may decline considerably, as may the
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rates that the Company can charge from advertising on its service as well as the
revenues that the Company anticipates from e-commerce.
REPAYMENT OF OBLIGATION UNDER CABLE & WIRELESS AGREEMENT
The Company expects that its primary source of internal liquidity
will be revenues from telephone toll charges earned under the terms of the
agreement that CallNet Plc, an affiliated entity, has with Cable & Wireless
Communications. The agreement with Cable & Wireless Communications entitles
CallNet Plc, a provider of Internet access, to receive 50% of the interconnect
toll revenues (after deducting certain costs) Cable & Wireless charges its
customers for calls to CallNet Plc. The agreement requires CallNet Plc to refund
certain payments if such telephone toll minutes do not meet certain targets. See
Part 1, Item 2, "Management's Discussion and Analysis or Plan of Operation -
Liquidity and Capital Resources".
NETWORK CAPACITY AND OPERATIONS
Rapid growth in subscriber demand may cause the Company and its data
communications access providers to experience difficulty at certain times in
providing adequate server and network capacity. As a result, subscribers may
from time to time encounter difficulty in accessing and using the CallNet
service. There can be no assurance that the Company will be able to expand
server and network capacity at a rate sufficient to satisfy increasing
subscriber demands, and the failure to do so could have a material adverse
effect on the Company's business. The Company currently relies on several
companies, particularly Cable & Wireless Communications, to provide data
communications access to its service. Any damage or failure that causes
interruptions in Cable & Wireless operations could have a material adverse
effect on the Company's business.
The Company's operations are dependent on its ability to protect its
computer equipment and the information stored in its data centers against damage
by fire, power loss, telecommunications failures, unauthorized intrusions and
other events. The Company believes it has taken prudent measures to reduce the
risk of interruption in its operations. However, there can be no assurance that
these measures are sufficient. Any damage or failure that causes interruptions
in the Company's operations could have a material adverse effect on its
business. While the Company carries property and business interruption insurance
to cover its computer operations, the coverage may not be adequate to compensate
for losses that may occur.
PRESSURES ON OPERATING MARGINS
One of the Company's goals is to increase market share by rapidly
growing its subscriber base. To achieve this goal, the Company has aggressively
promoted its service offerings and may implement other strategies designed to
facilitate subscriber growth. The costs associated with the rapid growth in its
subscriber base and investments in customer support have placed, and will
continue to place, pressures on the Company's operating margins.
The Company may adopt additional strategies designed to continue the
growth in its subscriber base, such as new marketing programs and promotional
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offers. Such strategies may result in an increase in costs as a percentage of
revenues. In addition, acceleration in the growth of its subscriber base,
changes in usage patterns among members or continuing investments in content may
also increase costs as a percentage of revenues. As a result, the Company does
not believe its operating margins have stabilized. There can be no assurance
that the Company's operating margins will not be adversely affected in the
future by such strategies or other conditions.
SEASONALITY
Subscriber acquisition is expected to be highest in the second and
third fiscal quarters, when sales of new computers and computer software are
highest due to the holiday season. Customer usage is expected to be lower in the
summer months due largely to extended day light hours and competing outdoor
leisure activities.
MANAGING A RAPIDLY GROWING AND CHANGING BUSINESS
The Company continues to experience major changes in its operations
resulting from rapid expansion of its business and other factors which have
placed significant demands on its administrative, operational and financial
resources. The Company's future performance will depend in part on its ability
to manage its growth and to adapt its administrative, operational and financial
control systems to the needs of the expanded entity. The failure of management
to anticipate, respond to and manage changing business conditions could have a
material adverse effect on the Company's business and results of operations.
ACCESS TO CONTENT PROVIDERS
As competition in the online services market intensifies, it may become
more difficult or expensive to secure and retain content and/ or content
providers. The Company generally pays royalties to its content providers under
short term renewable agreements, and there can be no assurance that the loss of
a number of content providers or significantly increased costs to maintain
certain content providers would not have a material adverse effect on the
Company's business.
NEW BUSINESSES AND INTERNATIONAL VENTURES
The Company pursues new products and services to diversify its sources
of revenue and leverage its technological and other competencies. There can be
no assurance that the Company will be able to successfully develop, or achieve
commercial acceptance for, these new products and services. The Company intends
to offer online services internationally through either wholly owned operations
or through joint ventures with existing Internet service providers of
telecommunications companies. There can be no assurance that the Company or its
partners will be able to successfully market, sell and deliver its services in
these markets. In addition, there are certain significant risks inherent in
doing business on an international level, such as laws governing content that
differ greatly from country to country, unexpected changes in regulatory
requirements, political risks, export restrictions, export controls relating to
encryption technology, tariffs and other trade barriers, fluctuations in
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currency exchange rates, issues regarding intellectual property and potentially
adverse tax consequences, any or all of which could impact the Company's
international operations.
CHANGING TECHNOLOGIES
As online services evolve, the Company will be required to offer
technological advances such as improved data compression and delivery of voice
and full motion video. Currently, online services are accessed primarily by
personal computers via modem. As online services become accessible by screen
based telephones, television or other consumer electronic devices, and become
commercially deliverable over other wired conduits such as coaxial and fiber
optic cable, the Company may have to develop new technology or modify its
existing technology to keep pace with these developments. Pursuit of these
technological advances will require substantial expenditures, and there can be
no assurance that the Company will succeed in adapting its online service
business to alternate access devices and conduits.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
Changes in the regulatory environment relating to the
telecommunications and media industry could have an adverse effect on the
Company's business. The Company cannot predict the likelihood that any such
legislation will pass, or the financial impact, if any, the resulting regulation
may have. Moreover, the applicability to online service and Internet access
providers of existing laws governing issues such as intellectual property
ownership, libel and personal privacy is uncertain. The law relating to the
liability of online service companies and Internet access providers for
information carried on or disseminated through their systems is currently
unsettled and has been the subject of several recent private lawsuits. If
similar actions were to be initiated against the Company, costs incurred as a
result of such actions could have a material adverse effect on the Company's
business.
RELIANCE ON KEY PERSONNEL
The Company's success depends in part upon the performance of its
executive officers and other key employees. The loss of the services of one or
more of its key personnel could have a material adverse effect on the Company.
The Company depends on its continued ability to attract and retain highly
skilled and qualified personnel. Competition for such personnel is intense, and
there can be no assurance that the Company will be successful in attracting and
retaining such personnel.
RELIANCE ON THIRD PARTIES
The Company depends substantially upon third parties for several
critical elements of its business, including, among others, CallNet Plc; revenue
sharing and Internet routing agreement with Cable & Wireless Communications and
the Company's agreement with Zilog, Inc. pursuant to which Zilog, Inc. has
agreed to manufacture and supply MailTV chips to television manufacturers. The
Company will outsource the manufacture of its MAILTV retrofit keyboards from an
outside manufacturer pursuant to purchase orders placed from time to time, will
not carry significant inventories of these keyboards and will have no guaranteed
supply arrangements. The Company relies on local telephone companies and other
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companies to provide data communications capacity via local telecommunications
lines and leased long distance lines. In addition, the Company relies on CallNet
PLC as an Internet service provider, which the Company plans to acquire.
INTELLECTUAL PROPERTY ISSUES
The Company regards its patents, trademarks, trade dress, trade secrets
and similar intellectual property as critical to its success, and the Company
will rely upon patent law, trademark law, trade secret protection and
confidentiality and/or license agreements with its employees, customers,
partners and others to protect its proprietary rights. There can be no assurance
that the steps taken by the Company to protect any of its proprietary rights
will be adequate or that third parties will not infringe or misappropriate the
Company's patents, trademarks, trade dress and similar proprietary rights. In
addition, there can be no assurance that other parties will not assert
infringement claims against the Company.
VOLATILITY OF SHARE PRICE
The market price of the Company's Common Stock has a history of
volatility. Factors such as quarterly variations in financial results and
membership growth and usage, new pricing strategies, the announcement of
technological innovations, mergers, acquisitions, strategic partnerships or new
product offerings by the Company or its competitors, the entrance of new
competitors into the online services market and changes in content providers may
have a significant impact on the market price of the Common Stock. Moreover, the
Common Stock could experience price volatility based on market conditions. In
particular, a substantial short interest exists in the Company's Common Stock
which may tend to exacerbate volatility.
SALES OF COMMON STOCK
Sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices of the Common Stock. The warrants that
have been issued by the Company since the reverse acquisition of WWCH have
provided for demand and piggyback registration rights. Exercise of such
registration rights could increase the number of shares of Common Stock sold in
the public markets.
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<TABLE>
<CAPTION>
WORLD CALLNET, INC.
(Formerly Worldwide Communications (Holdings) Limited)
(A Development Stage Company)
BALANCE SHEET
(Expressed in U.S. Dollars)
AS OF JUNE 30, 1999 AND SEPTEMBER 30, 1998
(Unaudited)
ASSETS June 30, September 30,
------ 1999 1998
<S> <C> <C>
CURRENT ASSETS:
Cash $ 11,623 $ 1,995
Other current assets 63,252
Receivable from affiliated entity 634,087 --
----------- -----------
708,962 1,995
----------- -----------
OTHER ASSETS:
Property and equipment, net of $6,636
and $0 accumulated depreciation 72,998 --
Investments
500,000 203,772
Intangible asset, net of $2,925 and $0
accumulated amortization 16,575 19,500
----------- -----------
Total other assets 589,573 223,272
----------- -----------
Total assets $ 1,298,535 $ 225,267
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
CURRENT LIABILITIES:
Notes payable, net of unamortized discount
of $115,851 and $0 $ 1,584,149 $ --
Accounts payable and accrued expenses 537,897 43,041
Deferred revenue -- 193,583
Due to affiliate -- 10,486
----------- -----------
Total current liabilities 2,122,046 412,675
----------- -----------
COMMITMENT AND CONTINGENCY (Notes 3 and 7)
STOCKHOLDERS' DEFICIT:
Common stock, $.001 par value; 20,000,000
shares authorized, 7,989,333 and 5,500,000
shares issues and outstanding 7,989 5,500
Additional paid-in capital 1,048,961 190,660
Accumulated deficit (1,912,788) (378,285)
Foreign currency translation adjustment 32,327 (5,283)
----------- -----------
Total stockholders' deficit (823,511) (187,408)
----------- -----------
Total liabilities and stockholders' deficit $ 1,298,535 $ 225,267
=========== ===========
</TABLE>
See accompanying notes to these financial statements.
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<TABLE>
<CAPTION>
WORLD CALLNET, INC.
(Formerly Worldwide Communications (Holdings) Limited)
(A Development Stage Company)
STATEMENT OF OPERATIONS
(Expressed in U.S. Dollars)
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1999
(Unaudited)
Three Nine
Months Months
Ended Ended
--------------------------
June 30, 1999
-------------
<S> <C> <C>
REVENUES $ 38,886 $ 157,363
COSTS AND EXPENSES:
Production and development 2,385 2,385
General and administrative 557,027 1,475,485
Interest expense 119,943 194,762
Depreciation and amortization 7,661 9,561
Impairment of marketable securities -- 9,672
----------- -----------
687,016 1,691,865
----------- -----------
NET LOSS (648,130) (1,534,503)
OTHER COMPREHENSIVE INCOME - Foreign currency translation
adjustment 19,425 37,610
----------- -----------
COMPREHENSIVE LOSS $ (628,705) $(1,496,893)
=========== ===========
NET LOSS PER SHARE (basic and diluted) $ (.08) $ (.20)
=========== ===========
WEIGHTED AVERAGE SHARES 7,989,000 7,493,000
=========== ===========
</TABLE>
See accompanying notes to these financial statements.
13
<PAGE>
<TABLE>
<CAPTION>
WORLD CALLNET, INC.
(Formerly Worldwide Communications (Holdings) Limited)
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
(Expressed in U.S. Dollars)
FOR THE NINE MONTHS ENDED JUNE 30, 1999
(Unaudited)
Foreign
Additional Currency
Common Stock Paid-In Accumulated Translation
Shares Amount Capital Deficit Adjustment Total
--------- -------- ---------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance September 30, 1998 5,500,000 $ 5,500 $ 190,660 (378,285) (5,283) $(187,408)
Issuance of shares of common stock on October 9,
1998 in connection with acquisition of 100% of
the Company's common stock by General
American Royalty 1,829,333 1,829 13,043 - - 14,872
Issuance of 160,000 shares on November 19, 1998
for cash
Issuance of 500,000 shares to acquire 15% of
CallNet Plc 160,000 160 167,400 - - 167,560
500,000 500 499,500 - - 500,000
Issuance of common stock purchase warrants
178,358 178,358
Net loss for the period - - - (1,534,503) - 1,534,503)
Foreign currency translation adjustment - - - - 37,610 37,610
--------- ------ ----------- ------------ --------- ---------
7,989,333 $7,989 $ 1,048,961 $ (1,912,788) $ 32,327 $(823,511)
========= ====== =========== ============ ========= =========
</TABLE>
See accompanying notes to these financial statements.
14
<PAGE>
WORLD CALLNET, INC.
(Formerly Worldwide Communications (Holdings) Limited)
(A Development Stage Company)
STATEMENT OF CASH FLOWS
(Expressed in U.S. Dollars)
FOR THE NINE MONTHS ENDED JUNE 30, 1999
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,496,893)
Depreciation and amortization expense 9,561
Impairment of marketable securities 9,672
Accretion of discount on notes payable 132,507
Increase in accounts payable and accrued expenses, net of
foreign currency translation adjustments 338,883
Increase in other current assets (63,252)
Other 5,797
-----------
Net cash used by operating activities (1,063,725)
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in amount due from affiliate (644,573)
Purchase furniture and fixtures (79,634)
-----------
(724,207)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term indebtedness, net of financing costs 1,630,000
Cash received in common stock issuances 167,560
-----------
1,797,560
NET INCREASE IN CASH 9,628
CASH, beginning of period 1,995
CASH, end of period $ 11,623
===========
NON CASH TRANSACTIONS:
Purchase of net assets in reverse acquisition for common stock 14,872
Acquisition of CallNet Plc shares for common stock 500,000
-----------
$ 514,872
===========
See accompanying notes to these financial statements.
15
<PAGE>
WORLD CALLNET, INC.
(Formerly Worldwide Communications (Holdings) Limited)
(A Development Stage Company)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------------
Organization
------------
World CallNet, Inc. (the "Company") (formerly Worldwide Communications
(Holdings) Limited) is a development stage company incorporated in the
United Kingdom on January 23, 1998. The Company's business plan is to
develop and sell certain consumer internet software and operate as a
pay-as-you-go internet service provider. The accompanying financial
statements include the accounts of the Company, its wholly owned subsidiary
World CallNet Ltd., a British telecommunications electronics design and
licensing company, and Overleaf Systems, Limited ("Overleaf"). Overleaf has
been inactive to date.
Investments
-----------
The Company's investments at June 30, 1999 consist solely of shares of
CallNet Plc, an affiliated company, as described in Note 4.
Foreign Currency Translation
----------------------------
The Company conducts its operations and maintains its accounts in British
pounds. Financial statements prepared in U.S. dollars are translated based
on the exchange rate at the balance sheet date for assets and liabilities
and a weighted average rate for revenues and expenses. Translation
adjustments are accumulated in a separate component of stockholders'
deficit entitled foreign currency translation adjustment.
Loss Per Share
--------------
Basic loss per share is computed based on the weighted average number of
shares outstanding during the period. Diluted loss per share takes common
stock equivalent shares (such as options, warrants and convertible
securities) into consideration. However, common stock equivalent shares are
not considered when their effect would be anti-dilutive.
Use of Estimates
----------------
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's management
to make estimates and assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual results could differ
from those estimates.
Income Taxes
------------
The Company accounts for income taxes under the liability method, which
requires recognition of deferred tax assets and liabilities for the
16
<PAGE>
WORLD CALLNET, INC.
(Formerly Worldwide Communications (Holdings) Limited)
(A Development Stage Company)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the difference between the
financial statements and tax bases of assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to
reverse. The Company has a tax loss carryforward at September 30, 1998 of
approximately $200,000 and a deferred tax asset, which is fully reserved,
of approximately $50,000. The Company has accrued approximately $77,000 in
payroll taxes due to United Kingdom taxing authorities.
Intangible Asset
----------------
Intangible asset consists of intellectual property, which is being
amortized by the straight-line method over five years.
Statement of Cash Flows
-----------------------
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
2. CONTINUED OPERATIONS
--------------------
The Company is in the development stage and has had $157,363 in revenues
through June 30, 1999. In addition, the Company will require substantial
capital to implement its business plan. These factors raise substantial
doubt about the Company's ability to continue as a going concern. In
December 1998 and April 1999, the Company completed bridge note offerings,
in which it raised proceeds (net of consulting and finders fees), of
approximately $1,100,000 and $540,000, respectively. The Company has also
negotiated a development and marketing agreement with a much larger company
that management believes will facilitate market penetration. Management
also intends to attempt to raise additional capital in the near term.
Management believes these actions will permit the Company to achieve its
objectives and attain profitable operations to allow the Company to
continue as a going concern.
3. INVESTMENT AND DEFERRED REVENUE
-------------------------------
In September 1998, the Company acquired 2,000,000 shares in Cherokee
Leisure Plc ("Cherokee"), a publicly traded company in the United Kingdom,
from another company in exchange for payment of $10,189 and assumption of
the other company's obligations to Cherokee. The obligations are to design,
install and support a website for Cherokee. The Company had valued the
17
<PAGE>
WORLD CALLNET, INC.
(Formerly Worldwide Communications (Holdings) Limited)
(A Development Stage Company)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
Cherokee shares based on their estimated market value of $203,772 at the
time of acquisition. The Company has recorded a deferred revenue liability
of $193,583, which represents the estimated value of the shares less the
cash payment. The cash payment was made by CallNet Plc, an affiliate of the
Company with directors in common with the Company, and is included in
"receivable from affiliated entity" in the accompanying balance sheet.
The Company is entitled to receive 40% of any revenue generated from the
website. No revenues were generated from the website through July 31, 1999
and the Company may be obligated to return 500,000 shares of the Cherokee
stock. Management of the Company does not believe that the website project
will be completed or generate any significant future revenues. Accordingly,
as of June 30, 1999, the entire investment of $203,772 less the offsetting
deferred revenue of $193,583 has been taken as an impairment loss.
4. ACQUISITIONS
------------
In October 1998, 100% of the Company's common stock was acquired by General
American Royalty, Inc. ("GAR"). The Company's stockholders obtained
approximately 75% of the outstanding common stock of GAR and three of the
Company's directors were appointed to the board of GAR. For financial
reporting purposes, the Company has accounted for the transaction as a
reverse acquisition of GAR. As a result of the transaction, the Company's
stockholders' deficit section reflects the GAR capital structure in the
accompanying balance sheet. As of the closing date of the acquisition, the
following amounts were recorded to reflect the accounts of GAR:
Total assets $ 20,537
Total liabilities 5,665
--------
Stockholder's equity $ 14,872
========
In February 1999, the Company completed the acquisition of fifteen percent
(15%) of the stock of CallNet Plc by issuing 500,000 shares of the
Company's common stock. The CallNet Plc shares were valued at $500,000 and
are included in Investments in the accompanying balance sheet. The
transaction was valued based on such factors as the market price of the
Company's common stock, the historical volatility of stock prices, the
number of shares held by public shareholders that have no trading
restrictions and the relatively large number of shares issued.
18
<PAGE>
WORLD CALLNET, INC.
(Formerly Worldwide Communications (Holdings) Limited)
(A Development Stage Company)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
5. NOTES PAYABLE
-------------
In December 1998 and April 1999, the Company completed a private placement
of notes payable totaling $1,150,000 and $550,000, respectively. The notes
bear interest at 10% and $850,000 of the notes are collateralized by the
Company's shares of Cherokee Leisure Plc. Interest is due monthly and
principal is due in full on December 1, 1999 and October 9, 1999,
respectively, or earlier under certain circumstances, including the raising
by the Company of $3.5 million or more of additional capital. The holders
of the notes were also issued stock purchase warrants entitling them to
purchase an aggregate of 1,675,000 shares of the Company's common stock
between March 1, 1999 and December 1, 2000 at prices ranging from $1.00 per
share to $10.00 per share. The Company paid $70,000 in consulting fees and
issued stock purchase warrants, on the same terms described above, to
purchase 220,000 shares of common stock in connection with the offering.
The holders of these warrants have certain demand and piggyback
registration rights. The Company has valued the aforementioned stock
purchase warrants at $178,358 using a discount factor of 8%. Both the value
of the stock purchase warrants and the referral fees have been treated as a
discount to notes payable. Amortization of discount related to the discount
was $132,507 for the nine months ended June 30, 1999 and is included in
interest expense. Remaining discount is being amortized based on the
maturity dates.
6. STOCKHOLDERS' EQUITY
--------------------
In January 1999, the Company's stockholders approved (1) a change in the
corporate name of GAR and its subsidiary, the Company, to World CallNet,
Inc., (2) an increase in the authorized shares to 30,000,000 shares of
common stock and 10,000,000 shares of preferred stock, and (3) a stock
option plan that had been adopted by the board of directors in November
1998. Under the stock option plan, the Company's board of directors may
grant options to acquire up to a total of 1,000,000 shares of stock to
officers, directors, employees, advisors or consultants of the Company.
Effective November 1998, the Company granted options to purchase an
aggregate of 600,000 shares as follows:
Grantee Options
------- -------
Each of three officers who are also directors 150,000
One outside director 100,000
One advisory director 50,000
19
<PAGE>
WORLD CALLNET, INC.
(Formerly Worldwide Communications (Holdings) Limited)
(A Development Stage Company)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
Each option entitles the grantee to purchase one share of the Company's
common stock at an exercise price of $1.50 per share and expires in
November 2001.
In March 1999, the Company granted an option to an officer of the Company
to purchase 100,000 shares of Common Stock at an exercise price of $3.50
per share, which option expires in March 2002.
7. RELATED PARTY TRANSACTIONS
--------------------------
Certain directors and stockholders of the Company are directors and/or
stockholders in other companies with which the Company had the transactions
set forth below:
o Certain intellectual property rights related to e-mail functionality
were assigned to the Company by Telemail Europe (via the Company's
newly formed subsidiary, Overleaf) in exchange for 100 shares of
stock. The parties that received the stock also paid the Company a
total of $166 for the shares.
o The Company entered into an agreement with CallNet Plc in which the
Company will license its system for the business of internet service
provider and CallNet Plc will sub-license such system to other
parties.
o The Company has made cash advances to CallNet Plc, a 15% owned
affiliated entity that equaled $634,087 at June 30, 1999.
8. COMMITMENTS
-----------
The Company has employment agreements with three officers who are also
directors. Each of these employment agreements requires an annual salary
through September 2001 of approximately $110,000 each, and provides that if
such agreement is terminated by either party during the term of the
agreement, the full salary and benefits are required to be paid to the
executive officer until the end of the term of the agreement. Each of the
these officers have identical employment agreements with CallNet Plc.
During February and March 1999, the officers deferred 23% of their salaries
from the Company in the aggregate. Commencing with the quarter ended June
30, 1999, each executive officer has agreed to defer one-half of his salary
from the Company until a substantial amount of additional capital has been
raised by the Company, as determined by the Board of Directors, at which
time the Company will be obligated to pay to these executive officers the
deferred portion of their salary. Such obligation is without interest and
is an unsecured obligation that is subordinated to the claims of certain
other unsecured creditors of the Company.
20
<PAGE>
WORLD CALLNET, INC.
(Formerly Worldwide Communications (Holdings) Limited)
(A Development Stage Company)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
SUBSEQUENT EVENTS
-----------------
During July and August 1999, the Company received cash advances totaling
$350,000 from an Australian-based company, which has agreed in principle to
purchase shares of the Company's common stock for cash and other
consideration. The terms of the proposed transaction have not been
finalized and as of the date of this report the parties have not signed a
definitive agreement. The proceeds from the advances were used to satisfy
the Company's working capital requirements.
21
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities.
In April 1999, the Company issued warrants exercisable until April 9,
2002, to purchase an aggregate of 1,100,000 shares of Company common
stock in connection with the placement of $550,000 of bridge notes
payable described in Item 5 below. The exercise price for 330,000 of
the warrants is $10.00 per share and for 770,000 of the warrants is
$4.00 per share. The holders of these warrants have the right to
exercise these warrants in cash or pursuant to a "net exercise"
provision whereby the holder of a warrant can use shares subject to
such warrant at their then fair market value as consideration for the
exercise of such warrant. In addition, the exercise price with respect
to these warrants is subject to standard anti-dilution provisions. In
addition, the warrants with a $4.00 exercise price are subject to
"ratchet" anti-dilution provisions whereby, subject to certain
exceptions, the exercise price of such warrants will be subsequently
reduced if during the term of the warrant the Company issues shares of
Company common stock at a price below $3.60 per share or grants options
or warrants with an exercise price or conversion price, respectively,
below $3.60 per share. The exercise price with respect to such warrants
will be reduced to the lowest issuance price or exercise or conversion
price.
The Company also issued warrants to purchase 37,500 shares of Company
common stock at $3.60 (paid in cash and not adjustable) per share as
part of consulting and referral compensation due in connection with the
placement of the bridge notes. Holders of all of the aforementioned
warrants have certain demand and piggyback registration rights. The
securities referenced herein were issued in transactions exempt from
registration under the Securities Act of 1933, as amended, pursuant to
the private placement exemption set forth in Section 4(2).
Item 3. Defaults on Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
22
<PAGE>
Item 5. Other Information.
In April 1999, the Company completed a private placement of notes
payable totaling $550,000 from three investors. The notes bear interest
at 10% per annum, which is payable monthly. The principal is due in
full on October 9, 1999, or earlier under certain circumstances,
including the raising by the Company of $3.5 million or more of
additional capital. The Company paid $12,500 in consulting fees in
connection with the placement of the notes and issued stock purchase
warrants as described in Item 2 above. The securities referenced herein
were issued in transactions exempt from registration under the
Securities Act of 1933, as amended, pursuant to the private placement
exemption set forth in Section 4(2).
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3.1 Certificate of Amendment to the Certificate of Incorporation
of the Company, which is incorporated by reference herein from
Exhibit 3.1 to the Company's Form 8-K, dated January 5, 1999.
10.1 Securities Purchase Agreement dated as of April 9, 1999 by and
among the Company and the Purchasers, which is incorporated by
reference herein from Exhibit 10.1 to the Company's Form
10-QSB for the quarter ended March 31, 1999.
10.2 Form of Promissory Note issued to the Purchasers pursuant to
the Securities Purchase Agreement, which is incorporated by
reference herein from Exhibit 10.1 to the Company's Form
10-QSB for the quarter ended March 31, 1999.
10.3 Form of Warrant with an exercise price of $4.00 per share
issued to the Purchasers pursuant to the Securities Purchase
Agreement, which is incorporated by reference herein from
Exhibit 10.1 to the Company's Form 10-QSB for the quarter
ended March 31, 1999.
10.4 Form of Warrant with an exercise price of $10.00 per share
issued to the Purchasers pursuant to the Securities Purchase
Agreement, which is incorporated by reference herein from
Exhibit 10.1 to the Company's Form 10-QSB for the quarter
ended March 31, 1999.
10.5 Registration Rights Agreement by and between the Company and
the Purchasers pursuant to the Securities Purchase Agreement,
which is incorporated by reference herein from Exhibit 10.1 to
the Company's Form 10-QSB for the quarter ended March 31,
1999.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
None filed during the three months ended June 30, 1999.
23
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
WORLD CALLNET, INC.
(Registrant)
/s/ Paul Goodman-Simpson
--------------------------------
Paul Goodman-Simpson, Director,
President and Chief Executive
Officer
Date: August 13, 1999
/s/Aaron Goodman-Simpson
--------------------------------
Aaron Goodman-Simpson, Vice
President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
Date: August 13, 1999
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM WORLD
CALLNET, INC. REPORT ON FORM 10-QSB FOR THE NINE MONTHS ENDED JUNE 30, 1999, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001014491
<NAME> World Callnet, Inc.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 12
<SECURITIES> 500
<RECEIVABLES> 634
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 709
<PP&E> 79
<DEPRECIATION> (6)
<TOTAL-ASSETS> 1298
<CURRENT-LIABILITIES> 2122
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> (832)
<TOTAL-LIABILITY-AND-EQUITY> 1298
<SALES> 157
<TOTAL-REVENUES> 157
<CGS> 2
<TOTAL-COSTS> 1497
<OTHER-EXPENSES> (38)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 195
<INCOME-PRETAX> (1497)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1497)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1497)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
