UNITED STATES
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 eleven months ended September 30, 1998
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
<PAGE>
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. ____
The registrant had no revenues for the eleven months ended September
30, 1998.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by using the closing price of registrant's common
stock, at January 29, 1999, was $35,242,998.
As of January 29, 1999, there were 7,916,833 shares of the Registrant's
Common Stock, par value $.001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format:
Yes No X
2
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<TABLE>
T A B L E O F C O N T E N T S
-------------------------------
<S> <C>
PART I Page
- ------ ----
Item 1. Description of Business 4
Item 2. Description of Properties 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
- -------
Item 5. Market for Common Equity and Related Stockholder Matters 9
Item 6. Management's Discussion and Analysis of Plan of Operations 10
Item 7. Financial Statements 12
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 22
PART III
- --------
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16 (a) of the Exchange Act 22
Item 10. Executive Compensation 24
Item 11. Security Ownership of Certain Beneficial Owners and
Management 25
Item 12. Certain Relationships and Related Transactions 27
Item 13. Exhibits and Reports on Form 8-K 27
Signature Page 28
</TABLE>
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The statements in this Report on Form 10-KSB that are not based on
historical information are considered forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, including statements regarding the Company's
hopes, intentions, beliefs or strategies regarding the future. Forward-looking
statements include, but are not limited to, Description of Business regarding
(i) its plans to market products in Europe, North America, South America and
Asia, (ii) its belief that offering free Internet access will capture customers
for CallNet ISP, (iii) its statement that other companies engaged in Internet
related businesses may be acquired, (iv) its expectation that the acquisition of
20% of CallNet ISP will be closed in mid February and the remaining 80% can be
acquired by the end of fiscal year 1999, (v) its belief that the majority of its
future revenues will be derived from its ownership of CallNet ISP, which earns a
share of telephone toll revenues from companies that provide telephone service
to their customers, and (v) the belief that its products and services will
appeal to the many segments of the Internet market; statements in Liquidity and
Capital Resources regarding (i) the projection that its working capital will be
adequate until mid 1999, (ii) the projection that additional capital from bridge
note and/or sale of equity securities will be necessary, (iii) the expectation
that product development and manufacturing costs will be borne by joint venture
partners, (iv) the estimate of research / development and plant expenditures for
the next twelve months, (v) the expectation that telephone toll revenues derived
from ownership of CallNet ISP will be the primary source of internal liquidity
and product sales will be a secondary source of internal liquidity, and (v) the
anticipation that the year 2000 will not have a material impact on the Company;
and the belief stated in Security Ownership of Certain Beneficial Owners and
Management that the shareholders listed have sole investment and voting power
over the shares included in the table and that all beneficial owners of at least
five percent are included.
DESCRIPTION OF BUSINESS
GENERAL
- -------
World CallNet, Inc. (the "Company") is a Delaware corporation
incorporated on December 28, 1992 as Hermes Capital Management, Inc. It was
inactive until October 1995, when it changed its name to General American
Royalty, Inc. and became active in the oil and gas royalty business in Texas and
New Mexico. In 1998, the Company sold all of its oil and gas royalty interests
and on October 9, 1998, acquired World Wide Communications (Holdings) Ltd.
("WWCH"), a privately held United Kingdom development stage telecommunications
company based in London, England. As a result of the acquisition, WWCH
shareholders were issued 75% of the Company's presently outstanding capital
stock and hold three of the four board of directors positions.
For financial reporting purposes the transaction was accounted for as a
reverse acquisition. WWCH was treated as the acquirer and will be the ongoing
reporting entity. This report includes only the WWCH financial statements since
its inception on January 23, 1998. Since the transaction was completed before
the Company's October 31 fiscal yearend, this annual report and all future
reports shall adopt WWCH's September 30 fiscal yearend. The Company changed its
name to World CallNet, Inc. in January 1999.
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BUSINESS OF ISSUER
- ------------------
The Company offers products and services that facilitate low cost
consumer access to the Internet. It is engaged in the development of Internet
access solutions through affordable products that utilize mediums not normally
associated with Internet access. This includes cellular telephones, television
sets and specially engineered input devices such as keyboards that function
without a personal computer. The Company has concentrated its efforts on
expanding Internet access to customers in Europe, but plans to market its
products in the United States and other regions of the world.
Most companies that offer Internet access are currently focused on the
subscription or monthly fee based personal computer market. The Company believes
that a significant opportunity exists to capture business from providing
Internet connectivity without charging users any registration or monthly fees or
requiring a computer. This approach is based on the concept that virtually every
household or business in the world is a potential customer if Internet access is
free. The Company offers products with integrated telephone circuitry that
provides Internet access using existing local telephone service.
Calls made by users to connect to the Internet are directed to an
Internet Service Provider ("ISP") designated by the Company with no registration
or monthly fees. The Company has entered into an agreement with CallNet Plc
("CallNet ISP"), an affiliate of the Company, in which the Company will license
its ISP business through CallNet ISP. Under the terms of the agreement, the
Company agreed to purchase 20% of CallNet ISP in exchange for 500,000 shares of
common stock. The Company expects to complete the purchase by mid February and
may acquire the remaining 80% of CallNet ISP before the end of fiscal year 1999.
The ownership of CallNet ISP is the key ingredient in the Company's
plan of operation. CallNet ISP has entered into a revenue participation
agreement with carrier Cable and Wireless Communications ("CWC"), which offers
users computer/modem and no computer connections to the Internet at local toll
rates. The agreement entitles CallNet ISP to receive a percentage of the toll
charges earned by CWC from calls connecting to the Internet through CallNet ISP.
Through its ownership of CallNet ISP, the Company's expects to earn its primary
source of revenues from these toll charges.
PRINCIPAL PRODUCTS AND MARKETS
- ------------------------------
The European telephone system offers callers access to its services,
including local calls, only through metered telephone tolls. Telephone service
providers have structured their telecommunications networks to derive income
from system usage rather than from fixed access charges. The Company believes
that this makes monthly fee based Internet service unaffordable for most
5
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European businesses or households. It has developed affordable products that
offer Internet access through existing telecommunications networks using CallNet
ISP for user connection. The participation in metered telephone toll revenues
through the proposed ownership of CallNet ISP is the Company's principal profit
center and the basis of design for all of its products and services.
In the United States, local telephone service is offered for a monthly
fee with either unlimited local calls allowed or for a small surcharge after a
certain number of free minutes each month. In Europe however, and the rest of
the world, local telephone calls are metered and are charged a per minute rate.
In the UK, these charges vary depending on the time of day, and the day of the
week, from about $0.06 to slightly more than $0.15 per minute. This includes all
local calls used for Internet connectivity. Because Europeans are accustomed to
paying for local calls in this manner, companies offering Internet service
without registration or monthly fees appear to be providing free Internet
access. The Company's goal is to capture a high volume of traffic from customers
that connect to the Internet through CallNet ISP.
Through its licensing arrangements with CallNet ISP, the Company offers
Internet connectivity as its main product. It is a distribution product, brought
to market via companies and organizations such as banks, supermarkets, retailers
and other ISP organizations. These entities become virtual ISP's by re-branding
CallNet ISP with their own names such as BankNet or StoreNet. The Company
provides the technology and infrastructure for these companies, enabling them to
develop and market their own Internet based products and services. Metered toll
revenues are earned from calls routed through the CallNet ISP network by these
companies.
The Company creates opportunities to generate telephone toll revenues
with products that include a proprietary keyboard that is a sophisticated
telephone instrument designed for dial-up connections to the Internet. The
keyboard is an affordable alternative to purchasing a computer and is marketed
using the concept of free Internet access with no registration or monthly fees.
A connection to local telephone service is the only requirement. All of the
Company's Internet access products utilize the special keyboard, which sells for
about fifty dollars.
Set-Top-Boxes provide Internet access through a standard television set
and sell at a price significantly lower than rival "Web TV" units. These units
are pre-configured to connect to CallNet ISP and feature full web browsing and
email. Users pay only for the time while online at the same rates charged for
local telephone calls.
A new product being marketed and developed is a silicon chip called
MailTV that facilitates Internet access using television sets connected to local
telephone service. The chip is being installed in new television sets and can be
retro-fitted to existing sets at a fraction of the cost of purchasing a
computer. The Company has entered into a joint marketing and distribution
agreement with Zilog, a major silicon chip manufacturer based in the United
States.
6
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Zilog has been promoting the MailTV chip to television manufacturers
throughout the world. The most recent agreement was with Vestel, an OEM TV
manufacturer. Under the agreement Zilog will supply Vestel with 5 million MaiITV
enabled chips to be incorporated into the entire production of Vestel's TV's.
Most of these TV's will be distributed in the United Kingdom and throughout
Europe in 1999 under various brand names. In addition, Zilog has requested that
World CallNet design for them, a Set-Top-Box that contains the MailTV chip. This
will be a low cost product and is aimed at the retrofit market.
The Company plans to expand into mainland Europe through operating
subsidiaries and venture partners. If opportunities become available, the
Company may acquire other businesses or entities that are competitors in
Internet related businesses. The customers that are acquired become part of the
CallNet system and facilitate the process of establishing the Company's products
and services. Future plans call for expansion to North America, South America,
and ultimately Asia.
COMPETITIVE BUSINESS CONDITIONS
- -------------------------------
The market for Internet products and services is highly competitive and
the Company expects that competition will continue to intensify. There are no
substantial barriers to entry in these markets and technology is advancing at a
very rapid pace. Although the Company believes its products and services will
appeal to the many segments of the Internet market, it is possible that a single
supplier of products and services similar to those of the Company may dominate
one or more market segments.
The Company competes with many other providers of Internet access and
online navigation such as America Online, Compuserve, Prodigy and Microsoft.
Many of these competitors are larger than the Company and have substantially
greater access to capital and technical resources than does the Company and may,
therefore, have a significant competitive advantage. Many of the Company's
competitors are capable of making larger expenditures to develop and market
their products and services.
Competitive conditions in the telecommunications industry could have a
significant influence on the success of CallNet ISP's ability to earn telephone
toll revenues. Arrangements that earn CallNet ISP a percentage of metered tolls
are dependent upon the telephone carrier's ability to maintain its network.
Market conditions and other factors that affect telephone carriers are beyond
the scope or control of the Company. If satisfactory agreements to share
revenues with telephone carriers cannot be maintained by CallNet ISP, the
Company would have to purchase its own telecommunications facilities.
7
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MAJOR CUSTOMERS
- ---------------
The Company's products are generally sold to the public and no single
customer is significant enough to adversely impact income if lost. However, the
Company's primary source of revenue is expected to be derived by CallNet ISP
from toll charges billed by local telephone companies to its customers through
carrier CWC. CWC is the second largest telephone company in the United Kingdom,
providing carrier network services on a worldwide basis. The CallNet ISP
communications equipment is located at the CWC Facilities Management in West
London.
In October 1998, an interconnect agreement was signed with CWC, whereby
CallNet ISP is entitled to receive payment for thirty five percent of toll call
revenues generated from CallNet ISP traffic. Based on the proposed acquisition
of CallNet ISP, the CWC agreement is expected to become the Company's primary
source of future revenues. The loss of this agreement could have a material
adverse impact on the Company's business.
REGULATORY MATTERS
- ------------------
Deregulation of the telecommunications industry has just begun in
Europe. As a result of deregulation, European telephone companies are engaged in
intense competition for local call traffic and to gain market share. The
Company's business plan is designed to take advantage of these factors in the
European telephone industry by participation in the toll charges earned by
telephone carriers from telephone connections to the Internet. CallNet ISP must
negotiate with telephone companies that own the telecommunication networks that
handle customer traffic and connection to the Internet. It is not possible to
predict the impact that deregulation will have on the Company's ability to
maintain satisfactory margins on contracts with network carriers.
EMPLOYEES
- ---------
The Company has eleven full-time employees in the United Kingdom and
has retained the services of a full-time consultant to oversee business
activities in the United States. The management believes it has satisfactory
relations with its employees.
DESCRIPTION OF PROPERTIES
The Company's administrative offices are located at Brecon House,
Meridian Gate, 207 Marsh Wall, in London. In addition, the Company has an office
in the United States located at 731 Meadows Building, 5646 Milton Street,
Dallas, Texas. Both of these offices are leased. The Company owns the patents
and intellectual property rights for all of its core products and plans to
license these technologies to semiconductor and consumer electronics
manufacturers.
8
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The Company regards its trade secrets and intellectual property rights
as critical to its success and will rely upon applicable laws, trade secret
protection and confidentiality and/or license agreements with its employees,
customers, partners and others to protects 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 proprietary rights. Additionally, there can be no
assurance that other parties will not assert infringement claims against the
Company.
LEGAL PROCEEDINGS
There were no legal proceedings involving the Company or any of its
subsidiaries as of the date of this report.
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 covered by this report.
MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is listed on the OTC Bulletin Board (symbol
WOWW). The first trading in the stock occurred on February 4, 1997. The
following table sets forth the high and low bid prices of the Company's common
stock, as reported by NASDAQ System Statistics furnished by NASD, during the
periods indicated. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions:
Quarter Ended HIGH LOW
-------------- ---- ----
March 31, 1997 $6.25 $4.75
June 30, 1997 4.50 3.50
September 30, 1997 5.75 4.25
December 31, 1997 4.25 2.63
March 31, 1998 3.00 1.13
June 30, 1998 1.63 .38
September 30, 1998 1.28 .39
As of December 31, 1998, the Company had approximately 110 common
shareholders of record and estimates that an additional 300 shareholders own
common shares in street name.
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During the last two years no cash dividends have been declared on the
Company's common stock. There are no restrictions that limit the Company's
ability to pay dividends on common equity stock or that are likely to do so in
the future.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
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 began operations in January 1998 and
this report includes historical data since that date. In January 1999, the
Company changed its name to World CallNet, Inc.
Since incorporation in January 1998, the Company has been involved
primarily in capital formation activities, refinement of its business strategy
and development of relationships with industry partners. The Company's principal
external source of capital for developing its products and services has been the
placement of bridge notes payable. In December 1998, the Company completed the
private placement of $1,150,000 in bridge notes that are due one year from date
of issuance. Additional placements of bridge notes or the sale of equity
securities to fund operating expenses will be necessary until the Company
becomes profitable.
The Company's plan of operation for the next twelve months includes the
ongoing operation of its Internet service and the continued development 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. It is expected
that costs of product development and manufacturing 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.
With working capital on hand, the Company estimates it can satisfy its
obligations and cash requirements until mid 1999. To meet debt obligations due
during the balance of fiscal 1999 and 2000, the Company will have to raise
additional capital in the next twelve months.
The Company has estimated that 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 $750,000 during the next
twelve months.
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If necessary, 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 will
be revenues from telephone toll charges earned by under the terms of its CWC
agreement. The fundamental business strategy is to direct telephone usage to the
CallNet telecommunications network from new CallNet ISP 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.
The Company is in the process of evaluating and implementing changes,
as necessary, to its information systems and accordingly does not anticipate any
material year 2000 issues from its own systems, programs or from any of its
products. The impact of such issues on the Company's suppliers, customers,
vendors and financial service organizations could have an adverse effect on the
Company.
RESULTS OF OPERATIONS
- ---------------------
The results of operations for purposes of this discussion include only
the financial information related to 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 from its
inception in early 1998. Financial information and related discussions contained
in reports previously filed by the Company are not comparable with the
disclosures included herein.
For the period from January 23, 1998 through September 30, 1998 the
Company incurred salaries and other administrative expenses related to capital
formation and development of its business plan. These expenses are reflected on
the statement of operations for the period as charges to general and
administrative expense.
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FINANCIAL STATEMENTS Page
Independent Auditors Report 13
Balance Sheet as of September 30, 1998 14
Statements of Operations for the Period from
January 23 1998 to September 30, 1998 15
Statements of Stockholders' Equity for the Period
from January 23 1998 to September 30, 1998 16
Statements of Cash Flows for the Period from
January 23 1998 to September 30, 1998 17
Notes To Financial Statements
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INDEPENDENT AUDITOR'S REPORT
The Board of Directors
World CallNet, Inc.
London, England
We have audited the accompanying balance sheet of World CallNet, Inc. (formerly
World Wide Communications (Holdings) Limited) as of September 30, 1998, and the
related statements of operations, stockholders deficit and cash flows for the
period from January 23, 1998 (date of inception) to September 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of World CallNet, Inc. as of
September 30, 1998, and the results of its operations and its cash flows for the
period then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company is in the development stage and has had no
revenues through September 30, 1998, which raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
HEIN + ASSOCIATES LLP
Dallas, Texas
January 25, 1999
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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)
SEPTEMBER 30, 1998
ASSETS
------
<S> <C> <C>
CURRENT ASSET -
Cash $ 1,995
OTHER ASSETS:
Investment in marketable securities 203,772
Intangible asset 19,500
---------
Total other assets 223,272
---------
Total assets $ 225,267
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 43,041
Accrued compensation due officers 165,565
Deferred revenue 193,583
Due to affiliate 10,486
---------
Total current liabilities 412,675
COMMITMENT AND CONTINGENCY (Notes 3 and 5)
STOCKHOLDERS' DEFICIT:
Common stock, $1.66 par value; 1,000 shares authorized, issued and outstanding
(20,000,000 shares authorized at $0.001 par value and 7,333,333 shares issued
on a pro forma basis) 1,660
Additional paid-in capital 194,500
Accumulated deficit (378,285)
Foreign currency translation adjustment (5,283)
---------
Total stockholders' deficit (187,408)
Total liabilities and stockholders' deficit $ 225,267
=========
</TABLE>
See accompanying notes to these financial statements.
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WORLD CALLNET, INC.
(Formerly Worldwide Communications (Holdings) Limited)
(A Development Stage Company)
STATEMENT OF OPERATIONS
(Expressed in U.S. Dollars)
FOR THE PERIOD JANUARY 23, 1998 TO SEPTEMBER 30, 1998
REVENUES $ --
GENERAL AND ADMINISTRATIVE EXPENSES 378,285
NET LOSS (378,285)
OTHER COMPREHENSIVE LOSS - Foreign currency translation adjustment (5,283)
---------
COMPREHENSIVE LOSS $(383,568)
=========
NET LOSS PER SHARE (basic and diluted) $ (12,610)
=========
WEIGHTED AVERAGE SHARES
30
=========
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 CHANGES IN STOCKHOLDERS' DEFICIT
(Expressed in U.S. Dollars)
FOR THE PERIOD FROM JANUARY 23, 1998 TO SEPTEMBER 30, 1998
Foreign
Common Stock Additional Currency
-------------------- Paid-In Accumulated Translation
Shares Amount Capital Deficit Adjustment Total
------ ------ --------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Issuance of shares to founders upon
incorporation on January 23, 1998 2 $ 3 $ -- $ -- $ -- $ 3
Issuance of shares on September 24, 1998 for
cash at par value and intangible asset 100 166 19,501 -- -- 19,667
Issuance of shares on September 24, 1998 for
cash at par value and funding of expenses 898 1,491 174,999 -- -- 176,490
Net loss for the period -- -- -- (378,285) -- (378,285)
Foreign currency translation adjustment -- -- -- -- (5,283) (5,283)
--------- --------- --------- --------- --------- ---------
1,000 $ 1,660 $ 194,500 $(378,285) $ (5,283) $(187,408)
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to these financial statements.
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WORLD CALLNET, INC.
(Formerly Worldwide Communications (Holdings) Limited)
(A Development Stage Company)
STATEMENT OF CASH FLOWS
(Expressed in U.S. Dollars)
FOR THE PERIOD JANUARY 23, 1998 TO SEPTEMBER 30, 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(378,285)
Expenses paid by stockholders 175,000
Increase in accounts payable and accrued expenses, net of
foreign currency translation adjustments 203,323
Cash advances from and expenses paid by affiliate 297
---------
Net cash provided by operating activities 335
CASH FLOWS FROM FINANCING ACTIVITIES -
Cash received in common stock issuances 1,660
---------
NET INCREASE IN CASH 1,995
CASH, beginning of period
---------
CASH, end of period $ 1,995
=========
NON CASH TRANSACTIONS:
Investment in marketable securities obtained for obligation to
provide services and for cash payment by affiliate $ 203,772
=========
Acquisition of intangible asset for common stock $ 19,500
=========
See accompanying notes to these financial statements.
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WORLD CALLNET, INC.
(Formerly Worldwide Communications (Holdings) Limited)
(A Development Stage Company)
(Expressed in U.S. Dollars)
NOTES TO FINANCIAL STATEMENTS
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 and its wholly-owned
subsidiary, Overleaf Systems, Limited ("Overleaf"). Overleaf has been
inactive to date.
Investment in Marketable Securities
-----------------------------------
The Company's investment in securities at September 30, 1998 is classified
as available for sale and carried at estimated market value.
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
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.
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WORLD CALLNET, INC.
(Formerly Worldwide Communications (Holdings) Limited)
(A Development Stage Company)
(Expressed in U.S. Dollars)
Intangible Asset
----------------
Intangible asset consists of intellectual property, which will be 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 no revenues through
September 30, 1998. 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, the Company completed a one-year note offering, in which it
raised net proceeds of approximately $1,100,000. 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 has valued the
Cherokee shares based on their estimated market value of $203,772 at the
time of acquisition. The estimated market value was materially unchanged at
September 30, 1998. 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 another company with directors
in common with the Company and is included in "due to affiliate" in the
accompanying balance sheet. The Company is entitled to receive 40% of any
revenue generated from the website. If such revenue generated is less than
approximately $700,000 through April 30, 1999, the Company must return
500,000 shares of the Cherokee stock. If such revenue exceeds approximately
$2,800,000 through April 30, 1999, the Company will be entitled to an
additional 500,000 shares of the Cherokee stock.
19
<PAGE>
WORLD CALLNET, INC.
(Formerly Worldwide Communications (Holdings) Limited)
(A Development Stage Company)
(Expressed in U.S. Dollars)
4. 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. Also, see Notes 3 and 6.
o CallNet Plc paid salaries of officers/directors and employees and paid
certain other administrative costs of the Company. Such amounts, which
totaled $185,486, have been recorded as administrative expense.
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.
5. COMMITMENT
----------
The Company has employment agreements with three officers/directors which
require annual payments through September 2001 of approximately $110,000
each.
6. Subsequent Events
-----------------
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 transaction will be treated as a reverse
acquisition of GAR by the Company. Following the reverse acquisition, the
Company's stockholders' deficit section will reflect the GAR capital
structure, which is presented parenthetically on a pro forma basis in the
accompanying balance sheet. As of September 30, 1998 GAR's unaudited
summarized financial position was as follows:
Total assets $ 20,537
Total liabilities 5,665
--------
Stockholder's equity $ 14,872
========
In October 1998 in connection with the merger with GAR referred to above,
the Company agreed to acquire 20% of the stock of CallNet Plc in exchange
for 500,000 shares of the Company's common stock.
20
<PAGE>
WORLD CALLNET, INC.
(Formerly Worldwide Communications (Holdings) Limited)
(A Development Stage Company)
(Expressed in U.S. Dollars)
In December 1998, the Company completed a private placement of notes
payable totaling $1,150,000. The notes bear interest at 10% and 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. The holders
of the notes were also issued stock purchase warrants entitling them to
purchase an aggregate of 575,000 shares of the Company's common stock
between March 1, 1999 and December 1, 2000 at $1.00 per share. The Company
paid a $50,000 commission in connection with the offering.
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. In
November 1998, the Company granted options to each of three of its
directors to acquire 150,000 shares for $1.50 a share. The options expire
in November 2001. Also in November 1998, the Company granted options to
acquire 100,000 shares to a director and 50,000 shares to an advisory
director under the same terms.
21
<PAGE>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On October 30, 1997 the Company engaged Hein + Associates LLP ("Hein")
as its independent principal accountant and auditor, and dismissed Coopers &
Lybrand, LLP ("C&L"). C&L had been engaged as principal accountants and issued
an audit report on the Company's financial statements for the last fiscal year.
C&L's audit reports contained no adverse opinion of disclaimer of opinion and,
were not qualified as to uncertainty, audit scope or accounting principles. The
Company had no disagreements with C&L over accounting principles or practices,
financial statement disclosure, or auditing scope or procedure which, if not
resolved to C&L's satisfaction, would have caused it to make reference to the
subject matter of the disagreements in its audit report. C&L's letter confirming
these facts was included as part of the Company's filing on Form 8-K dated
October 30, 1997.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT
Set forth below are the identities of the directors, executive officers
and significant employees of the Company and a brief account of their business
experience. The Company's bylaws provide for up to nine directors who are
elected for one-year terms. Executive officers are appointed by the board of
directors to serve in their respective capacities for one year until the
directors duly appoint their successors.
DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------
Served as
Term Director
Name Age Position and Offices Expires Since
- ----------------- --- -------------------- ------- ---------
Paul Goodman- 41 President and 2000 1998
Simpson (1) Director
Aaron Goodman- 37 Vice President and 2000 1998
Simpson (1) Director
Keith Goodyer 31 Vice President and 2000 1998
James F. Smith 62 Director 1999 1996
Walter B. Wriston 79 Advisory Director 2000 1998
(1) Paul Goodman-Simpson and Aaron Goodman-Simpson are brothers.
22
<PAGE>
BUSINESS EXPERIENCE
- -------------------
Paul Goodman-Simpson. Mr. Goodman-Simpson has been a director and the
president of the Company since October 9,1998 and a managing director and a
co-founder in 1997 of WWCH, which became a wholly owned subsidiary of the
Company on October 9, 1998. From 1993 to 1997 he was the managing director of
KORE Ltd., a computer software distribution company. From 1992 to 1997 he was
Director of Sales (Far East Asia) of International Software Systems, Inc., a
software company. From 1985 to 1991 he was a salesman for two other software
companies.
Aaron Goodman-Simpson. Mr. Goodman-Simpson has been a director and the
vice president for operations and sales of the Company since October 9, 1998,
when the Company acquired all the capital stock of WWCH. He joined WWCH in 1997
as its sales director and vice president for operations. He serves, and has
served since 1994, as the sales director of KORE Ltd., a computer software
distribution company. From 1992 until October 1994 he was the business
development manager for Computer 2000 Datech Ltd., Europe's largest computer
peripheral distributor. From 1986 until 1992 he was a director of A & B
Developments Ltd., a construction company to which Mr. Goodman-Simpson
introduced computer-aided design to its practice.
Keith Goodyer. Mr. Goodyer is a director and vice president of the
Company since October 9, 1998 and the technical director and a co-founder in
1997 of WWCH, which became a wholly owned subsidiary of the Company on October
9, 1998. He manages WWCH's research and development facility in Newport Pagnell,
England. From 1979 until co-founding WWCH, he was an independent Internet
consultant and developer. He developed several new consumer electronics and
Internet tools including the Company's TelEmail and MailTV products. From 1992
to April 1997 Mr. Goodyer was Internet Appliance Product Manager of MSU
Corporation, a public company that designs internet appliances, and led a
development team that produced the first Set-Top-Box for connecting television
sets to the Internet.
James F. Smith. Mr. Smith is a director and was president of
the Company from 1995 until October 9, 1998, when the Company acquired all the
capital stock of WWCH. Prior to joining the Company in 1995, Mr. Smith was
active in the oil and gas business and had been a founder and executive officer
of four public companies that were engaged in the oil and gas business.
Walter B. Wriston. Mr. Wriston has served as an advisory
director of the Company since November 1998. He retired as Chairman and Chief
Executive Officer of Citicorp and its principal subsidiary, Citibank, N.A., in
September 1984. Mr. Wriston serves as a director of ICOS Corporation, York
International Corporation, Cygnus, Inc., Vion Pharmaceuticals, Inc. and WMNB
Acquisition Corp. He also served as Chairman of President Reagan's Economic
Policy Advisory Board and a member and former Chairman of The Business Council.
23
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
- -------------------------------------------------------
The following persons during the last fiscal year failed to file on a
timely basis, as disclosed in the following table, reports required by Section
16(a) of the Exchange Act:
Number of Number of
Name Late Reports Transactions
Paul Goodman-Simpson 2 1
Aaron Goodman-Simpson 2 1
Keith Goodyer 2 1
James F. Smith 2 2
Douglas Weedon 2 2
George E. Green 2 2
Sam E. Nicholson 2 2
The Company knows of no existing failures to file a required form.
EXECUTIVE COMPENSATION.
Set forth below is the aggregate remuneration during the periods
indicated of the officers and directors who received remuneration, and officers
and directors as a group:
<TABLE>
Remuneration
Name of Individual Capacities in Which September 30, September 30,
Identity of Group Remuneration was Received 1998 1997
- ----------------- ------------------------- ---- ----
<S> <C> <C> <C>
James F. Smith President and Chief Executive
Officer and Director (1) $ 15,000 $ 30,000
Paul Goodman- (2) 66,388 (4) -
Simpson
Aaron Goodman- (3) 66,388 (4) -
Simpson
Keith Goodyer (3) 66,388 (4)
-
Officers and directors
as a group (4 persons) $ 214,164 $ 30,000
</TABLE>
24
<PAGE>
(1) Includes $3,000 of other compensation and does not include any personal
benefits provided by the Company as such benefits did not exceed ten
percent of total salary and bonus. Mr. Smith resigned as President and
Chief Executive Officer on October 9, 1998.
(2) Mr. Goodman-Simpson became a director and was appointed as President
and Chief Executive Officer of the Company on October 9, 1998.
(3) Messes Goodman-Simpson and Goodyer became directors and were appointed
as Vice Presidents of the Company on October 9, 1998.
(4) Represents salaries and reimbursement of expenses paid by CallNet Plc,
a 20% owned subsidiary of the Company.
The Company has employment agreements with Paul Goodman-Simpson, Aaron
Goodman-Simpson and Keith Goodyer. Each is employed for a term to end September
30, 2001 at an annual salary of (pound)65,000 (approximately $110,000) plus an
automobile allowance of (pound)7,500 (approximately $12,675).
In September 1998, James F. Smith exercised an option, granted on
August 28, 1998, to purchase 7,000 shares of common stock at $0.01 per share.
Based on the $1.00 market price of the stock, Mr. Smith realized a $7,368 value
upon exercise of the option.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
As of December 31, 1998, set forth below are the numbers of shares and
the percentage of outstanding shares of Common Stock of the Company owned
beneficially by each director of the Company, each executive officer named in
the Executive Compensation Table, by all officers and directors as a group, and
by each shareholder known by the Company to own more than five percent of the
Company's common stock, including those shares subject to outstanding options or
warrants:
Beneficial Ownership
--------------------
Name and Address Number of Percentage
of Beneficial Owner Shares (1) of Class(2)
------------------- ------------------------
James F. Smith 234,000 (3) 2.9%
4925 Greenville Ave. Ste 717
Dallas, TX 75206
Paul Goodman-Simpson (4) 535,000 (5) 6.6%
Brecon House, Meridian Gate
207 Marsh Wall
London E149YT
25
<PAGE>
Aaron Goodman-Simpson (4) 315,000 (5) 3.9%
Brecon House, Meridian Gate
207 Marsh Wall
London E149YT
Keith Goodyer 287,500 (5) 3.6%
Brecon House, Meridian Gate
207 Marsh Wall
London E149YT
Walter B. Wriston 50,000 (6) 0.6%
405 Park Ave, 3rd Floor
New York, NY 10022
Officers and directors 1,421,000 16.7%
as a group (4 persons)
(1) This table is based upon information supplied by officers, directors
and principal shareholders and applicable schedules filed with the
Securities and Exchange Commission. Unless otherwise indicated in the
footnotes to this table and subject to community property laws where
applicable, the Company believes that each of the shareholders named in
this table has sole voting and investment power with respect to the
shares indicated as beneficially owned. The number of shares for each
person is calculated in accordance with rules of the Securities and
Exchange Commission and includes shares each person has the right to
acquire within 60 days from the exercise of stock options.
(2) Percentages are calculated on the basis of the amount of outstanding
shares of stock (7,916,833), plus for each person or group, any shares
that person or group has the right to acquire within 60 days through
the exercise of options.
(3) Includes 105,000 shares held of record by Sammie S. Smith, Mr. Smith's
spouse. Mr. Smith disclaims any beneficial interest in these 105,000
shares. Also includes 100,000 shares subject to being acquired within
60 days at $1.50 per share pursuant to a stock option granted by the
Company.
(4) Paul Goodman-Simpson and Aaron Goodman-Simpson are brothers.
(5) Includes 150,000 shares subject to being acquired within 60 days at
$1.50 per share pursuant to a stock option granted by the Company.
(6) Includes 50,000 shares subject to being acquired within 60 days at
$1.50 per share pursuant to a stock option granted by the Company.
26
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During the period from inception in January 1998 through September 30,
1998, CallNet Plc, a 20% owned subsidiary, paid salaries of officers/directors
and employees and paid certain other administrative costs of the Company
totaling $185,486.
Certain intellectual property rights related to e-mail functionality
were assigned to the Company by Telemail Europe in exchange for 100 shares of
stock. The parties that received the stock also paid the Company a total of $166
for the shares. 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. Both of
the aforementioned entities have directors and shareholders in common with the
Company.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
2.1 The Plan of Acquisition with WWCH, which is incorporated
herein by reference as filed as exhibit to Form 8-K dated
October 23, 1998.
3.1 Certificate of Incorporation of the Company and amendments
thereto, which is incorporated herein by reference as Exhibit
3(i) to Form 10 filed on March 26, 1997.
3.2 Amendment to Certificate of Incorporation, which is
incorporated by reference herein as Exhibit 3(i) to Form 8-K,
dated October 23, 1998.
3.3 By-laws of the Company, which are incorporated by reference
herein as Exhibit 3(ii) to Form 10 filed on March 26, 1997.
10(a) Agreement between General American Royalty, Inc. and ZiLOG, Inc.
dated December 2, 1998.
10(b) Employment agreement between the Company and Paul Goodman-Simpson,
Aaron Goodman-Simpson and Keith Goodyer.
21 List of all the Company's subsidiaries, the state or other
jurisdiction of incorporation, and the names under which such
subsidiaries do business.
27 Financial data schedule.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the last
quarter of the period covered by this report.
27
<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 January 29, 1999
-----------------
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
/s/ Aaron Goodman-Simpson /s/ Paul Goodman-Simpson
--------------------- --------------------
Aaron Goodman-Simpson, Vice Paul Goodman-Simpson, President,
President and Director Chief Executive Officer and Director
Date January 29, 1999 Date January 29, 1999
------------------ ----------------
/s/ Keith Goodyer /s/ James Christodolou
------------- ------------------
Keith Goodyer, Vice President and James Christodolou, Principal
Director Accounting Officer
Date January 29, 1999 Date January 29, 1999
------------------ ----------------
/s/ James F. Smith
---------------
James F. Smith, Director
Date: January 29, 1999
28
