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 December 31, 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
As of January 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, in the Company's Report
on Form 10-KSB, or 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 in 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 PLC, (iii) its statement that other companies engaged in Internet
related businesses may be acquired, (iv) its expectation that the acquisition of
the remaining 85% of CallNet Plc 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 PLC, which earns a share of telephone toll revenues from
companies that provide telephone service to their customers, (vi) its 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") and (vii) its belief that its products and services will appeal
to the many segments of the Internet market; and (vii) statements in
Management's Discussion and Analysis or Plan of Operation regarding (a) the
projection that its 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 development and
manufacturing 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.
2
<PAGE>
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 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 three months ended December 31, 1998 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.
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 was incorporated in January 1998 and
during the period from incorporation through December 31, 1998 had been involved
primarily in capital formation activities, refinement of its business strategy
and development of relationship with industry partners. In January 1999, the
Company changed its name to World CallNet, Inc.
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. 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 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 most of the 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 and to meet other obligations, the
Company will have to raise additional capital in the next twelve months.
3
<PAGE>
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.
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 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 35% of the telephone toll revenues CWC charges
its customers for calls to 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 targets for the next three-month period 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 10% of the quarterly payment made to CallNet Plc for achieving less
than 50% of the target revenues.
The fundamental business strategy is to direct telephone usage to the
CallNet Plc telecommunications network from new Internet 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 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 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
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.
4
<PAGE>
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
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.
5
<PAGE>
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 $35,000 for the three months ended December
31, 1998 were derived from license fees related to the Company's MailTV software
chip.
For the three months ended December 31, 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 as charges to general and administrative expense.
Interest expense of $2,500 is related to $300,000 of notes payable
dated November 30, 1998 that bear interest at 10% per annum. The Company is
obligated to make monthly interest payments to holders of these notes and to
holders of an additional $850,000 of notes dated December 31, 1998.
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.
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
6
<PAGE>
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
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 35% of the telephone toll
revenues 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".
7
<PAGE>
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 has implemented pricing changes and 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
offers and implementation of new pricing programs. Such strategies may result in
an increase in costs as a percentage of revenues. In addition, an 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 arc
8
<PAGE>
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
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 call be
no assurance that the Company will succeed in adapting its online service
business to alternate access devices and conduits.
9
<PAGE>
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, its revenue sharing
and Internet routing agreement with Cable & Wireless Communications and its
agreement with Zilog, Inc. pursuant to which Zilog, Inc. has agreed to
manufacture and supply MAILTV chips to television manufacturers. The Company
purchases 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 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
10
<PAGE>
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.
FUTURE 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.
11
<PAGE>
<TABLE>
<CAPTION>
WORLD CALLNET, INC.
(Formerly Worldwide Communications (Holdings) Limited)
(A Development Stage Company)
BALANCE SHEET
(Expressed in U.S. Dollars)
AS OF DECEMBER 31 AND SEPTEMBER 30, 1998
(Unaudited)
ASSETS December 31, September 30,
1998 1998
<S> <C> <C>
CURRENT ASSETS:
Cash $ 89,966 $ 1,995
Cash held in escrow account 757,283 --
----------- -----------
847,249 1,995
----------- -----------
OTHER ASSETS:
Investment in marketable securities 203,772 203,772
Intangible asset, net of $325 and $0
accumulated amortization 19,175 19,500
----------- -----------
Total other assets 222,973 223,272
----------- -----------
Total assets $ 1,070,196 $ 225,267
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable, net of unamortized discount
of $51,000 and $0 $ 1,001,607 $ --
Accounts payable and accrued expenses 45,541 43,041
Accrued compensation due officers 165,565 165,565
Deferred revenue 193,583 193,583
Due to affiliate -- 10,486
----------- -----------
Total current liabilities 1,406,296 412,675
----------- -----------
COMMITMENT AND CONTINGENCY (Notes 3 and 7)
STOCKHOLDERS' DEFICIT:
Common stock, $.001 par value; 20,000,000
shares authorized, 7,489,333 and 5,500,000
shares issues and outstanding 7,489 5,500
Additional paid-in capital 465,162 190,660
Accumulated deficit (810,300) (378,285)
Foreign currency translation adjustment 1,549 (5,283)
----------- -----------
Total stockholders' deficit (336,100) (187,408)
----------- -----------
Total liabilities and stockholders' deficit $ 1,070,196 $ 225,267
=========== ===========
</TABLE>
See accompanying notes to these financial statements.
12
<PAGE>
WORLD CALLNET, INC.
(Formerly Worldwide Communications (Holdings) Limited)
(A Development Stage Company)
STATEMENT OF OPERATIONS
(Expressed in U.S. Dollars)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998
(Unaudited)
REVENUES $ 34,988
COSTS AND EXPENSES:
General and administrative expenses 461,012
Interest expense 5,666
Amortization expense 325
-----------
467,003
-----------
NET LOSS (432,015)
OTHER COMPREHENSIVE GAIN - Foreign currency translation adjustment 6,832
-----------
COMPREHENSIVE LOSS $ (425,183)
===========
NET LOSS PER SHARE (basic and diluted) $ (.06)
=======
WEIGHTED AVERAGE SHARES 7,245,043
===========
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 THREE MONTHS ENDED DECEMBER 31, 1998
(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 160,000 160 167,400 -- -- 167,560
Issuance of common stock purchase warrants 94,059 94,059
Net loss for the period -- -- -- (432,015) -- (432,015)
Foreign currency translation adjustment -- -- -- -- 6,832 6,832
---------- ---------- ---------- ---------- ---------- ----------
7,489,333 $ 7,489 $ 465,162 $ (810,300) $ 1,548 $ (336,100)
========== ========== ========== ========== ========== ==========
</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 THREE MONTHS ENDED DECEMBER 31, 1998
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(432,015)
Accretion of discount on notes payable 3,166
Increase in accounts payable and accrued expenses, net of
foreign currency translation adjustments 2,500
Decrease in amount due to affiliate 10,486
Other
1,436
---------
Net cash used by operating activities (414,427)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term indebtedness, net of financing costs 334,838
Cash received in common stock issuances 167,560
---------
502,398
NET INCREASE IN CASH 87,971
CASH, beginning of period 1,995
---------
CASH, end of period $ 89,966
=========
NON CASH TRANSACTIONS:
Purchase of net assets in reverse acquisition for common stock $ 14,872
=========
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 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 December 31, 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
16
<PAGE>
WORLD CALLNET, INC.
(Formerly Worldwide Communications (Holdings) Limited)
(A Development Stage Company)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
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.
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 $34,988 in revenues
through December 31, 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
December 31, 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
17
<PAGE>
WORLD CALLNET, INC.
(Formerly Worldwide Communications (Holdings) Limited)
(A Development Stage Company)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
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.
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
========
5. NOTES PAYABLE
-------------
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 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
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 $57,500 consulting
fee and issued stock purchase warrants, on the same terms described above,
to purchase 182,500 shares of common stock in connection with the offering.
The Company has valued the aforementioned stock purchase warrants at
$94,059 using a discount factor of 8%. Both the value of the stock purchase
warrants and the
18
<PAGE>
WORLD CALLNET, INC.
(Formerly Worldwide Communications (Holdings) Limited)
(A Development Stage Company)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
referral fee of $57,500 have been treated as a discount to notes payable.
Accretion of discount related to the discount was $3,666 for the three
months ended December 31, 1998 and is included in interest expense.
Remaining discount is being amortized based on the maturity date of
December 1, 1999.
6. 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.
7. 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 three
executive officers has agreed with the Company that until a substantial
amount of additional capital has been raised, he will receive only one-half
of his salary. The Company's obligation to pay the deferred portion of the
salary, without interest, is an unsecured obligation of the Company that is
subordinated to the claims of certain other unsecured creditors of the
Company. Each of these officers has identical employment agreements and
payment arrangements with CallNet Plc.
8. SUBSEQUENT EVENTS
-----------------
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
19
<PAGE>
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
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.
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.
20
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities.
(c)
(1) On October 9, 1998, the registrant acquired 100% of the outstanding
common stock of privately-held, UK based, World Wide Communications
(Holdings) Ltd. ("WWCH"), for 5,500,000 shares of its common stock,
pursuant to the exemption from registration set forth in Section 4(2)
of the Securities Act of 1933, as amended. The registrant's
shareholders of record on October 9, 1998 received 396,000 additional
shares of common stock, as a stock dividend and, therefore, the
distribution of such shares of common stock did not constitute a sale
that required registration under the Securities Act of 1933, as
amended. As a result of the acquisition and issuance of shares, the
("WWCH") shareholders own approximately 75% of the registrant's issued
and outstanding common stock.
Effective as of the closing date, the registrant's officers and two of
its directors resigned. James F. Smith remained as a director of the
registrant. Paul Goodman-Simpson was elected President and Chief
Executive Officer, Aaron Goodman-Simpson was elected Vice President and
Secretary, and Keith Goodyer was elected Vice President and Treasurer.
These three officers were also appointed to the Board of Directors of
the registrant.
Information regarding security ownership, compensation and business
background of the registrant's directors and management as of December
31, 1998 is contained in the registrant's report on Form 10-KSB
covering the period from January 23, 1998 through September 30, 1998.
(2) The Company has completed two private placements of notes and stock
purchase warrants in the quarter ended December 31, 1998. See Item 5(a)
of this Part II. The notes and stock purchase warrants were issued to
private investors pursuant to the exemption from registration set forth
in Section 4(2) of the Securities Act of 1933, as amended.
Item 3. Defaults on Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
21
<PAGE>
Item 5. Other Information.
(a) On November 30, 1998 the registrant completed a private placement of
unsecured notes payable totaling $300,000. Interest on the notes is
payable monthly at a rate of 10% per annum, and principal on the notes
is due in full on December 1, 1999 and earlier under certain
circumstances, including the raising of $3.5 million or more of
additional capital. On December 31, 1998 the registrant completed the
placement of an additional $850,000 of notes payable. The terms of the
notes are identical to the previous placement except that the notes in
the $850,000 placement are collateralized by the Company's shares of
Cherokee Leisure Plc.
All 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 $57,500 consulting fee and issued
stock purchase warrants, on the same terms described above, to purchase
182,500 shares of common stock in connection with the offering.
The holders of such stock purchase warrants have the right to require
the Company at its expense to register under the Securities Act of
1933, as amended, the resale of such stock purchase warrants and
underlying shares of the Company common stock upon the request of
holders of such stock purchase warrants to acquire 51% or more of the
shares of Company common stock underlying such purchase warrants. In
addition, such holders have certain piggyback registration rights.
(b) Effective January 15, 1999, James Christodoulou ("Christodoulou") was
elected Chief Financial Officer of the Company. The Company has reached
an agreement, in principle with Christodoulou to enter into a three (3)
year employment agreement, effective as of January 15, 1999, providing
for an annual salary of approximately $180,000, provided that until the
Company has raised a substantial amount of additional capital, one-half
of Mr. Christodoulou's salary will be deferred in a manner similar to
the other executive officers as described in Note 5 to Financial
Statements above. The termination provisions of Mr. Christodoulou's
employment agreement have not been fully negotiated, but it is expected
that the employment agreement will provide for termination for cause
and the payment of the full amount remaining under the employment
agreement in the event that Christodoulou is terminated following a
change in control of the Company.
22
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
2.1 The Plan of Acquisition with WWCH, which is incorporated
herein by reference from Exhibit 2.1 to Form 10-K for the
period from January 23, 1998 through September 30, 1998.
3.1 Certificate of Incorporation of the registrant and amendments
thereto, which is incorporated herein by reference from
Exhibit 3(i) to Form 10 filed on March 26, 1997.
3.2 Amendment to Certificate of Incorporation, which is
incorporated by reference herein from Exhibit 3(i) to Form
8-K, dated October 23, 1998.
3.3 By-laws of the registrant, which are incorporated by reference
herein from Exhibit 3(ii) to Form 10 filed on March 26, 1997.
10.1 Specimen of Promissory Note dated November 30, 1998 and
December 31, 1998, Security Agreement dated December 31, 1998,
and Warrant to Purchase Shares of Common Stock of General
American Royalty, Inc. d.b.a. World CallNet, Inc. dated
November 30, 1998 between the registrant and twenty-two
private investors filed herewith.
10.2 Employment agreements between the Company and the following
corporate officers: Paul Goodman-Simpson, Aaron
Goodman-Simpson and Keith Goodyer, which are incorported by
reference herein from Exhibit 10(b) to Form 10KSB/A filed
February 4, 1999.
10.3 The Company's Stock Option Plan, which is incorporated by
reference herein from Exhibit 99 to Form 8-K filed January 26,
1999.
27 Financial Data Schedule filed herewith.
(b) Reports on Form 8-K.
One report on Form 8-K dated October 9, 1998 was filed during the
period covered by this report. The registrant reported the acquisition of
100% of World Wide Communications (Holdings) Ltd. and change in control of
the registrant resulting from the acquisition. The Form 8-K also reported a
change of fiscal yearend from October 31 to September 30.
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: March 15, 1999
/s/ James Christodoulou
-------------------------------
James Christodoulou, Chief
Financial Officer (Principal
Financial and Accounting
Officer)
Date: March 15, 1999
24
Promissory Note
$62,500.00 Now York, New York November 30, 1998
FOR VALUE RECEIVED the undersigned General American Royalty, Inc. d.b.a.
World CallNet Inc., a Delaware: corporation hereinafter whether one or more,
called "Maker") promises to pay to the order of Harvey J. Lippman (hereinafter,
whether one or more Called "Payee), the Sum of Sixty five thousand and no/100
Dollars, ($62,500.00) Principal and interest, if any, under this Note is payable
at 6 Peter Cooper road Apartment 6A, Now York NY 10010, or at such other place
as Payee may, from time to time designate in writing
The unpaid principal of this note shall bear interest at the rate of ten
percent (10%) per annum from the date hereof until the principal hereof is paid.
This Note shall be payable on or before the earlier of (i) December 1, 1999
or (ii) five (5) days after Maker has received the aggregate of $3,500,000
through the sales of securities in either a private or public transaction after
the date hereof. Interest Shall be payable monthly, beginning on January 1,
1999. Unless otherwise provided herein, all payments shall first be applied to
payments of accrued and unpaid interest, if any, and the balance of each such
payment shall be applied to reduction of principal.
All payments hereunder shall be payable in lawful money of the United
States of America which shall be legal tender for public and private debts at
the time of payment.
1. Prepayments. Maker shall have the right to prepay the unpaid principal
balance hereof in part or in its entirety, In the event of a prepayment, there
shall be no penalty or premium due. Any prepayment, whether in whole or in part,
shall be applied first to accrued interest, if my, and then to principal. and
interest shall immediately cease to run on any amount of the principal so
prepaid. Partial prepayments of principal shall be applied to the payments of
principal due hereon in inverse order of maturity.
2. Default remedies. The entire unpaid principal balance of and all accrued
interest on, this Note shall immediately be due and payable at the option of the
holder hereof upon the occurrence of any one or more of the events of default
("Event of Default"), For purpose of this Paragraph 2, the term "Event of
Default" shall mean: (i) a failure by the Maker to pay any installment of`
principal or interest hereunder when due; or (ii) the entry of an order,
judgment or decree by any court of competent jurisdiction granting the Maker
relief as a debtor under the Federal Bankruptcy Code or otherwise adjudicating
the Maker as a bankrupt or a insolvent or the making of an assignment for the
benefit of creditors by the Maker, or the commencement by or against the maker
of a voluntary or involuntary case for relief as a debtor under the Federal
Bankruptcy Code or the of any other bankruptcy, insolvency, reorganization,
arrangement, debt adjustment, receivership, liquidation, trusteeship
custodianship, or dissolution proceedings by or against the Maker, and, if
<PAGE>
instituted adversely the consent by the Maker to the same or the admission in
writing of the Material allegations contained in the Petition filed in said
proceedings provided however, if any action as described herein shall be
instituted against the Maker, the Maker shall have thirty (30) days to dismiss
such action.
3. Cumulative Rights. No delay on the part of the holder of this Note in
the exercise of any power or right under this Note or under any other instrument
executed pursuant hereto shall operate as a waiver thereof, nor shall a single
or partial exercise of any power or right preclude other or further exercise
thereof or the exercise of any other power or right. Enforcement by the holder
of this Note of any security for the payment hereof shall not constitute any
election by it of emedies so a to preclude the exercise of any other remedy
available to it. This Note shall not be subject to offset by Maker.
4. Waiver. Maker and all endorsers, sureties and guarantors of this Note
weave, demand, presentment, protest, notice of dishonor, notice of nonpayment,
notice of intention to accelerate, notice of acceleration, notice of protest and
any and all lack of diligence or delay in collection or the filing of suit
hereon which may occur, and agree to all extensions and partial payments, before
or after maturity, without prejudice to the holder hereof.
5. Attorneys' Fees And Costs. In the event that one or more Events of
Default shall occur, and in the event that thereafter this Note is placed in the
hands of an attorney for collection, or the event that this Note is collected in
whole or in part through legal proceedings of any nature, then and in any such
case, there shall be added to the unpaid principal balance hereof all reasonable
costs of collection whether or not suit is filed.
6. Governing Law. This Note shall be governed by and construed in
accordance with, the laws of the State of New York and of the United States of
America.
7. Headings. The headings of the Sections of this Note are inserted for
convenience only and shall not be deemed to constitute a part hereof.
8. Usury. All Agreements between Maker and the holder of ft Note, whether
now existing or hereafter arising and whether written or oral are expressly
limited so that in no contingency or event whatsoever, whether by acceleration
of the maturity of this Note or otherwise shall the amount paid, or agreed to be
paid, to the holder hereof for the use, forbearance or detention of the money to
be loaned hereunder or otherwise, exceed the maximum amount pemissible under
applicable law. If from any circumstances whatsoever fulfillment of any
Provisions of this Note or of any other document evidencing, securing or
pertaining to the indebtedness evidenced hereby, at the time performance of such
provision shall be due, shall involve transcending the limit of validity
prescribed by law, than ipso facto, the obligation to be fulfilled shall be
reduced to the limit such validity and if from any such circumstances the holder
of this Note shall ever receive anything of value as interest or deemed interest
by applicable law under this Note or any other document evidencing, securing or
pertaining to the indebtedness evidenced hereby or otherwise an amount that
would
<PAGE>
exceed the highest lawful rate, such amount that would be excessive interest
shall be applied to the reduction of the principal amount owing under this Note
or on account any other indebtedness of Maker to the holder hereof relating to
this Note, and not to the payment of interest or if such excessive interest
exceeds the unpaid balance of principal of this Note and such other indebedness,
such excess shall be refunded to Maker. In determining whether or not the
interest paid or payable with respect to any Indebtedness of Maker to the holder
hereof, under any specific contingency, exceeds the highest lawful rate, Maker
and the holder hereof shall, to the maximum extent permitted by applicable law,
(a) characterize any non-principal payment as an expense, fee or premium rather
than as interest, (b) exclude voluntary prepayments and the effects thereof, (c)
amortize, prorate, allocate and spread the total amount of interest throughout
the full term of such indebtedness so that the actual rate of interest on
account of such indebtedness is uniform throughout the term thereof, and/or (d)
allocate interest between portions of such indebtedness, to the end that no such
portion shall bear interest at a rate greater than that permitted by law. The
terms and provisions of this paragraph shall control and supersede every other
conflicting provision of all agreements between Maker and the holder hereof.
9. Successors and Assigns. All of the stipulations, promises and agreements
in this Note contained by or on behalf of Maker shall bind the successors and
assigns of Maker, whether so expressed or not, and inure to the benefit of the
successors and assigns of Maker and Payee.
10. Severability. In the event any one or more of the provisions contained
in this Note shall for any reason be held to be invalid, illegal or in any
respect such invalidity, illegality or unenforceability shall not affect any
other provision hereof, and this Note shall be construed as if such invalid,
illegal un unenforceable provision had now been contained herein.
IN WITNESS WHEREOF, the undersigned has executed this Note a of the day and
year first above written.
General American Royalty, Inc.
d.b.a. World CallNet, Inc.
By /s/ Paul Goodman-Simpson
-------------------------
Paul Goodman-Simpson
President
<PAGE>
PROMISSORY NOTE
$50,000.00 New York, New York December 31, 1998
FOR VALUE RECEIVED, the undersigned, General American Royalty, Inc. d.b.a.
World CallNet, Inc., a Delaware corporation, (hereinafter, whether one or more,
called "Maker"), promises to pay to the order of Mr. Robert Brooks (hereinafter,
whether one or more called "Payee"), the sum of Fifty Thousand Dollars
($50,000). Principal and interest, if any, under this Note is payable at Sousa
Drive, Sands Point, Now York, 11050, or at such. other place as Payee may, from
time to time, designate in writing.
The unpaid principal of this note shall bear interest at the rate of ten
percent (10%) per annum from the date hereof until the principal hereof is paid.
This Note shall be payable on or before, the earlier of (i) December 1,
1999 or (ii) five (5) days after Maker has received the aggregate of $3,500,000
through the sales of securities in either a private or public transaction after
the date hereof. Interest shall be payable monthly, beginning on February 1,
1999. Unless otherwise provided herein, all payments shall first be applied to
payments of accrued and unpaid interest, if any, and the balance of each such
payment shall be applied to reduction of principal.
All Payments hereunder shall be payable in lawful money of the United
States of America which shall be legal tender for public and private debts at
the time of payment.
1. Prepayments. Maker shall have the right to prepay the unpaid principal
balance hereof in part or in its entirety. In the event of a prepayment, there
shall be no penalty or premium due. Any prepayment, whether in whole or in Part,
shall be applied first to accrued interest, if any, and then to principal, and
interest shall immediately cease to run on any amount of the principal so
prepaid. Partial prepayments of principal shall be applied to the payments of
principal due hereon in inverse order of maturity.
2. Default Remedies. The entire unpaid principal balance of, and all
accrued interest on, this Note shall immediately be due and payable at the
option of the holder hereof upon the occurrence of any one or more of the events
of default ("Events of Default"). For purpose of this Paragraph 2, the term
"Event of Default" shall mean: (i) a failure by the Maker to pay any installment
of Principal or interest hereunder when due; or (ii) the entry of an order,
judgment or decree by any court of competent jurisdiction granting the Maker
relief as a debtor under the Federal Bankruptcy Code or otherwise adjudicating
the Maker as a bankrupt or as insolvent or the making of an assignment for the
benefit of creditors by the Maker, or the commencement by or against the Maker
of a voluntary or involuntary case for relief as a debtor under the Federal
Bankruptcy Code or the commencement of any other bankruptcy, insolvency,
arrangement, debt adjustment, receivership, liquidation, trusteeship,
custodianship, or dissolution proceedings by or against the Maker, and, if
instituted adversely, the consent by the Maker to the same or the admission in
writing of the material allegations contained in the petition filed in said
<PAGE>
proceedings; provided, however, if any action as described herein shall be
instituted against the Maker, the Maker shall have thirty (30) days to dismiss
such action.
3. Cumulative Rights. No delay on the part of the holder of this Note in
the exercise of any power or right under this Note or under any other instrument
executed pursuant hereto shall operate as a waiver thereof, nor shall a single
or partial exercise of any power or right preclude other or further exercise
thereof or the exercise of any other power or right. Enforcement by the bolder
of this Note of any security for the payment hereof shall not constitute any
election by it of remedies so as to preclude the exercise of any other remedy
available to it. This Note shall not be subject to offset by Maker.
4. Waiver. Maker and all endorsers, sureties and guarantors, of this Note
waive, demand, presentment, protest, notice of dishonor, notice of nonpayment,
notice of intention to accelerate, notice of acceleration, notice of protest and
any and all lack of diligence or delay in collection or the filing of suit
hereon which may occur, and agree to all extensions and partial payments, before
or after maturity, without prejudice, to the holder hereof
5. Attorneys' Fees and Cost. In the event that one or more Events of
Default shall occur, and in the event that thereafter this Note is placed in the
hands of an attorney for collection, or the event that this Note is collected in
whole or in part through legal proceedings of any nature, then and in any such
case, there shall be added to the unpaid principal balance hereof a reasonable
costs of collection whether or not suit is filed.
6. Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of New York and of the United States of
America.
7. Headings. The headings of the sections of this Note are inserted for
convenience only and shall not be deemed to constitute a part hereof.
8. Usury. All agreements between Maker and the holder of this Note, whether
now existing or hereafter arising and whether written or oral, are expressly
limited so that in no contingency of event whatsoever, whether by acceleraton of
the maturity of this Note or otherwise, shall the amount paid, or agreed to be
paid, to the holder hereof for the use, forbearance or detention of the money to
be loaned hereunder or otherwise, exceed the amount permissible under applicable
law. If from any circumstances whatsoever fulfillment of any provisions of this
Note or of any other document evidencing, securing or pertaining to the
indebtedness evidenced hereby, at the time performance of such provision shall
be due, shall involve transcending the limit of validity prescribed by law, then
ipso facto, the obligation to be fulfilled shall be reduced to the limit such
validity and if from any such circumstances the bolder of this Note shall ever
receive anything of value as interest or deemed interest by applicable law under
this Note or any other document evidencing, securing or pertaining to the
indebtedness evidenced hereby or otherwise an amount that would exceed the
highest lawful rate, such amount that would be excessive interest shall be
applied to the reduction of the principal amount owing under this Note or on
account any other indebtedness of Maker to the holder hereof relating to this
Note, and not to the payment of interest or if such excessive interest exceeds
the unpaid
<PAGE>
balance of principal of this Note and such other indebtedness, such excess shall
be refunded to Maker. In determining whether or not the interest paid or payable
with respect to any indebtedness of Maker to the holder hereof, under any
specific contingency, exceeds the highest lawful rate, Maker and the holder
hereof shall, to the maximum extent permitted by applicable law, (a)
characterize any non-principal payment as an expense, fee or premium rather than
as interest, (b) exclude voluntary prepayments and the effects thereof, (c)
amortize, prorate, allocate and spread the total amount of interest throughout
the full term of such indebtedness so that the actual rate of interest on
account of such indebtedness is uniform throughout the term thereof, and/or (d)
allocate interest between portions of such indebtedness, to the end that no such
portion shall bear interest at a rate greater than that permitted by law. The
terms and provisions of this paragraph shall control and supersede every other
conflicting provision of all agreements between Maker and the holder hereof.
9. Successors and Assigns. All of the stipulations, promises and agreements
in this Note contained by or on behalf of Maker shall bind the successors and
assigns of Maker, whether so expressed or not, and inure to the benefit of the
successors and assigns of Maker and Payee.
10. Severability. In the event any one or more of the provisions contained
in this Note shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision hereof, and this Note shall be construed as
if such invalid, illegal un unenforceable provision had never been contained
herein.
11. Security. This Note is one of several investor notes aggregating the
sum of $950,000 which are secured by a pledge of 2,000,000 Shares of Common
Stock of Cherokee Leisure PLC, (the "Collateral"). The Collateral is held by
Harvey J. Lippman, Esq. as trustee for the Note holders and each note holder
shall be entitled to the security of a proportionate share of the Collateral
subject to the terms of a written Security Agreement.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the day
and year first above written.
General American Royalty, Inc.
d.b.a. World CallNet, Inc,
By: /s/ Paul Goodman-Simpson
------------------------
Paul Goodman-Simpson
President
<PAGE>
SECURITY AGREEMENT
Date: December 31, 1998
Debtor: General American Royalty, Inc., d.b.a. World CallNet, Inc.
Debtor's Mailing Address (including county): Beacon House, Meridian Gate
207 Marsh Wall
London, E14 9YT
United Kingdom
Secured Party: Harvey J. Lippman, Esq., Trustee for Secured Promissory Note
Holders
Secured Party's Mailing Address (including county): c/o Richardson & Associates
866 United Nations Plaza
Suite 444
New York, New York 10017
U.S.A.
Classification of Collateral: Instruments, General Intangibles
Collateral (including all accessions):
2,000,000 shares of common stock of Cherokee Leisure PLC
Obligation
Note Aggregate notes in the amount of $850,000 (separate notes to each
investor, but secured by proportionate portion of collateral herein
held by secured party as trustee)
Date: December 31, 1998
Amount $850,000
Maker. General American, Royalty, Inc, d.b.a. World CallNet, Inc.
Payee: Individual Purchasers of December 31, 1998, Secured Promissory
Notes, c/c Harvey J. Lippman, Esq., Trustee
Final Maturity Date: December 1, 1999
Term of Payment (optional): as described in the Note
Other Obligation: None
Debtor's Representation Concerning Location of Collateral (optional): The
collateral shall be delivered to the secured party. The collateral shall be
returned to the debtor upon repayment of the Notes.
Subject to the terms of this agreement, Debtor grants to Secured Party a
security interest in the collateral and all its proceeds to secure payment and
perfomence of Debtor's obligation in this security agreement and all renewals
and extensions of any of the obligation.
<PAGE>
Debtor's Warranties
1. Financing Statement. Except for that in favor of Secured Party, no
financing statement covering the collateral is filed in any public office.
2. Ownership. Debtor owns the collateral and has the authority to grant
this security interest. Ownership is free from any set off, claim, restriction,
lien, security interest; or encumbrance except this security interest and lien
for taxes not yet due.
3. Fixtures and Accessions. None of the collateral is affixed to real
estate, is an accession to any goods, is commingled with other goods, or will
become a fixture, secession, or part of a product or mass with other goods
except as expressly provided in this agreement.
4. Financial Statements. All information about Debtor's financial condition
provided to Secured Party was accurate when submitted, as will be any
information subsequently provided.
Debtor's Convenants
1. Protection of Collateral. Debtor will defend the collateral against all
claims and demands adverse to Secured Party's interest in it and will keep it
free from all liens except those for taxes not yet due and from all security
interests except this one. The Collateral will remain in Debtor's possession or
control at all times, except as otherwise provided in this agreement. Debtor
will maintain the collateral in good condition and protect it against misuse,
abuse, waste, and deterioration except for ordinary wear and tear resulting from
its intended use
2. Insurance. Debtor will insure the collateral in accord with Secured
Party's reasonable requirements regarding choice of carrier, casualties insured
against, and amount of coverage. Policies will be written in favor of Debtor and
Secured Party according to their respective interests or according to Secured
Party's other requirements. All policies will provide that Secured Party will
receive at least ten days' notice before cancellation, and the policies or
certificates evidencing them will be provided to Secured Party when issued.
Debtor assumes all risk of loss and damage to the collateral to the extent of
any deficiency in insurance coverage. Debtor irrevocably appoints Secured Parity
as attorney-in-fact to collect any return, unearned premiums, and proceeds of
any insurance on the collateral and to endorse any draft or check deriving from
the policies ad made payable to Debtor.
3. Secured Party's Costs. Debtor will pay all expenses incurred by Secured
Party in obtaining, preserving, perfecting, defending, and enforcing this
security interest or the collateral and in collecting or enforcing the note.
Expenses for which Debtor is liable include, but are not limited to, taxes,
assessments, reasonable attorney's fees, and other legal expenses. These
expenses will bear interest from the dates of payments at the highest rate
stated in notes that are part of the obligation, and Debtor will pay Secured
Party this interest on demand at a time and place reasonably specified by
Secured Party. These expenses and interest will be par of the obligation and
will be recoverable as such in all respects.
4. Additional Documents. Debtor will sign any papers that Secured Party
considers necessary to obtain, maintain, and perfect this security interest or
to comply with any relevant law.
5. Notice of Changes. Debtor will immediately notify Secured Party of any
material change in the collateral; change in Debtor's name, address, or
location; change in any matter warranted or represented in this agreement;
change that may affect this security interest; and any event of default.
6. Use and Removal of Collateral. Debtor will use the collateral primarily
accordin to the stated classification unless Secured Party consents otherwise in
writing. Debtor will not permit the collateral to be affixed to any real estate,
to become an accession to any goods, to be commingled with other goods; or to
become a fixture, accession, or part of a product or mass with other goods
except as expressly provided in this agreement.
7. Sale. Debtor will not sell, transfer, or encumber any of the collateral
without the prior written consent of Secured Party.
Rights and Remedies of Secured Party
1. Generally. Secured Party may exercise the following rights and remedies
either before or after default:
a. take control of any proceeds of the collateral;
b. release any collateral in Secured Party's possession to my
debtor, temporarily or otherwise;
c. take control of any funds generated by the collateral, such as
refunds from and proceeds of insurance, and reduce any part of
the obligation accordingly or permit Debtor to use such funds to
repair or replace damaged or destroyed collateral covered by
insurance; and
d. demand, collect, convert, redeem, settle, compromise, receipt
for, realize on, sue for, and adjust the collateral either in
Secured Party's or Debtor's name, as Secured Party desires.
<PAGE>
2. Insurance. If Debtor fails to maintain insurance as required by thee
agreement or otherwise by Secured Party, then Secured Party may Purchase
single-interest insurance coverage that will protect only Secured Party. If
Secured Party purchases this insurance, its premiums will become part of the
obligation.
3. The secured party is the trustee for the holders of the December 31,
1998 Secured Promissory Notes issued by debtor. The trustee may resign by notice
to the holders of the Secured Promissory Notes. A successor trustee as secured
party on behalf of the holders of the Secured Promissory Notes may be appointed
by the vote of note holders holding more than 50% of the face amount of the
Secured promissory Notes.
Events of Default
Each of the following conditions is an event default:
1. if Debtor defaults in timely payment or performance of any
obligation, covenant, or liability in any written agreement between Debtor
and Secured Party or in any other transaction secured by 06 agreement;
2. if any warranty, covenant, or representation made to Secured Party
by or on behalf of Debtor proves to have been false in any Material respect
when made;
3. if a receiver is appointed for Debtor or any of the collateral;
4. if the collateral is assigned for the benefit of creditors or, to
the extent permitted by law, if bankruptcy or insolvency proceedings
commence against or by any of these parties: Debtor; any partnership of
which Debtor is a general partner; and any maker, drawer, accepter,
endower, guarantor, surety, accommodation party, or other person liable on
or for any put of the obligation;
5. if any financing statement regarding the collateral but not related
to this security interest and not favoring Secured Party is filed;
6. if any lien attaches to any of the collateral; and
7. if any of the collateral is lost, stolen, damaged, or destroyed,
unless it is promptly replaced with collateral of like quality or restored
to its former condition.
Remedies of Secured Party on Default
During the existence of any event of default, Secured Party may declare the
unpaid principal and earned interest of the obligation immediately due in whole
or part, enforce the obligation, and exercise any rights and remedies granted by
chapter 9 of the Texas Business and Commerce Code or by this agreement,
including to following:
1. require Debtor to deliver to Secured Party all books and records
relating to the collateral;
2. require Debtor to assemble the collateral and make it available to
Secured Party at a place reasonably convenient to both parties;
3. take Possession of any of the collateral and for this purpose enter
any premises where it is located if this can be done without breach of the
peace;
4. sell, lease, or otherwise dispose of any of the collateral in
accord with the rights, remedies, and duties of a secured party under
chapters 2 and 9 of the Texas Business and Commerce code after giving
notice as required by those chapters, unless the collateral threatens to
decline speedily in value, is perishable, or would typically be sold on a
recognized market, Secured Party will give Debtor reasonable notice of my
public sale of the collateral or of a time after which it may be otherwise
disposed of without further notice to Debtor; in this event, notice will be
deemed reasonable if it is mailed, postage prepaid, to Debtor at the
address specified in this agreement at least ten days before any public
sale or ten days before the time when the collateral may be otherwise
disposed of without further notice to Debtor;
5. surrender any insurance policies covering the collateral and
receive the unearned premium;
6. apply any proceeds from disposition of the collateral after default
in the manner specified in chapter 9 of the Now York Uniform Commercial
Code, including payment of Secured Party's reasonable attorney's fees and
court expenses; and
7. if disposition of the collateral leaves the obligation unsatisfied,
collect the deficiency from Debtor
General
1. Parties Bound. Secured Party's rights under this agreement shall inure
to the benefit of its successors and assigns Assignment of any part of the
obligation and delivery by Secured Party of any part of the collateral will
fully discharge Secured Party from responsibility for that part of the
collateral. If Debtor is more than one, all their representations, warranties,
and agreements are joint and several. Debtor's obligations under this agreements
shall bind Debtor's personal representatives, successors, and assigns.
2. Waiver. Neither delay in exercise nor partial exercise of any Secured
Party's remedies or rights shall waive further exercise of those remedies or
rights. Secured Party's failure to exercise remedies or rights does not waive
subsequent exercise of those remedies or rights. Secured Party's waiver of any
default does not waive further default. Secured Party's waiver of &my right in
this agreement or of any default is binding only if it is in writing. Secured
Party may remedy any default without waiving it.
<PAGE>
3. Reimbursement. If Debtor fails to perform any of Debtor's obligations,
Secured Party may perform those obligations and be reimbursed by Debtor on
demand at the place where the note is payable for any sums so paid, including
attorney's fees and other legal expenses, plus interest on those sums from the
dates of payment at the rate stated in the note for matured, unpaid amounts. The
sum to be reimbursed shall be secured by this security agreement.
4. Interest Rate. Interest included in the obligation shall not exceed the
maximum amount of nonuaurious interest that any be contracted for, taken,
reserved, charged, or received under law; any interest in excess of that maximum
amount shall be credited to the principal of the obligation or, if that has been
paid, refunded. On any acceleration or required or permitted prepayment of the
obligation, any such excess shall be canceled automatically as of the
aceleration or prepayment or, if already paid, credited on the principal amount
of the obligation or, if the principal amount has been paid, refunded. This
provision overrides other provisions in this and all other instruments
concerning the obligation.
5. Modifications. No provisions of this agreement shall be modified or
limited except by written agreement.
6. Severability. The unenforceability of any provision of this agreement
will not affect the enforceability or validity of my other provision.
7. After-Acquired Consumer Goods. This security interest shall attach to
after-acquired consumer goods only to the extent permitted by law.
8. Applicable Law. This agreement will be construed according to Texas
laws.
9. Place of Performance. This agreement is to be performed in the county of
Secured Party's mailing address.
10. Financing Statement. A carbon, photographic, or other reproduction of
this agreement or any financing statement covering the collateral is sufficient
as a financing statement.
11. Presumption of Truth and Validity. If the collateral is sold after
default, recitals in the bill of sale or transfer will be prima facia evidence
of their truth, and all prerequisites to the sale specified by this agreement
and by chapter 9 of the Texas Business and Commerce Code will be presumed
satisfied.
12. Singular end Plural. When the context requires, singular new ad
pronouns Include the Plural,
13. Priority of Security Interest. This security interest shall neither
affect nor be affected by any other security for any of the obligation. Neither
extensions of any of the obligation nor releases of any of thr collateral will
affect the priority or validity of this security interest with reference to any
third person.
14. Cumulative Remedies. Foreclosure of this security interest by suit does
not limit Secured Party's remedies, including the right to sell the collateral
under the terms of this agreement. All remedies of Secured Party may be
exercised at the same or different times, and no remedy shall be a defense to
any other. Secured Party's rights end remedies include all those granted by law
or otherwise, at addition, to those specified in this agreement.
15. Agency. Debtor's appointment of Secured Party as Debtor's agent is
coupled with an interest and will survive any disability of Debtor.
SECURED PARTY DEBTOR
/s/ Harvey J. Lippman [Signature illegible]
- ------------------------------- --------------------------------
Harvey J. Lippman, Esq. Trustee General American Royalty, Inc.
d.b.a. World CallNet,Inc.
<PAGE>
This Warrant and the securities issuable upon the exercise of this Warrant, have
not been registered under the Securities Act of 1933 as amended ("Securities
Act"), and may not be sold transferred or otherwise disposed of unless (i) the
Shares are registered under the Securities Act of 1933 and the securities act of
any state applicable to such sale, or (ii) the proposed seller provides the
Company with an opinion of counsel that the securities are being sold in a
transaction which is except from the registration requirements of the Securities
Act of 1933 and any applicable state securities acts and the Company is
satisfied that no registration statement is then required and that this Warrant
and the underlying securities may be sold, transferred or ortherwise disposed of
in the manner contemplated without registration under the Securities Act of 1933
or any state securities act.
WARRANT TO PURCHASE SHARES
OF COMMON STOCK OF
GENERAL AMERICAN ROYALTY, INC. D.B.A. WORLD CALLNET, INC.
N0. 02
Warrant to Purchase
VOID AFTER 5:00 P.M., CENTRAL TIME
December 1, 2000
FOR VALUE RECEIVED, General American Royalty, Inc. d.b.a. World CallNet,
Inc., a corporation organized under the laws of Delaware (the "Company"),
promises to issue in the name of, and sell and deliver to Harvey J. Lippman, 6
Peter Cooper Road, Apartment 6A, New York, NY 10010 (the "Holder"), a
certificate or certificates for an aggregate of 31,250 shares of common Stock
(the "Shares"), at any time on or after March 1, 1999, and prior to 5:OO P.M.,
Central Time on December 1, 2000 (the "Expiration Date"), upon payment therefor
of $1.00 per Share in lawful funds of the United States of America, such amount
(the "Basic Exercise Pric") being subject to adjustment in the circumstances set
forth hereinbelow. This applicable Basic Exercise Price, until such adjustment
is made and thereafter as adjusted from time to time, is called the "Exercise
Price."
THIS WARRANT MAY NOT BE ASSIGNED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED,
OR OTHERWISE ENCUMBERED OR OTHERWISE DISPOSED OF (EXCEPT FOR ASSIGNMENT TO
AFFILIATES OF HOLDER), IT MAY NOT BE ASSIGNED, SOLD, TRANSFERRED, PLEDGED,
HYPOTHECATED OR OTHERWISE ENCUMBERED OR DISPOSED OF BY THE HOLDER, EXCEPT BY THE
HOLDER'S EXERCISE HEREOF AS SET FORTH HEREIN FOLLOWING DUE RFMSTRATION UNDER
APPLICABLE FEDERAL AND STATE SECURITIES LAWS, OR IN TWO TRANSACTIONS EXEMPT FROM
SUCH REGISTRATION,
1. Exercise of Warrant In case the Holder of this Warrant shall desire to
exercise this Warrant in whole or in part, the Holder shallsurrender this
Warrant, with the form of exercise notice on the last page hereof duly executed
by the Holder, to the Company accompanied by payment of the Exercise Price of
$1.00 per Share, subject to adjustment as noted herein.
This Warrant may be exercise in whole or in part but not for fractional
Shares. In case of the exercise in part only, the Company will deliver to the
Holder a new Warrant of like tenor In the name of the Holder evidencing the
right to Purchase the number of Shares as to witch this Warrant has not been
exercised. This Warrant, at any time prior to the exercise hereof, upon
presentation and
<PAGE>
surrender to the Company may be exchanged, along or with other Warrants of like
tenor registered in the name of the same Holder, for another Warrant or other
Warrants of like tenor in the name of such Holder exercisable for the same
aggregate number of Shares as the Warrant or Warrants surrendered.
2. Registration Rights. Upon written notice of purchasers holding the right
to acquire 51% or more of the shares underlying the Warrants, the Company agrees
to register, at the Company's expense the Shres under the Securities Act and
applicable state securities laws. Also, in the event the Company files a
registration for the registration or sale of any Shares with the United States
Securities and Exchange Commission or under the laws of any State, the Company
agrees, at the Company's expense to register this Warrant and the underlying
shares.
3. Stock Dividends a Reclassification Reorganizations Anti-Dilution
Provisions. This Warrant is subject to the following further provisions:
a. In case, prior to the expiration of this Warrant by exercise or by
its terms, the Company shall issue any shares of its Common Stock as a
stock dividend or subdivide the number of outstanding shares of Common
stock into a greater number of shares, then in such case, the number of
shares of Common Stock issuable upon conversion of the Shares underlying
this Warrant shall be proportionately increased and conversely, in the
event the Company shall contract the number of outstanding shares of Common
Stock by combining such shares of Common Stock into a smaller number of
shares of Common Stock then, in such case the number of shares of Common
Stock issuable upon conversion of the Shares underlying this Warrant shall
be proportionately decreased. If the Company shall, at any time during the
life of this Warrant, declare a dividend payable in cash on its Common
Stock and shall at substantially the some time offer to its stockholders
generally a right to purchase new shares of Common Stock from the proceeds
of such dividend or for an amount substantially equal to the dividend, all
shares of Common stock so issued shall for the purpose of this Warrant. be
deemed to have been issued as a stock dividend. Any dividend paid or
distributed upon the Common stock in shares of any other class of
securities convertible into shares of Common Stock or any other securities
shall be treated as a dividend paid In Common Stock to the extent that
shares of Common Stock are issuable upon the conversion thereof.
b. In case, prior to the expiration of this Warrant by exercise or by
its terms, the Company shall be recapitalized by reclassifying its
outstanding Common Stock into shares with a different par value or shall
thereafter reclassify any such shares in a like manner, or the Company or a
successor corporation shall consolidate, or merge with or convey all or
substantially all of its, or all or substantially all of any successor
corporations, property and assets to any other corporation or corporation
(any such corporation being included within the meaning of the term
"successor corporation" hereinbefore used in the event of any consolidation
or merger of any such corporation with, or the sale of all or substantially
all of the property of any such corporation to another corporation or
corporations), the Holder shall thereafter have the right to purchase,
pursuant to and under the terms and conditions and during the time
specified in this Warrant, in lieu of the shares of Common Stock issuable
upon conversion of the Shares underlying this Warrant and that are
purchasable upon the exercise of this Warrant, such shares of Common Stock,
securities or assets as may be issued upon conversion of the Shares
theretofore underlying this Warrant, upon the exercise
<PAGE>
of this Warrant had such recapitalization, consolidation, merger or
conveyance not taken place; and, in any such event, the rights of the
Holder to an adjustment in the number of shares of Common Stock underlying
the Shares underlying this Warrant and that purchasable upon the exercise
of this Warrant as herein provided, shall continue and be preserved in
respect to any sham, securities or assets which the Holder of this Warrant
becomes entitled to purchase.
C. Upon the occurrence of each event requiring an adjustment of the
Exercise Price or of the number of shares of Common Stock issuable upon
conversion of the Shares underlying this Warrant that are purchasable
pursuant to this Warrant in accordance with, and as required by, the terms
of Subsection (a) of this Section 3, the Company shall use its best efforts
to forthwith cause either a firm of independent certified public
accountants (who may be the regular accountants for the Company) or the
Chief Financial Officer of the Company to compute the adjusted Exercise
Price or the adjusted number of shares of Common Stock issuable upon
conversion of the Shares issuable upon exercise of this Warrant by reason
of such event in accordance with the provisions of Subsection (a) or (b).
The Company shall forthwith mail to do Holder of this Warrant a copy of
such computation, which shall be conclusive and shall be binding upon such
Holder unless contested by such Holder by written notice to the Company
within 14 days after the mailing thereof by the Company.
d. In case.
(1) the Company shall make a record of the holders of its Common
Stock for the purpose of entitling them to receive, a dividend payable
(whether payable in cash, securities, property or in any other form);
or
(2) the Company shall make a record of the holders of its Common
Stock for the purpose of entitling them to subscribe for or purchase
any shares of any class or to receive any other rights; or
(3) the Company shall set a date for any reclassification other
reorganization of the capital stock of the Company, consolidation or
merger of the Company with or into another corporation, or conveyance
of all or substantially all of the assets of the Company, or
(4) the Company shall set a date for the voluntary or involuntary
dissolution, liquidation or winding upon of the Company;
then, in any such case, the Company shall mail to the Holder of this
Warrant at least 30 days prior to such record date or the date set for any
actions described In subparagraphs (d)(1) through (d)(3) above, a notice
advising such Holder of the date or expected date on which a record is to
be taken for the purpose of such dividend, distribution of rights or the
date on which such reclassification, reorganization, consolidation, merger,
conveyance, dissolution, liquidation or winding up is to take place, as the
case may be. Such notice shall also specify the date or expected date, if
any is to be fixed, as of which holders of Common Stock of record shall be
entitled to participate in said dividend, distribution of rights, or shall
be entitled to exchange their shares of Common Stock for securities or
<PAGE>
other property deliverable upon such reclassification, reorganization,
consoidation, merger, conveyance dissolution, liquidation or winding up, as
the case nay be. Each such written notice shall be given by certified mail,
postage prepaid, return receipt requested, addressed to the holder of the
Warrant at the address of such holder as shown on the books of the Company.
e. In case the Company, at any time while this Warrant shall remain
valid and unexercised, shall sell more than one-half of its property, or
dissolve, liquidate or wind up its affairs or sell or dispose of all or any
part of the assets, securities or property of any wholly-owned subsidiary,
the Holder of this Warrant shall thereafter be entitled to receive upon
exercise hereof (in lieu of such shares of Common Stock underlying the
Shares underlying this Warrant) and the same kind and amount of any
securities or assets a may be issuable, distributable or payable upon any
such sole, dissolution, liquidation or winding up with respect to such
number of shares of Common Stock of the Company as would otherwise have
been issuable upon conversion of the Shares underlying this Warrant. The
Company shall mail notice thereof by registered mail to the Holder and
shall make no distribution to the shareholders of the Company until the
expiraton of thirty (30) days from the date of such mailing; provided,
however, that in any such event if the Holder shall not exercise this
Warrant within thirty (30) days from the date of mailing such notice, all
fights herein granted not so exercised within such thirty (30) day period
shall thereafter become null and void. The Company shall not, however, be
prevented from consummating any such sale without awaiting the expiration
of such thirty (30) day period, it being the intent and purposes hereof to
enable the Holder upon exercise of this Warrant to participate in the
distribution of the consideration to be received by the Company upon any
such sale or in the distribution of assets upon any dissolution or
liquidation of the Company.
f. In the event the Company, at any time while this Warrant shall
remain valid and unexercised, shall propose to declare any partial
liquidating dividend, it shall notify the Holder of this Warrant as set
forth in Subsection (d) of this Section 3. The term "partial liquidating
dividend" shall, include a dividend in cash or other property of an amount
that, together with all other divdends in cash or other property paid or
declared and set aside for payment, is equal to or greater then 40% of the
cumulative consolidated not Income of the Company subsequent to one year
form the due hereof.
g. The provisions of this Section 3 are for the purpose of, and shall
be to the effect that upon any exercise of this Warrant the Holder shall be
entitled to receive the same amount and, kind of securities and other
property that it would have been entitled to receive as the owner at all
times subsequent to the date hereof of to number of shares of Common Stock
issuable upon conversion of the Shares purchased upon any such exercise.
4. Covenants of the Company. The Company hereby covenants and agrees that
prior to the expiration of this Warrant by exercise or by its terms:
a. The Company will not by amendment of its Articles of Incorporation,
as they may currently exist, or through reorganization, consolidation,
merger, dissolution, or see of assets, or by any other voluntary act or
deed, avoid or seek to avoid the observance or performance of any of the
covenants, stipulations or conditions to be observed or performed hereunder
by the Company, but will at all times in good faith assist, insofar as it
is able, in the carrying out of all
<PAGE>
provisions of this Warrant and in the taking of all other actions that may
be necessary in order to protect the rights of the Holder against
dilution.
b. if at any time or from time to time, the Company shall, by
subdivision, consolidation or reclassification of shares, or otherwise,
change as a whole the outstanding shares of Common Stock into a different
number or clue of shares, the number and class of shares as so changed
shall, for the purpose of each Warrant and the terms and conditions hereof,
replace the shares outstanding immediately prior to such change, and the
Warrant purchase price in effect, and the number of Shares purchasable
under each Warrant, immediately prior to the date on which such change "I
become effective, shall be proportionately adjusted.
c. Irrespective of any adjustment or chop in the Warrant purchase
price, the number of shares of Common Stock issuable upon conversion of the
Shares actually purchasable under each Warrant of like tenor, the Warrants
theretofore and thereafter issued may continue to express the Warrant
purchase price per Share and the number of shares purchasable thereunder as
the Warrant purchase price per Share and the number of Shares purchasable
were expressed on the Warrants when initially issued.
d. If at any time while any Warrant is outstanding the Company
consolidates with or merges into another corporation, firm or entity, or
otherwise enters into a form of business combination, the Holder, upon
exercise hereof, shall be entitled to purchase, with respect to each share
of Common Stock issuable upon conversion of Shares purchasable hereunder,
that number of Owns to which a holder of one (1) share of Common Stock
would have been entitled upon the occurrence of such business combination
without any change in, or payment in addition to, the Warrant purchase
price in effect immediately prior to such merger or consolidation, and the
Company shall take such step in connection with such consolidation or
merger as may be necessary to assure that all the provisions of each
Warrant shall thereafter be applicable, as nearly as reasonably may be, in
relation to any securities or property thereafter deliverable upon the
exercise of each Warrant. The Company shall not effect any such
consolidation, merger or other form of business combination unless, prior
to the consummation thereof, the successor corporation (if other than the
Company) resulting therefrom shall assume, by written istrument executed
and mailed to the registered holder of each Warrant at the address of such
holder shown on the books of the Company, the obligation to deliver to such
holder such securities, or property such holder shall be entitled to
purchase in accordance with the foregoing provisions.
e. Upon the happening of any event requiring an adjustment of the
Warrant purchase price hereunder, the Company shall forthwith give written
notice thereof to the registered Holder of each Warrant, stating the
adjusted Warrant purchase price and the adjusted number of shares of Common
Stock issuable upon conversion of shares purchasable upon the exercise
thereof resulting from such event, and setting forth in reasonable detail
the method of calculation. The certificate of either the Company's
independent certified public accountants or Chief financial officer shall
be conclusive evidence of the correctness of any computation made hereunder
unless contested by a Holder by written notice to the Company within 14
days after the mailing thereof by the Company. Notice pursuant to this
paragraph shall be given by certified mail, postage prepaid,
<PAGE>
return receipt requested, addressed to the registered holder of each
Warrant at the address of such holder appearing in the records of the
Company.
f. The Company shall at all times reserve and keep available, out of
its authorized and unissued capital stock, solely for the purpose of
providing for the exercise, forthwith upon the request of the Holder of the
Warrant(s) then outstanding and in effect, such numbers of shares of Common
Stock as shall, from time to time, be sufficient for the conversion of
Shares upon such exercise of the Warrants. The Company shall, from time to
time, in accordance with the laws of the State of Delaware, increase the
authorized amount of its capital stock, if at any time the number of shares
of Common remaining unissued and unreserved for other purposes shall not be
sufficient to permit the exercise of do Warrants then outstanding and in
effect.
g. The Company covenants and agrees that all shares that may be issued
upon the exercise of the rights represented by this Warrant will, upon
issuance be validly issued, fully paid and non-assessable, and free from
all taxes, liens and charges with respect to the issue thereof (other than
taxes in respect of any transfer occurring with such issue). The Company
further covenants and agrees that, during the period within which the
rights represented by this Warrant may be exercise, the Company will at all
times have authorized and reserved a sufficient number of shares of its
Common Stock to provide for the conversion and exercise of the rights
represented by this Warrant.
6. Loss, Theft, Destruction or Mutilation. In case this Warrant shall
become mutilated or defaced or be destroyed, lost or stolen, the Company shall
execute and deliver a new Warrant in exchange for and upon surrender and
cancellation of such mutilated or defaced Warrant or in lieu of and substitution
of such Warrant so destroyed, lost or stolen, upon the Holder of such Warrant
filing the Company such evidence satisfactory to it that such Warrant has been
so mutilated, defaced, destroyed, lost or stolen and of the ownership thereof by
the Holder; provided, however, that the Company shall be entitled, as a
condition to the execution and delivery of such new Warrant, to demand indemnity
satisfactory to it and payment of expenses and charges incurred in connection
with the delivery of such new Warrant, except that no bond shall be required
from the Holder. All Warrants so surrendered to the Company shall be canceled.
7. Record Owner. At the time of the surrender of this Warrant, together
with the form of subscription properly executed and payment of the Exercise
Price, the person exercising this Warrant shall be deemed to be the Holder of
record of the shares of Common Stock deliverable upon such exercise, in whole,
or in part, notwithstanding that the stock transfer of the Company shall then be
closed or that certificates representing such shares of Common Stock shall not
then be actually delivered to such person. The Company will pay all totes with
respect to the issuance of this Warrant or the shares of Common Stock issuable
upon exercise hereof, or thereof
8. Fractional Shares. No fractional Shares, fractional shares or scrip
representing fractional shares of Common Stock shall be issued upon the exercise
of this Warrant or conversion of the Shares. With respect to any fraction of a
Share called for on such exercise, the Holder may elect to receive, and the
Company shall pay to the Holder, an amount in cash equal to such fraction
multiplied by the Exercise Price. In the alternative, the Holder may elect to
remit to the company
<PAGE>
an amount in cash equal to the difference between such fraction and one,
multiplied by the Exercise Price, and the Company will issue the Holder one
share of Preferred Stock in addition to the number of whole shares required by
the exercise of the Warrant; provided, however, that the Company shall not be
obligated by the operation of this Section 8 to issue Shares in the aggregate
exceeding the number of shares duty registered in accordance with the applicable
federal and state securities laws or as to which an exemption from registration
has been determined to be available.
9. Call-Provision. The Company may call the warrants represented hereby in
the event that prior to the Exercise Date, provided the Company has registered
the underlying Shares, and the average closing price of the underlying common
stock as adjusted herein, on any stock exchange, public bulletin board or other
market place for any twenty market days equals or exceeds $6.00 per share (US).
Such prices may be any combination of such markets and must not be from only one
source. Such call must be exercised by the Company giving ten days prior written
notice of the call to the holder hereof. After receipt of notice of call, the
holder may exercise the warrant as provided herein up until the expiration of
the notice period. The call price shall be $1.00 per share of underlying shares
and shall be tendered to holder upon expiration of the notice period. After
tender of the call price, if the warrant is not exercised prior thereto, the
warrant shall cease to exist.
10. Original Issue Taxes. The Company will pay all United States, state and
local (but not foreign) original issue taxes, if any, upon the issuance of this
Warrant or the Shares deliverable upon exercise hereof or the shares of Common
Stock upon conversion of the Shares.
11. Mailing of notices, etc. All notices, and other communications from the
Company to the Holder of this Warrant shall be mailed by first-class registered
or certified mail, return receipt requested, postage prepaid, to the Holder, at
the address set forth in the records of the Company, or to such other address
furnished to the Company in writing from time to time by the Holder of this
Warrant. All notices from the Holder of this Warrant to the Company shall be
mailed to the Company at General American Royalty, Inc. d.b.a. World CallNet,
Inc., Beacon House Meridian Gate, 207 Marsh Wall, London, E149YT, United
Kingdom, Attention: Paul Goodman-Simpson, President.
12. Registration Under the Securities Act of 1933. This Warrant and the
Shares issuable upon exercise of this Warrant have not been registered under the
Securities Act or the securities acts of any state or foreign country by virtue
of the Registration Statement. This Warrant and all replacement Warrants and all
Shares issued upon exercise of the Warrant shall bear the following legend
(unless a current registration statement for such shares is in effect):
This Warrant, and the securites issuable upon the exercise
of this Warrant, have not been registered under the
Securites Act of 1933, as amended ("Securities Act") and may
not be sold, transferred or otherwise disposed of unless (i)
the Shares are registered under the Securities Act of 1933
and the securities act of any state applicable to such
sale, or (ii) the proposed seller provides the Company with
an
<PAGE>
opinion of counsel that the securities are being sold in a
transaction which is except from the registration
requirements of the Securities Act of 1933 and any
applicable state securities acts and the Company is
satisfied that no registration statement is then required
and that this Warrant and the underlying securities may be
sold, transferred or otherwise disposed of in the manner
contemplated without registration under the Securities Act
of 1933 or any state securities act.
13. Laws of the of Delaware. This Warrant shall be governed by, interpreted
under and construed in all respects in accordance with the laws of the State of
Delaware, irrespective of the place of domicile or residence of any party. In
the event of a controversy arising out of the interpretation, construction,
performance or breach of this Warrant, the parties hereby agree and consent to
the jurisdiction and venue of any State or Federal court of competent
jurisdiction.
14. Entire Agreement and Modification. The Company and the Holder of this
Warrant hereby represent and warrant that this Warrant is intended to and does,
contain and embody all of the understandings and agreements, both written and
oral, of the parties hereto with respect to the subject matter of this Warrant,
and that there exists no oral, agreement or understanding express or implied,
whereby the absolute, final and unconditional character nature of this Warrant
be in any way invalidated, empowered or affected. A modification or waiver of
any of the terms, conditions or provisions of this Warrant shall be effective
only if made in writing and executed with the same formality as this Warrant.
This Warrant will become wholly void and of no effect and the rights
evidenced hereby Will terminate unless exercised in accordance with the terms
and provision hereof at or before 5:00 P.M., London Time, on the Expiration
Date.
IN WITNESS WHEREOF, the Company by its duty authorized officer has executed
this Warrant on this 30 day of November, 1998
Attest: General American Royalty, Inc,
d.b.a World CallNet, Inc..
/s/ L. Thompson By: /s/ Paul Goodman-Simpson
- -------------------- -----------------------------------
Paul Goodman-Simpson, President
<PAGE>
FORM OF EXERCISE
The undersigned hereby irremovably elects to exercise the purchase rights
represented by this Warrant for, and to purchase thereunder, ___________ Shares
of General American Royalty, Inc. d.b.a. World CallNet, Inc., a corporation, and
herewith makes payment of $1.00 per share, or at total of $________ therefor,
and requests that such Shares be issued to:
- ----------------------------------------------
(Print Name)
- ----------------------------------------------
(Address)
- ----------------------------------------------
(Taxpayer Identification Number)
Dated:
---------------------- ---------------------------------------
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM WORLD
CALLNET, INC. REPORT ON FORM 10-QSB FOR THE THREE MONTHS ENDED DECEMBER 31,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001014491
<NAME> WORLD CALLNET, INC.
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 847
<SECURITIES> 204
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 847
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1070
<CURRENT-LIABILITIES> 1406
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> (443)
<TOTAL-LIABILITY-AND-EQUITY> 1070
<SALES> 35
<TOTAL-REVENUES> 35
<CGS> 0
<TOTAL-COSTS> 461
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6
<INCOME-PRETAX> (425)
<INCOME-TAX> 0
<INCOME-CONTINUING> (425)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (425)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
