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 nine months ended June 30, 2000
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 August 10, 2000 there were 17,671,304 shares of registrant's
common stock outstanding.
Transitional Small Business Disclosure Format (Check One): Yes No X
--- ---
1
<PAGE>
REGISTRANT'S DISCLAIMER STATEMENT RE: PRIVATE SECURITIES LITIGATION REFORM ACT
AND OTHER MATTERS
The statements in this Report on Form 10-QSB and in other filings by
World CallNet, Inc. (the "Company") with the Securities and Exchange Commission,
or in press releases issued by the Company that are not based on historical
information are considered forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including statements regarding the
Company's projections, hopes, expectations, intentions, beliefs or strategies
regarding the future. Forward-looking statements include, but are not limited
to, plans discussed in the Company's Form 10-K for the period ended September
30, 1999, in the section entitled "Description of Business" regarding: (i) its
plans to market its proprietary MailTV products in Europe, North America, South
America and Asia Pacific, (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 belief that the
majority of its future revenues will be derived from MailTV and its ownership of
CallNet Plc, which earns a share of telephone toll revenues from companies that
provide telephone service to their customers, and (v) the belief that its
products and services will appeal to the many segments of the Internet market;
its statement in Legal Proceedings that the outcome of any legal proceedings and
claims against the Company will not have a material adverse effect on the
Company's business, operating results, and financial condition; and statements
in Liquidity and Capital Resources regarding (i) the statement that the Company
has a working capital deficit and has generated significant operating losses to
date, (ii) the projection that additional capital from additional placements of
bridge notes, the sale of debt or equity securities, the entering into of other
financial instruments, the sale or joint venturing of assets or businesses to
fund operating expenses will be necessary for the Company to survive
financially, (iii) the expectation that product development and manufacturing
costs will be borne by the Company and business partners, (iv) the estimate of
property and/or significant capital equipment expenditures for the next twelve
months, (v) the expectation that Internet related revenues derived from its
proprietary MailTV products and ownership of CallNet Plc will be the primary
source of internal liquidity and sales of products that are designed to
facilitate new Internet access will be a secondary source of internal liquidity,
and (vi) the anticipation that the year 2000 will not have a material impact on
the Company.
On August 1, 2000 Shareholders representing in excess of 50% of the
Company's voting stock by Action without Meeting, and in accordance with Section
228 of the Delaware Corporations Code and Section 11 of Article II of the
By-laws of the Corporation, removed the Company's executive Directors and
appointed a new executive board. The Company therefore advises that the
statements in the previous paragraph are those of previous management and until
the Company's newly elected board has had sufficient time to review the
Company's operations and affairs the current Management is not in any position
to comment on any prior forward-looking statement or claim previously made by
the Company or its past Management.
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."
2
<PAGE>
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.; WCN Ltd.; and Worldnet Communications, Inc.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Financial information required by Item 301(b) of Regulation S-B can be
found on the pages following Item 2 below. The financial information contained
herein for the nine months ended June 30, 2000 is unaudited but includes all
adjustments that the Company considers necessary for a fair presentation of the
results for such periods. The financial information should be read in
conjunction with the financial statements for the year ended September 30, 1999
included in the Company's Annual Report on Form 10-KSB. Operating results for
the nine months ended June 30, 2000 are not necessarily indicative of the
results that may be expected for the entire year ended September 30, 2000.
Item 2. Management's Discussion and Analysis or Plan of Operation.
During 1998 the Company sold all of its interests in oil and gas royalty
properties for cash and, after repayment of debt and accounts payable, became a
publicly traded shell. In October 1998, the Company completed the acquisition of
World Wide Communication (Holdings) Ltd. ("WWCH"), in a transaction accounted
for as a reverse acquisition. As a result, the Company became the successor to
the business and financial operations of WWCH, including its fiscal yearend of
September 30. WWCH began operations in January 1998 and this report includes
historical data since that date. In January 1999, the Company changed its name
to World CallNet, Inc.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Since incorporation in January 1998, the Company has been involved
primarily in capital formation activities, refinement of its business strategy
and development of relationships with industry partners. The Company's principal
external source of capital for developing its products and services has been
proceeds from bridge debt financing and the private placement of common stock.
It is the view of the current Company Board, since appointment two weeks ago and
on a limited corporate review to date, that additional placements of bridge
notes, the sale of equity securities, the entering into of other financial
instruments, the sale or joint venturing of assets or businesses to fund
operating expenses will be necessary for the Company to survive financially.
In September 1999, the Company entered into an agreement with
Australian-based MailTV Pty Limited to sell up to 14,500,000 shares of its
common stock for cash and equity ownership in MailTV Pty. Limited's Dallas based
parent company, KeyClub.net, Inc. As of the date of this report the sale of
4,143,915 shares the Company's common stock to MailTV Pty Limited have been
completed pursuant to the terms of the agreement. The Company received a total
of $3,884,920 in cash and 653,125 shares of common stock of KeyClub.net, Inc.
the parent company of MailTV Pty, in consideration for the 4,143,915 shares of
the Company's common stock.
3
<PAGE>
Under the terms of the agreement MailTV Pty Limited can purchase an
additional 10,356,085 shares of the Company's common stock on the same terms. It
is uncertain whether any additional sales of common stock will be completed
pursuant to the agreement. The Company's board is currently reviewing MailTV
Pty. Limited's claim of various breaches of Agreement by the Company, the
non-completion of Conditions Precedent by the Company and possible commercial
resolution between the Company, MailTV Pty. Limited and KeyClub.net, Inc.
In January 2000, the Company completed a private placement of common stock
totaling $2,362,500 at $1.75 per share. The Company also completed in April
2000, a private placement of common stock totaling $3,981,112 at $4 per share.
Since August 1999, the Company has raised capital from the sale of its common
stock totaling approximately $10,075,000, net of cash commissions.
Approximately $585,500 of the proceeds from the aforementioned sales of
common stock was used to repay bridge notes payable and accrued interest. Since
October 1, 1999, the Company has spent approximately $490,000 on capital
expenditures including plant/office equipment, furniture and software billing
system. The balance has been used as working capital and to pay the costs
incurred in an unsuccessful proposed public offering and merger by CallNet Plc.,
a wholly owned subsidiary of the Company.
As of June 30, 2000, the Company had a net working capital deficit of
approximately $1,100,000. For the nine months ended June 30, 2000, the Company
used $6,764,077 in cash by operations and has incurred $15,068,303 in operating
losses since its inception. To date, the Company has met its working capital
needs through private placement sales of its common stock for cash and the
issuance of common stock to repay debt obligations to certain creditors.
On March 31, 2000, bridge notes payable of $1,137,500 plus accrued interest
of $57,500 were repaid in exchange for 891,787 shares of the Company's common
stock. The transaction included the exercise of 487,500 stock purchase warrants
at $1 per share, with the remaining $707,500 of principal and accrued interest
exchanged for common stock at $1.75 per share.
Subsequent to June 30, 2000, Shareholders representing in excess of 50%
of the Company's voting stock, by Action without Meeting removed the Company's
executive directors and appointed a new executive board on Tuesday, August 1,
2000 (See Part II, Item 5, Other Information).
Since appointment of a new board on August 1, 2000, the Company is
reviewing its investment in CallNet Plc., which incurred an operating loss of
approximately $6,100,000 for the nine months ended June 30, 2000. The
unprofitable economics of providing Internet service at no charge to CallNet
Plc's subscribers has resulted in the discontinuation of CallNet's free 0800
Internet access programs. The Company has implemented a pay as you go fee
structure for existing customers. Currently, the possible sale of CallNet Plc to
unaffiliated third parties is being investigated by the Company as are possible
listing opportunities.
The Company's principal product is MailTV, an affordable alternative to
purchasing a computer that provides the user access to text based Internet
services such as email, on-line stock quotes and other similar services. With
MailTV a connection to a local telephone service and a television set are the
only requirement.
4
<PAGE>
MailTV chips are either embedded into new television sets or available as a
retrofit device or set top box for existing televisions sets and are intended to
be available for a price significantly lower than rival "Web TV" units.
The Company is currently reviewing all its plans for future business
operations. The Company will require substantial capital to implement any
revised business plan. The Company is considering ways that costs of product
development, manufacturing and marketing of its MailTV products may be financed
through the sale of the Company's equity securities, from joint venture partners
seeking an economic interest in the MailTV technology, or through its
relationship with MailTV Pty. Limited or KeyClub.net, Inc.
The Company has incurred significant net losses since inception, which
raises substantial doubt about the Company's ability to continue as a going
concern. If additional financing is not successfully completed and if the
Company is not able to obtain additional financing arrangements, it may be
unable to meet its continuing operational obligations, pursue its basic business
strategy, take advantage of new opportunities, develop or enhance existing
products, or respond to competitive pressures and financial or marketing
hurdles. Such inability could have a materially adverse effect on the business,
operating results and financial condition.
Moreover, the estimated cost of the proposed expansion of the Company's
production and marketing activities is subject to numerous uncertainties,
including the problems, expenses, difficulties, complications and delays, many
of which are beyond management's control, frequently encountered in connection
with the establishment and development of new business activities, and may be
affected by the competitive environment in which the Company is operating.
Accordingly, there can be no assurance that the Company will complete the
proposed expansion of production and marketing activities described herein.
The Company is reviewing its capital expenditure budgets for projected
future needs for plant and/or significant capital equipment. The Company is also
reviewing and evaluating its commitment to complete the development and
implementation of an integrated telecommunications billing system started in
March 2000.
The Company has implemented certain changes, as necessary, to its
information systems and accordingly does not anticipate any material year 2000
issues from its own systems, programs or from any of its products. The impact of
such issues on the Company's suppliers, customers, vendors and financial service
organizations is not expected to have an adverse effect on the Company.
RESULTS OF OPERATIONS
---------------------
The presentation of the results of operations with respect to revenues and
related production and development costs is based on the comparison of results
for the nine and six months ended June 30, 2000 and March 31, 2000,
respectively. Since the Company did not commence any of its significant business
operations until October 1999, a comparison of fiscal year 2000 revenues and
related production and development costs to the corresponding periods in 1999
would not be a relevant comparison.
5
<PAGE>
Revenues for the nine months ended June 30, 2000 totaled $1,283,801
compared to $933,540 for the six months ended March 31, 2000. Revenues of
approximately $360,000, consisting of rebates and discounts for long distance
telephone services and CallNet 0800 telephony usage earned from CallNet Plc's
subscribers during the six months ended March 31, 2000 became uncollectible and
were charged to bad debt expense in the quarter ended June 30, 2000. Such
revenues were not remitted to CallNet Plc by two companies that were obligated
to provide telephone service to CallNet customers pursuant to revenue sharing
agreements. As a result of the loss of these two telephone service providers,
revenues declined proportionately for the three months ended June 30, 2000
compared to the six months ended March 31, 2000.
Production and development costs attributable to revenues for the nine
months ended June 30, 2000 totaled $4,046,399 compared to $1,875,855 for the six
months ended March 31, 2000. CallNet Plc's agreement with North American Gateway
("NAG") and WCN Ltd. (an unaffiliated entity included as the telephony service
provider in the unsuccessful CallNet Plc proposed merger with a London Stock
Exchange company and public offering in the UK) required these two entities to
pay all of the interconnect charges for telephone usage by CallNet Plc internet
customers. NAG and WCN Ltd., both switchless resellers of telephone services,
breached contracts with CallNet Plc by not paying interconnect charges for
CallNet Plc's customers telephone usage and failed to remit any rebates or fees
earned for long distance calls placed by its customers. The Company has included
the interconnect charges in its production and development costs for the three
and nine months ended June 30, 2000.
General and administrative expenses increased from $1,447,547 for the nine
months ended June 30, 1999, to $6,200,379 for the nine months ended June 30,
2000. The increase was due to the cost of additional personnel, infrastructure
and facilities necessary to meet the growth in the Company's operations. Since
the launching of CallNet 0800 free Internet access in October 1999, the Company
has added additional fulltime employees in response to the significant growth in
new subscribers. General and administrative expenses for the three months ended
June 30, 2000 were $3,159,678 compared to $537,602 for the three months ended
June 30, 1999. The extraordinary increase was primarily due to the factors
described above as well as expenses in the current quarter related to the
unsuccessful proposed merger with a London Stock Exchange company and public
offering in the UK. In connection with the proposed transaction the Company
incurred approximately $435,000 in due diligence expenses, including legal fees,
audit costs, travel expenses, etc. during the three months ended June 30, 2000.
Interest expense (before amortization of discount) for the nine months
ended June 30, 2000 decreased when compared to the nine months ended June 30,
1999 due to the repayment of $500,000 of bridge notes in October 1999.
Amortization of the remaining discount related to such debt was $195,049 for the
nine months ended June 30, 2000 and was $132,507 for the nine months ended June
30, 1999. The discount related to the value, as calculated using the Black
Scholes options pricing model, of stock purchase warrants issued in connection
with the bridge notes.
Depreciation and amortization for the nine months ended June 30, 2000, is
primarily composed of $739,350 of amortization of the excess cost over book
value of the assets of CallNet Plc, which became a 100% owned subsidiary of the
Company in September 1999.
6
<PAGE>
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 the objectives
in 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 and further the Company
may not be able to continue operations.
COMPETITION
-----------
The online services and Internet markets are highly competitive. The
Company believes that existing competitors, which include, among others,
commercial online services such as America OnLine and Dixon's FreeServe,
Internet-based services, including, among others, the Microsoft Network, and
Internet service providers, including various national and local independent
Internet service providers as well as long distance and regional telephone
companies, including, among others, British Telecommunications and Cable &
Wireless Communications and various other regional telephone operating
companies, are likely to enhance their service offerings. In addition, new
competitors, including Internet directory services and various media and
telecommunications companies, have entered or announced plans to enter the
online services and Internet markets, resulting in greater competition for the
Company. Many of the direct competitors and possible future competitors referred
to above have significantly greater financial, technical, marketing and
personnel resources than the Company. These factors may have a material adverse
effect on the Company's financial condition and operating results. In addition,
in response to increased competition, the Company may adopt additional
strategies designed to continue the growth in its subscriber base, such as new
marketing programs and promotional offers and implementation of new pricing
programs. Such strategies may result in an increase in costs as a percentage of
revenue.
The business of providing Internet access services is new, extremely
competitive, rapidly evolving and subject to rapid technological change. World
CallNet expects that such competition will intensify significantly in the near
future. A number of companies are developing or have introduced devices and
technologies to facilitate access to the Internet via a television. 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 of World
7
<PAGE>
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 has devoted 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.
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 to provide data communications access to its service. Any damage or
failure that causes interruptions in 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
------------------------------
The Company has aggressively promoted its service offerings to increase its
market share and achieve growth its subscriber base. The Company may implement
other strategies designed to facilitate subscriber growth. The costs associated
with the rapid growth in its subscriber base and investments in customer support
have placed, and will continue to place, pressures on the Company's operating
margins.
The Company may adopt additional strategies designed to continue the
growth in its subscriber base, such as new marketing programs and promotional
offers. Such strategies may result in an increase in costs as a percentage of
revenues. In addition, acceleration in the growth of its subscriber base,
changes in usage patterns among members or continuing investments in content may
also increase costs as a percentage of revenues. As a result, the Company does
not believe its operating margins have stabilized. There can be no assurance
that the Company's operating margins will not be adversely affected in the
future by such strategies or other conditions.
8
<PAGE>
SEASONALITY
-----------
Subscriber acquisition is expected to be highest in the second and third
calendar quarters, when sales of new computers and computer software are highest
due to the holiday season. Customer usage is expected to be lower in the summer
months due largely to extended day light hours and competing outdoor leisure
activities.
MANAGING A RAPIDLY GROWING AND CHANGING BUSINESS
------------------------------------------------
The Company continues to experience major changes in its operations
resulting from rapid expansion of its business and other factors, which have
placed significant demands on its administrative, operational and financial
resources. The Company's future performance will depend in part on its ability
to manage its growth and to adapt its administrative, operational and financial
control systems to the needs of the expanded entity. The failure of management
to anticipate, respond to and manage changing business conditions could have a
material adverse effect on the Company's business and results of operations.
ACCESS TO CONTENT PROVIDERS
---------------------------
As competition in the online services market intensifies, it may become
more difficult or expensive to secure and retain content and/ or content
providers. The Company generally pays royalties to its content providers under
short term renewable agreements, and there can be no assurance that the loss of
a number of content providers or significantly increased costs to maintain
certain content providers would not have a material adverse effect on the
Company's business.
NEW BUSINESSES AND INTERNATIONAL VENTURES
-----------------------------------------
The Company pursues new products and services to diversify its sources of
revenue and leverage its technological and other competencies. There can be no
assurance that the Company will be able to successfully develop, or achieve
commercial acceptance for, these new products and services. The Company intends
to offer online services internationally through either wholly owned operations
or through joint ventures with existing Internet service providers of
telecommunications companies. There can be no assurance that the Company or its
partners will be able to successfully market, sell and deliver its services in
these markets. In addition, there are certain significant risks inherent in
doing business on an international level, such as laws governing content that
differ greatly from country to country, unexpected changes in regulatory
requirements, political risks, export restrictions, export controls relating to
encryption technology, tariffs and other trade barriers, fluctuations in
currency exchange rates, issues regarding intellectual property and potentially
adverse tax consequences, any or all of which could impact the Company's
international operations.
9
<PAGE>
CHANGING TECHNOLOGIES
---------------------
As online services evolve, the Company will be required to offer
technological advances such as improved data compression and delivery of voice
and full motion video. Currently, online services are accessed primarily by
personal computers via modem. As online services become accessible by screen
based telephones, television or other consumer electronic devices, and become
commercially deliverable over other wired conduits such as coaxial and fiber
optic cable, the Company may have to develop new technology or modify its
existing technology to keep pace with these developments. Pursuit of these
technological advances will require substantial expenditures, and there can be
no assurance that the Company will succeed in adapting its online service
business to alternate access devices and conduits.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
---------------------------------------------
Changes in the regulatory environment relating to the telecommunications
and media industry could have an adverse effect on the Company's business. The
Company cannot predict the likelihood that any such legislation will pass, or
the financial impact, if any, the resulting regulation may have. Moreover, the
applicability to online service and Internet access providers of existing laws
governing issues such as intellectual property ownership, libel and personal
privacy is uncertain. The law relating to the liability of online service
companies and Internet access providers for information carried on or
disseminated through their systems is currently unsettled and has been the
subject of several recent private lawsuits. If similar actions were to be
initiated against the Company, costs incurred as a result of such actions could
have a material adverse effect on the Company's business.
RELIANCE ON KEY PERSONNEL
-------------------------
The Company's success depends in part upon the performance of its executive
officers and other key employees. The loss of the services of one or more of its
key personnel could have a material adverse effect on the Company. In August
2000, three directors who also served as executive officers of the Company were
removed by the vote of a majority vote of the Company's shareholders. There can
be no assurance that the Company will be successful in attracting new
experienced personnel or retaining such personnel.
RELIANCE ON THIRD PARTIES
-------------------------
The Company depends substantially upon third parties for several critical
elements of its business, including revenue sharing and Internet routing
agreements with telecommunications companies and the Company's agreement with
ZiLOG, Inc. pursuant to which ZiLOG, Inc. has agreed to manufacture and supply
MailTV chips to television manufacturers. ZiLOG has informed the Company on June
30, 2000 that it was very disappointed with the progress of the MailTV product
and that until further notice, although it will continue to supply chips against
firm orders, it will otherwise place the MailTV project on maintenance. The
Company's newly appointed executives have made arrangements for discussion and
negotiation with ZiLOG which they are hopeful will lead to a re-instatement of
full project support of MailTV by ZiLOG. The Company proposes to outsource the
manufacture of its MAILTV retrofit keyboards from an outside manufacturer
pursuant to purchase orders placed from time to time. The Company 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.
10
<PAGE>
INTELLECTUAL PROPERTY ISSUES
----------------------------
The Company regards its patents, patent applications, trademarks, trademark
applications, trade dress, trade secrets and similar intellectual property as
critical to its success, and the Company will rely upon patent law, trademark
law, trade secret protection and confidentiality and/or license agreements with
its employees, customers, partners and others to protect its proprietary rights.
There can be no assurance that the steps taken by the Company to protect any of
its proprietary rights will be adequate or that third parties will not infringe
or misappropriate the Company's patents, trademarks, trade dress and similar
proprietary rights. In addition, there can be no assurance that other parties
will not assert infringement claims against the Company.
VOLATILITY OF SHARE PRICE
-------------------------
The market price of the Company's Common Stock has a history of volatility.
Factors such as quarterly variations in financial results and membership growth
and usage, new pricing strategies, the announcement of technological
innovations, mergers, acquisitions, strategic partnerships or new product
offerings by the Company or its competitors, the entrance of new competitors
into the online services market and changes in content providers may have a
significant impact on the market price of the Common Stock. Moreover, the Common
Stock could experience price volatility based on market conditions.
SALES OF COMMON STOCK
---------------------
Sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices of the Common Stock. The warrants that
have been issued by the Company since the reverse acquisition of WWCH have
provided for demand and piggyback registration rights. Exercise of such
registration rights could increase the number of shares of Common Stock sold in
the public markets.
11
<PAGE>
WORLD CALLNET, INC.
CONSOLIDATED BALANCE SHEET
(Expressed in U.S. Dollars)
AS OF JUNE 30, 2000
(Unaudited)
---------
ASSETS
------
CURRENT ASSETS:
Cash $ 1,705,103
Trade accounts receivable, net of allowance for doubtful
accounts of $368,937 137,986
Prepaid expenses and other current assets 449,722
------------
Total current assets 2,292,811
------------
OTHER ASSETS:
Investment in marketable equity securities 326,563
Furniture and equipment, net at cost 495,305
Goodwill, net of accumulated amortization of $821,500 4,001,565
Other intangible assets, net 157,178
Bonds, deposits and other assets 215,262
------------
Total other assets 5,195,873
------------
$ 7,488,684
Total assets ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses 3,443,943
------------
Total current liabilities 3,443,943
------------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value; 10,000,000 shares
authorized, no shares issued or outstanding --
Common stock, $0.001 par value; 100,000,000 shares authorized:
18,171,304 shares issued and 17,671,304 shares outstanding 18,171
Additional paid-in capital 19,643,430
Accumulated deficit (15,068,303)
Treasury stock, 500,000 shares, at cost (482,000)
Valuation allowance for investment securities (401,343)
Foreign currency translation adjustment 334,786
------------
Total stockholders' equity 4,044,741
------------
Total liabilities and stockholders' equity $ 7,488,684
============
See accompanying notes to these financial statements.
12
<PAGE>
<TABLE>
<CAPTION>
WORLD CALLNET, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Expressed in U.S. Dollars)
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
Three Months Nine Months
Ended Ended
June 30, June30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 350,261 $ 38,886 $ 1,283,801 $ 157,363
COSTS AND EXPENSES:
Production and development 2,170,544 2,385 4,046,399 2,385
General and administrative 3,159,678 537,602 6,200,397 1,447,547
Interest expense -- 119,943 252,591 194,762
Depreciation and amortization 317,037 7,661 881,741 9,561
------------ ------------ ------------ ------------
5,647,259 667,591 11,381,128 1,654,255
------------ ------------ ------------ ------------
NET LOSS $ (5,296,998) $ (628,705) $(10,097,327) $ (1,496,893)
============ ============ ============ ============
NET LOSS PER SHARE $ (.30) $ (.08) $ (.68) $ (.20)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES 17,494,299 7,989,000 14,886,724 7,493,000
============ ============ ============ ============
</TABLE>
See accompanying notes to these financial statements.
13
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
(Expressed in U.S. Dollars)
FOR THE NINE MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(10,097,327) $ (1,496,893)
Depreciation and amortization expense 881,741 9,561
Amortization of debt issuance costs 195,049 132,507
Issuance of common stock for services 90,000 --
Decrease in receivables 9,571 --
Increase in prepaid expenses and other current assets (350,563) (63,252)
Increase in accounts payable and accrued expenses 1,950,356 338,883
Changes in currency translation and other 557,096 15,469
------------ ------------
Net cash used by operating activities (6,764,077) (1,063,725)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in amount due from affiliate -- (644,573)
Purchase furniture and equipment (411,751) (66,053)
------------ ------------
Net cash used by investing activities (411,751) (724,207)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term indebtedness, net of financing costs -- 1,630,000
Repayment of short-term indebtedness (562,500) --
Cash received in common stock issuances and subscriptions 9,229,188 167,560
------------ ------------
Net cash provided by financing activities 8,666,688 1,797,560
------------ ------------
NET INCREASE IN CASH 1,490,860 9,628
CASH, beginning of period 214,243 1,995
------------ ------------
CASH, end of period $ 1,705,103 $ 11,623
============ ============
NON CASH TRANSACTIONS:
Purchase of net assets in reverse acquisition for common stock $ -- $ 14,872
Acquisition of CallNet Plc shares for common stock -- 500,000
Increase in investments from MailTV shares received 162,500 --
Repayment of notes payable and accrued interest with common stock 1,195,000 --
------------ ------------
$ 1,357,500 $ 514,872
============ ============
</TABLE>
See accompanying notes to these financial statements.
14
<PAGE>
WORLD CALLNET, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Expressed in U.S. Dollars
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------------
Organization and Nature of Operations
-------------------------------------
World CallNet, Inc. (the "Company") is incorporated in the United Kingdom.
The Company is primarily engaged in developing proprietary Internet devices
and software applications, developing commercial Internet websites and
operating a pay-as-you-go Internet service provider. Primarily all of the
Company's operations and customers are located in the United Kingdom as of
June 30, 2000.
Unaudited Information
---------------------
The consolidated balance sheet as of June 30, 2000 and the consolidated
statements of operations for the three and nine month periods ended June 30,
2000 and 1999 were taken from the Company's books and records without audit.
However, in the opinion of management, such information includes all
adjustments (consisting only of normal recurring accruals) which are
necessary to properly reflect the consolidated financial position of the
Company as of June 30, 2000 and the results of operations for the three and
nine months ended June 30, 2000 and 1999.
The accompanying financial statements include the accounts of the Company and
its two wholly owned subsidiaries, CallNet Plc and Overleaf Systems, Limited
("Overleaf"). Overleaf has been inactive to date. All significant balances
and transactions have been eliminated in consolidation. The foregoing notes
to these financial statements include only the information regarding
transactions and events that occurred during the nine months ended June 30,
2000. These notes should be read in conjunction with the notes to the audited
September 30, 1999 financial statements.
2. TRANSACTION WITH MAILTV
-----------------------
In September 1999, the Company entered into an agreement with MailTV Pty Ltd.
("MailTV"), an Australian company, in which MailTV is to acquire up to
14,500,000 shares of the Company's common stock in two phases. The first
phase involved the Company exchanging 2,900,000 shares of its common stock
for $2,718,750 in cash and 453,125 shares of KeyClub.net, a publicly traded
company affiliated with MailTV. This phase closed on September 30, 1999,
although $1,765,530 of the cash was received in installments that were
completed in January 2000.
The second phase resulted in the Company exchanging 1,243,915 shares of its
common stock for $1,166,170 in cash and 200,000 shares of KeyClub.net. As a
result of assessment by the Company of stock trading prices of KeyClub.net,
Inc. shares since January 2000, the Company has provided a valuation
allowance of $401,343 on its investment in KeyClub.net,
15
<PAGE>
WORLD CALLNET, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Expressed in U.S. Dollars
Inc. shares. The valuation allowance reflects an adjustment to the carrying
value of the KeyClub.net shares to equal $.50 per share.
Management does not currently believe the reduction in value is permanent in
nature and has recorded it as a component of stockholders' equity.
3. NOTES PAYABLE
-------------
In October and December 1999, the Company repaid in cash $550,000 of notes
payable, plus accrued interest to three note holders. On March 31, 2000,
$1,137,500 of the remaining $1,150,000 notes payable, plus accrued interest
of $57,500 was repaid through the issuance of the Company's common stock to
the note holders. Stock purchase warrants covering 487,500 shares of the
Company's common stock were exercised at $1.00 per share and remaining
principal and accrued interest was repaid through the issuance of common
stock at $1.75 per share. A total of 891,787 shares of the Company's common
stock were issued in the exchange and warrant exercises by the note holders.
During April 2000, the remaining outstanding $12,500 of notes payable was
repaid in cash. As of June 30, 2000, 1,187,500 stock purchase warrants
applicable to the notes payable remained outstanding.
4. STOCKHOLDERS' EQUITY
--------------------
In January 2000, the Company completed a private placement of 1,350,000
shares of its common stock for total proceeds of $ 2,362,500. In connection
with the placement, the Company paid a cash commission of $37,100 and issued
150,000 shares of its common stock.
On February 24, 2000, the Company's stockholders approved the following
proposals:
o An amendment to the Company's Stock Option Plan to increase the number
of shares to be issued under such plan from 1,000,000 to 3,000,000.
o An amendment to the Company's Second Amended and Restated Certificate
of Incorporation to increase the authorized number of shares of common
stock from 30,000,000 to 100,000,000.
On April 19, 2000, the Company completed the private placement of $3,981,112
of its common stock at $4.00 per share. In connection with the offering, the
Company paid a cash commission of $112,500 and is obligated to issue 28,125
shares of its common stock.
16
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities.
Not Applicable
Item 3. Defaults on Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
On August 1, 2000, Company shareholders representing in excess of 50% of the
Company's voting stock resolved to dismiss the Company's executive directors,
Mr. Paul Goodman-Simpson, Mr. Aaron Goodman-Simpson and Mr. Keith Goodyer.
Mr. John Kahlbetzer, Mr. Graham Avery and Mr. Peter Cordas were elected as new
directors. At a Board of Directors Meeting following, Mr. Gerard Farley, an
existing non-executive director was appointed Company President, Mr. Graham
Avery was appointed Chairman and Chief Executive Officer and Mr. Peter Cordas
was appointed as Vice President Corporate Finance. Mr. Peter Boonen continues as
a director of the Company.
The Action by Shareholders Without Meeting was in accordance with Section 228 of
the Delaware Corporations Code and Section 11 of Article II of the By-laws of
the Corporation.
17
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3.1 Certificate of Amendment to the Certificate of Incorporation
of the Company, which is incorporated by reference herein as
Exhibit 3.1 to the Company's Form 8-K, dated January 5, 1999.
3.2 Amendment to Second Amended and Restated Certificate of
Incorporation, which is incorporated by reference herein as
Exhibit 3.2 to the Company's Form 10-QSB, dated May 22, 2000.
3.2 By-laws of the Company, which are incorporated by reference
herein as Exhibit 3(ii) to Form 10 filed on March 26, 1997.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
None filed.
18
<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/ Gerard Farley
---------------------------------
Gerard Farley, President and
Director
Date: August 21, 2000
/s/ Graham Leigh
---------------------------------
Graham Leigh, Principal Financial
and Accounting Officer
Date: August 21, 2000
19
