UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington. D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the yearended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from______to_______
Commission file number 1-12835
WORLD CALLNET, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2468002
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Brecon House, Meridian Gate, 207 Marsh Wall, London E14 9YT
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code) 0171 335 8300
Securities registered under Section 12 (b) of the Exchange Act: None
Securities registered under Section 12 (g) of the Exchange Act:
Common Stock, Par Value $.001
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(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
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. ____
The registrant had revenues of $697,243 for the year ended September
30, 1999.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by using the closing price of registrant's common
stock, at December 31, 1999, was $44,407,000.
As of December 31, 1999, there were 13,471,324 shares of the
Registrant's Common Stock, par value $.001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's proxy statement dated January 13, 2000 is incorporated by
reference herein into Part III of this Annual Report on Form 10-KSB.
Transitional Small Business Disclosure Format:
Yes No X
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T A B L E O F C O N T E N T S
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PART I Page
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Item 1. Description of Business 4
Item 2. Description of Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 12
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 7. Financial Statements 15
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 28
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16 (a) of the Exchange Act 34
Item 10. Executive Compensation 34
Item 11. Security Ownership of Certain Beneficial Owners and
Management 34
Item 12. Certain Relationships and Related Transactions 34
Item 13. Exhibits and Reports on Form 8-K 34
Signature Page 36
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The statements in this Report on Form 10-KSB that are not based on
historical information are considered forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, including statements regarding the Company's
hopes, intentions, beliefs or strategies regarding the future. Forward-looking
statements include, but are not limited to, Description of Business regarding
(i) its plans to market 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
projection that its working capital will be adequate until the end of 2000, (ii)
the projection that additional capital the sale of debt or equity securities
will be necessary after the year 2000, (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.
DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
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World CallNet, Inc. (the "Company") is a Delaware corporation
incorporated on December 28, 1992 as Hermes Capital Management, Inc. It was
inactive until October 1995, when it changed its name to General American
Royalty, Inc. and became active in the oil and gas royalty business in Texas and
New Mexico. In 1998, the Company sold all of its oil and gas royalty interests
and on October 9, 1998, acquired World Wide Communications (Holdings) Ltd.
("WWCH"), a privately held United Kingdom development stage telecommunications
company based in London, England. At the date of the acquisition, WWCH
shareholders were issued 75% of the Company's outstanding capital stock and
given three of the four board of directors positions.
For financial reporting purposes the transaction was accounted for as a
reverse acquisition. WWCH was treated as the acquirer and will be the ongoing
reporting entity. This report includes only the WWCH financial statements since
its inception on January 23, 1998. The Company changed its name to World
CallNet, Inc. in January 1999.
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On September 2, 1999, the Company entered into stock purchase
agreements with the shareholders of CallNet Plc. ("PLC"), a company incorporated
in the United Kingdom, pursuant to which the Company acquired all of the issued
shares of capital stock (the "PLC Stock") of CallNet Plc, and options to
purchase CallNet Stock (the "PLC Options"), from the holders of the shares of
the PLC Stock and PLC Options, in exchange for the issuance of an aggregate of
2,544,560 shares of common stock, par value $0.001 per share, of the Company.
Prior to the completion of the exchange, the Company owned approximately 15% of
the issuedshares of the capital stock of PLC which were acquired as of October
1998 in exchange for 500,000 shares of the Company's $0.001 par value common
stock.
On September 30, 1999, the Company entered into a stock purchase
agreement with MailTV Pty Ltd. ("MailTV Pty"), a company incorporated in New
South Wales, Australia, and Paul Goodman-Simpson the Company's President and
Chief Executive Officer. Pursuant to the Agreement the Company was to issue to,
and MailTV Pty was to acquire, 14,500,000 shares of common stock of the Company,
which represents approximately 50% of the Company's issued and outstanding
shares on a fully diluted basis, for an aggregate purchase price of $13,593,750
plus 2,265,625 shares of the issued and outstanding common stock of KeyClub.net,
Inc. (the "KeyClub Shares"). KeyClub.net, Inc. ("KeyClub") is a Florida
corporation and its common stock trades publicly on the Over-the-Counter
Electronic Bulletin Board under the symbol "KEYK." KeyClub.net Inc is the
majority owner of MailTV Pty.
The parties agreed that at the first closing of the Agreement, the
Company was to issue to MailTV Pty 2,900,000 Shares (the "First Tranche Shares")
and at the second closing, which was to take place on or before December 31,
1999, the Company was to issue to MailTV Pty 11,600,000 Shares (the "Second
Tranche Shares"). The purchase price for the First Tranche Shares was to be the
payment by MailTV Pty to the Company of $2,718,750, less certain amounts
previously received by it from MailTV Pty, and 453,125 KeyClub Shares. The
purchase price for the Second Tranche Shares was to be the payment by MailTV Pty
to the Company of $10,875,000 and 1,812,500 KeyClub Shares.
MailTV Pty did not fully fund all of the amounts required pursuant to
the terms of the Agreement. As a result, the Company and MailTV Pty agreed to
amend the terms of the Agreement to provide for a multi tier Agreement pursuant
to which MailTV Pty has been granted additional time to complete its payment of
consideration totaling $13.6 million in cash and 2,265,625 million shares of
KeyClub.net.
As amended, the Agreement provides for the final closing to be deferred
to January 31, 2000. The Company may also agree to grant MailTV Pty a further
extension to allow for a settlement on February 29, 2000, should this be
required. Such extension shall be conditioned upon receipt of a further partial
payment of $2,000,000 in cleared funds and 333,333 KeyClub Shares no later than
January 31, 2000.
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The Agreement has also been amended as follows: (i) MailTV Pty has
waived any and all rights that it had, or may have, to match any offer of
funding that the Company wishes to engage in; (ii) any anti-dilution rights or
other rights to subscribe to purchase any additional Shares that MailTV Pty has,
or may have had, have been terminated; (iii) in the event that any of the
payments required to be made by MailTV Pty are not fully satisfied on or before
any of the dates provided for such payments, such event shall be deemed to
constitute an intentional breach of the covenants, representations and
warranties made by MailTV Pty contained in the Agreement, as amended, and shall
be grounds for immediate and final termination of the Agreement, as amended; and
(iv) in the event that MailTV Pty fails to satisfy any of the conditions in the
Agreement, as amended, and the Company elects to terminate the Agreement, as
amended, the Company agrees to release MailTV Pty from any damages resulting
from MailTV Pty's default in consideration for MailTV Pty's agreement that
neither the Company nor Paul Goodman Simpson shall, in any way, be liable to
MailTV Pty for any damages whatsoever resulting from termination of the
Agreement, as amended.
BUSINESS OF ISSUER
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The Company offers products and services that facilitate consumer
access to the Internet and provide business users with electronic commerce
("e-commerce") solutions. By offering free Internet access to its users the
Company has been able to generate a significant amount of Internet traffic
through its network. As a result, agreements and alliances have been developed
with telecommunications companies and retailers of consumers products that give
the Company an economic interest in revenues resulting from Internet usage.
Products that are marketed include mediums not usually associated with Internet
access such as MailTV enabled television sets and specially engineered MailTV
retrofit devices that enable Internet access through a television set without a
personal computer. The Company has concentrated its efforts on expanding
Internet access to customers in Europe, but plans to market its products in the
United States and other regions of the world including Asia Pacific.
Most companies that offer Internet access are currently focused on the
subscription or monthly fee based personal computer market. The Company believes
that a significant opportunity exists to capture business from providing
Internet connectivity without charging users any registration or monthly fees or
requiring a computer. This approach is based on the concept that virtually every
household or business in the world is a potential customer if Internet access is
free and a computer is not required. The Company's proprietary MailTV products
provide Internet access using an existing local telephone service and a
television set.
Calls made by users to connect to the Internet, either from a personal
computer or a MailTV enabled television set are directed to an Internet Service
Provider ("ISP") designated by the Company with no registration or monthly fees.
The Company has entered into an agreement with CallNet Plc , a wholly owned
subsidiary of the Company, in which the Company will license its UK ISP business
through CallNet Plc.
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The ownership of CallNet Plc is a key ingredient in the Company's plan
of operation in the UK. CallNet Plc has entered into revenue participation
agreements with certain telephone carriers, which offer basic telephone and long
distance access to the public. Under the terms of the agreements CallNet Plc is
entitled to receive a percentage of toll charges earned by the carrier or a
fixed rebate amount for calls connecting to the Internet through CallNet Plc.
CallNet Plc's revenue participation agreements with telephone carriers and joint
ventures with entities that market goods and services on the Internet are
expected to be a primary source of revenue for the Company.
PRINCIPAL PRODUCTS AND MARKETS
- ------------------------------
In the United States, local telephone service is offered for a monthly
fee with either unlimited local calls allowed or for a small surcharge after a
certain number of free minutes each month. In Europe however, and many other
territories worldwide, local telephone calls are metered and are charged at a
per minute rate. Telephone service providers have structured their
telecommunications networks to derive income from system usage rather than from
fixed access charges. These charges vary depending on the time of day, but
include all local calls used for Internet connectivity.
The Company believes that this makes monthly fee based Internet service
unaffordable for most European businesses or households. It has developed
affordable MailTV products and services that offer free Internet access through
existing telecommunications networks and television sets using CallNet Plc for
user connection in the UK. CallNet Plc offers its subscribers Internet
connections without any monthly fees or charges. The Company's goal is to
capture a high volume of traffic from customers that connect to the Internet
through CallNet Plc and MailTV. The participation in profits from telephone
usage and e-commerce generated from MailTV and CallNet Plc's Internet traffic is
the Company's principal profit center and the basis of design for all of its
products and services.
The Company offers Internet connectivity as its main product, either
through regular personal computer access or through its proprietary MailTV
products. In response to the tremendous growth in e-commerce and Internet access
in general, the Company offers its proprietary MailTV and ISP products and
services to businesses and organizations such as banks, supermarkets, retailers
and other affinity marketing groups. The Company provides the technology and
infrastructure for these business partners, enabling them to add value to market
their own Internet based products and services. By creating these alliances the
Company participates in profits generated from e-commerce and e-advertising
activities developed by such organizations.
In October 1999, Call Net Plc launched CallNet 0800 in the UK, a
completely free Internet service that provides free ISP access and no per minute
charges for telephone usage. The cost of telephone usage for connect time is
100% rebated in consideration for CallNet 0800 customers agreeing to use
CallNet's designated telephone carrier as their local and long distance carrier.
As of December 31, 1999, approximately 100,000 new subscribers had signed up for
the CallNet 0800 service. Affinity marketing programs have been completed with
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F1 (Formula One) Racing, Phones 4 U and Evesham Micros who market goods and
services through websites hosted and operated by CallNet Plc. These affinity
programs provide for profit participation by the Company from all revenues
generated from the websites.
The Company also creates opportunities to generate Internet traffic
through its proprietary MailTV products, which provide dial-up connections to
the Internet through CallNet Plc. MailTV is an affordable alternative to
purchasing a computer and is marketed using the concept of free Internet access
with no registration or monthly fees. A connection to a local telephone service
and a television set are the only requirement.
MailTV is either embedded into new television sets or available as a
retrofit device for existing televisions sets and is intended to be available
for a price significantly lower than rival "Web TV" units. All MailTV enabled
television sets and retro-fit devices are units that are pre-configured to
connect to CallNet Plc and feature text based services for home banking,
shopping, stock price tracking and email. MailTV is an online system with calls
charged at the normal local telephone rates. In addition, a host of text based
services and applications will provide e-commerce revenues through normal
televisions sets.
MailTV silicon chips are manufactured by ZiLOG, Inc. ("ZiLOG"), a major
silicon chip manufacturer based in the United States, under a joint marketing
and distribution agreement. Zilog has been promoting the MailTV chip to
television manufacturers throughout the world. The most recent agreement was
with Vestel, an OEM TV manufacturer. Under the agreement Zilog will supply
Vestel with MailTV modules, which will be incorporated into the production of
Vestel's television sets. Television sets will be distributed under various
brand names in the United Kingdom and throughout Europe in 2000.
The Company plans to expand its operation and MailTV distribution into
mainland Europe through operating subsidiaries and venture partners. If
opportunities become available, the Company may acquire other businesses or
entities to facilitate the process of establishing the Company's products and
services. Future plans call for expansion to Asia Pacific, North America, South
America, and Eastern Europe.
COMPETITIVE BUSINESS CONDITIONS
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The market for Internet products and services is highly competitive and
the Company expects that competition will continue to intensify. There are no
substantial barriers to entry in these markets and technology is advancing at a
very rapid pace. Although the Company believes its products and services will
appeal to the many segments of the Internet market, it is possible that a single
supplier of products and services similar to those of the Company may dominate
one or more market segments.
The Company competes with many other providers of Internet access and
online navigation such as America Online, Compuserve, Prodigy, Dixon's Freeserve
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and Microsoft. Many of these competitors are larger than the Company and have
substantially greater access to capital and technical resources than does the
Company and may, therefore, have a significant competitive advantage. Many of
the Company's competitors are capable of making larger expenditures to develop
and market their products and services.
Competitive conditions in the telecommunications industry could have a
significant influence on the success of CallNet Plc's ability to earn telephone
toll revenues. Arrangements that earn CallNet Plc a percentage of metered tolls
are dependent upon the telephone carrier's ability to maintain its network.
Market conditions and other factors that affect telephone carriers are beyond
the scope or control of the Company. If satisfactory agreements to share
revenues with telephone carriers cannot be maintained by CallNet Plc, the
Company would have to purchase its own telecommunications facilities.
MAJOR CUSTOMERS
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The Company's products are generally sold to the public and no single
customer is significant enough to adversely impact income if lost. The Company
will continue to develop affinity-marketing programs to generate customers for
both its proprietary MailTV and ISP products eliminating any reliance on a
single customer.
REGULATORY MATTERS
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Deregulation of the telecommunications industry has just begun in
Europe. As a result of deregulation, European telephone companies are engaged in
intense competition for local call traffic and to gain market share. The
Company's business plan is designed to take advantage of these factors in the
European telephone industry by participation in the toll charges earned by
telephone carriers from telephone connections to the Internet. CallNet Plc must
negotiate with telephone companies that own the telecommunication networks that
handle customer traffic and connection to the Internet. It is not possible to
predict the impact that deregulation will have on the Company's ability to
maintain satisfactory margins on contracts with network carriers.
EMPLOYEES
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The Company has 23 full-time employees in the United Kingdom and has
retained the services of a full-time consultant to oversee business activities
in the United States. The Company utilizes the services from third party
organizations wherever possible in order to maintain a competitive edge. The
Company's management believes it has satisfactory relations with its employees.
DESCRIPTION OF PROPERTIES
The Company leases its administrative offices located at Brecon House,
Meridian Gate, 207 Marsh Wall, in London, and a research and development site
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located in Newport Pagnell, north of London. The Company owns the patents and
intellectual property rights for MailTV and plans to commercialize these
technologies via joint venture agreements worldwide.
TRADE SECRETS AND INTELLECTUAL PROPERTY
- ---------------------------------------
The Company regards its trade secrets and intellectual property rights
as critical to its success and will rely upon applicable laws, trade secret
protection and confidentiality and/or license agreements with its employees,
customers, partners and others to 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 proprietary rights. Additionally, there can be no
assurance that other parties will not assert infringement claims against the
Company.
LEGAL PROCEEDINGS
During the ordinary course of business the Company may be subject to
various legal proceedings and claims, either asserted or unasserted. While the
outcome of these claims cannot be predicted with certainty, the Company does not
believe that the outcome of any such legal matters will have a material adverse
effect on the Company's business, operating results, and financial condition.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE COMPANY
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The executive officers of the Company and their ages as of December 31,
1999 are as follows:
Name Age Position(s)
- ---- --- -----------
Paul Goodman-Simpson 42 President and Chief Executive Officer
Aaron Goodman-Simpson 38 Vice President and Chief Financial Officer
Keith Goodyer 32 Vice-President
Richard Ibbotson 44 Secretary
The Company's executive officers are appointed by, and serve at the
discretion of, the Board of Directors. Each executive officer, with the
exception of Mr. Ibbotson, is a full-time employee of the Company. Paul
Goodman-Simpson and Aaron Goodman-Simpson are brothers.
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BUSINESS EXPERIENCE
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Paul Goodman-Simpson. Mr. Goodman-Simpson has been a director and the
president of the Company since October 9, 1998 and a managing director and a
co-founder in 1997 of WWCH, which became a wholly owned subsidiary of the
Company on October 9, 1998. From 1993 to 1997 he was the managing director of
KORE Ltd., a computer software distribution company. From 1992 to 1993 he was
Director of Sales (Far East Asia) of International Software Systems, Inc., a
software company. From 1985 to 1992 he was a salesman for two other software
companies.
Aaron Goodman-Simpson. Mr. Goodman-Simpson has been a director and the
vice president for operations and sales of the Company since October 9, 1998,
when the Company acquired all the capital stock of WWCH. He joined WWCH in 1997
as its sales director and vice president for operations. He served as the sales
director of KORE Ltd., a computer software distribution company from 1994 to
1997. From 1992 until October 1994 he was the business development manager for
Computer 2000 Datech Ltd., Europe's largest computer peripheral distributor.
From 1986 until 1992 he was a director of A & B Developments Ltd., a
construction company to which Mr. Goodman-Simpson introduced computer-aided
design to its practice.
Keith Goodyer. Mr. Goodyer is a director and vice president of the
Company since October 9, 1998 and the technical director and a co-founder in
1997 of WWCH, which became a wholly owned subsidiary of the Company on October
9, 1998. He manages WWCH's research and development facility in Newport Pagnell,
England. From 1989 until co-founding WWCH, he was an independent Internet
consultant and developer. He developed several new consumer electronics and
Internet tools including the Company's TelEmail and MailTV products. From 1992
to April 1997 Mr. Goodyer was Internet Appliance Product Manager of MSU
Corporation, a public company that designs Internet appliances, and led a
development team that produced the first Set-Top-Box for connecting television
sets to the Internet.
Richard Ibbotson. Mr. Ibbotson has been the Company secretary since
October 1998. He became a qualified solicitor in 1980. From 1981 to 1996, he was
a partner in private practice with Ashington Denton. From 1996 to date, he has
been a consultant in private practice.
MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is listed on the OTC Bulletin Board (symbol
WOWW). The first trading in the stock occurred on February 4, 1997. The
following table sets forth the high and low bid prices of the Company's common
stock, as reported by NASDAQ System Statistics furnished by NASD, during the
periods indicated. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions:
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MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is listed on the OTC Bulletin Board (symbol
woww). The first trading in the stock occurred on February 4, 1997. The
following table sets forth the high and low bid prices of the Company's common
stock, as reported by NASDAQ System Statistics furnished by NASD, during the
periods indicated. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions:
Quarter Ended HIGH LOW
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March 31, 1998 3.00 1.13
June 30, 1998 1.63 .38
September 30, 1998 1.28 .39
December 31, 1998 8.25 .88
March 31, 1999 9.00 3.13
June 30, 1999 5.38 1.13
September 30, 1999 3.06 1.06
December 31, 1999 7.31 1.28
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As of December 31, 1999, the Company had approximately 140 common
shareholders of record. Securities Transfer Corporation, located in Dallas,
Texas, serves as the Company's stock transfer agent.
During the last two years no cash dividends have been declared on the
Company's common stock. There are no restrictions that limit the Company's
ability to pay dividends on common equity stock or that are likely to do so in
the future.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During 1998 the Company sold all of its interests in oil and gas
royalty properties for cash and, after repayment of debt and accounts payable,
became a publicly traded shell. In October 1998, the Company completed the
acquisition of World Wide Communication (Holdings) Ltd. ("WWCH"), in a
transaction accounted for as a reverse acquisition. As a result, the Company
became the successor to the business and financial operations of WWCH, including
its fiscal yearend of September 30. WWCH began operations in January 1998 and
this report includes historical data since that date. In January 1999, the
Company changed its name to World CallNet, Inc.
Since incorporation in January 1998, the Company has been involved
primarily in capital formation activities, refinement of its business strategy
and development of relationships with industry partners. The Company's principal
external source of capital for developing its products and services has been
proceeds from bridge debt financing and the private placement of common stock.
Additional placements of bridge notes or the sale of equity securities to fund
operating expenses will be necessary until the Company becomes profitable.
In December 1998 and April 1999, the Company completed the private
placement of $1,150,000 and $550,000, respectively, in bridge notes. In
September 1999, the Company completed a private placement of 2,900,000 shares of
its common stock to Australian-based MailTV Pty. The agreement obligates MailTV
Pty to purchase an additional 11,600,000 shares of common stock under the same
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terms. In January 2000, the Company completed a private placement of common
stock totaling $2,362,500 at $1.75 per share. The proceeds from the
aforementioned placements of common stock were used to repay notes payable and
for working capital.
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 proprietary Internet products such as MailTV. The Company will
require substantial capital to implement its business plan, which is discussed
further in Note 2 to the Financial Statements. It is expected that costs of
product development and manufacturing these products will be borne by the
Company and business partners such as Zilog, OEM television manufacturers and
other third parties seeking to generate new technologies and MailTV applications
developed by the Company.
The Company has incurred net losses since inception of $4,587,408,
which raises substantial doubt about the Company's ability to continue as a
going concern. However, with present working capital of approximately $3,000,000
and an additional $8,900,000, which is contracted to be closed by February 29,
2000, the Company estimates it can satisfy its obligations and cash requirements
until the end of 2000. To meet its working capital obligations plus research and
development cost requirements after the end of 2000, the Company will have to
raise additional capital from external sources if cash generated from operations
is not sufficient.
The Company has estimated that expenditures for plant and/or
significant capital equipment will be approximately $1,500,000 during the next
twelve months.
If necessary, the Company will issue shares of its capital stock to
acquire assets, customers and other entities that appear to be viable business
opportunities.
The Company expects that its primary sources of internal liquidity will
be fees, toll charges and rebates earned under the terms of agreements with
telecommunications companies doing business with CallNet Plc Internet and MailTV
customers. In addition the Company will earn revenues from e-commerce activities
from both CallNet ISP and MailTV. The fundamental business strategy is to direct
telephone usage to the CallNet telecommunications network by increasing the
CallNet Plc customer base and through sales and usage of MailTV. The Company
also has agreements to earn a percentage of sales from companies that market
products and services through web sites hosted by CallNet Plc. The Company also
offers products that are designed to facilitate new Internet access. Sales of
such products and services are expected to be a secondary source of revenues for
the Company.
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 could have an adverse effect on the Company.
If the 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 our production and marketing activities is subject to
numerous uncertainties, including the problems, expenses, difficulties,
complications and delays, many of which are beyond our control, frequently
encountered in connection with the establishment and development of new business
activities, and may be affected by the competitive environment in which we are
operating. Accordingly, there can be no assurance that the Company will complete
the proposed expansion of production and marketing activities described herein.
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RESULTS OF OPERATIONS
- ---------------------
For the period from January 23, 1998 through September 30, 1998 the
Company incurred salaries and other administrative expenses related to capital
formation and development of its business plan. These expenses are reflected on
the statement of operations for the period as charges to general and
administrative expense.
For the year ended September 30, 1999, the Company earned revenues of
approximately $697,000 from licensing fees and telephone toll charges under the
terms of CallNet Plc's agreements with telecommunications companies. No revenues
were earned for the period from January 23, 1998 (date of inception) through
September 30, 1998 .
General and administrative expenses increased from $383,568 for the
period from January 23, 1998 (inception) through September 30, 1998 to
$4,866,951 for the year ended September 30, 1999. Such amount increaseddue to
the cost of additional personnel, infrastructure and facilities required for the
Company to become operational. The number of fulltime employees and consultants
increased more than 100% since September 30, 1998, as the Company emerged from
being in the development stage. Also included in general and administrative
expenses for the year ended September 30, 1999 was approximately $756,000 in
non-cash charges related to the issuance of stock options and warrants.
Interest expense for the year ended September 30, 1999, was incurred on
$1,700,000 of bridge debt that was completed in November 1998, December 1998 and
April 1999. Amortization of the discount related to such debt totaled
approximately $1,249,742 for the year ended September 30, 1999.
14
<PAGE>
FINANCIAL STATEMENTS
Page
Independent Auditor's Report 16
Consolidated Balance Sheet as of
September 30, 1999 and 1998 17
Consolidated Statements of Operations for
the Year Ended September 30, 1999 and
the Period from January 23, 1998 to
September 30, 1998 18
Consolidated Statement of Stockholders'
Equity for the Period from January 23, 1998
to September 30, 1999 19
Consolidated Statements of Cash Flows for
the Year Ended September 30, 1999 and the
Period from January 23, 1998 to September 30, 1998 21
Notes To Consolidated Financial Statements 23
15
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
World CallNet, Inc.
London, England
We have audited the accompanying consolidated balance sheet of World CallNet,
Inc. as of September 30, 1999, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the year then
ended and the period from January 23, 1998 (date of inception) to September 30,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of World CallNet, Inc.
as of September 30, 1999, and the results of its operations and its cash flows
for the year then ended and the period from January 23, 1998 (date of inception)
to September 30, 1998 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred significant losses through
September 30, 1999, which raise substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
HEIN + ASSOCIATES LLP
Dallas, Texas October 29, 1999, except for Notes 2, 4 and 11, which are Dated
January 10, 2000
16
<PAGE>
<TABLE>
<CAPTION>
WORLD CALLNET, INC.
CONSOLIDATED BALANCE SHEET
(Expressed in U.S. Dollars)
AS OF SEPTEMBER 30, 1999
ASSETS
<S> <C>
CURRENT ASSETS:
Cash $ 214,243
Trade accounts receivable, no allowance for doubtful accounts 147,557
Prepaid expenses 99,159
Stock subscription receivable 1,765,530
------------
Total current assets 2,226,489
------------
Investment in marketable equity securities 565,406
Furniture and fixtures, at cost 185,706
Goodwill, net of accumulated amortization of $82,150 4,846,917
Other intangible assets, net of accumulated amortization of $66,586 212,193
Bonds, deposits and other assets 218,819
------------
Total other assets 6,029,041
------------
Total assets $ 8,255,530
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable, net of unamortized discount 1,504,951
Accounts payable and accrued expenses 1,166,071
Accrued compensation due officers 327,516
------------
Total current liabilities 2,998,538
------------
COMMITMENTS (Note 10)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value; 10,000,000 shares
authorized, no shares issued or outstanding --
Common stock, $0.001 par value; 30,000,000 shares
authorized; 13,441,893 shares issued and 12,941,893
shares outstanding 13,442
Additional paid-in capital 10,737,002
Accumulated deficit (4,970,976)
Treasury stock, 500,000 shares, at cost (522,476)
------------
Total stockholders' equity 5,256,992
------------
Total liabilities and stockholders' equity $ 8,255,530
============
</TABLE>
See accompanying notes to these financial statements.
17
<PAGE>
WORLD CALLNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in U.S. Dollars)
FOR THE YEAR ENDED SEPTEMBER 30, 1999 AND THE PERIOD FROM
JANUARY 23, 1998 TO SEPTEMBER 30, 1998
1999 1998
----------- -----------
REVENUES $ 697,243 $ --
COSTS AND EXPENSES:
Production and development 355,586 --
General and administrative 4,879,799 383,568
Interest 114,268 --
Depreciation and amortization 180,929 --
Amortization of debt discount 1,249,742 --
----------- -----------
6,780,324 383,568
----------- -----------
LOSS BEFORE MINORITY INTEREST (6,083,081) (383,568)
MINORITY INTEREST IN LOSS OF SUBSIDIARY 1,495,673 --
----------- -----------
NET LOSS $(4,587,408) $ (383,568)
=========== ===========
NET LOSS PER SHARE (basic and diluted) $ (.57) $ (.07)
=========== ===========
WEIGHTED AVERAGE SHARES 8,110,636 5,500,000
=========== ===========
See accompanying notes to these financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
WORLD CALLNET, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(Expressed in U.S. Dollars)
FOR THE PERIOD FROM JANUARY 23, 1998 TO SEPTEMBER 30, 1999
Common Stock Treasury Stock Additional
------------- -------------- Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
------ ------- ------ ------ -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of shares to founders upon
incorporation 11,000 $ 11 -- $ -- $ -- $ -- $ 11
Issuance of shares for cash at par value and
intangible asset 550,000 550 -- -- 19,117 -- 19,667
Issuance of shares for cash at par value
and funding of expenses 4,939,000 4,939 -- -- 171,543 -- 176,482
Net loss for the period -- -- -- -- -- (383,568) (383,568)
--------- --------- --------- --------- --------- --------- ---------
Balance as of September 30, 1998 5,500,000 5,500 -- -- 190,660 (383,568) (187,408)
Issuance of shares in reverse acquisition 1,829,333 1,829 -- -- 18,708 -- 20,537
Issuance of shares for 15% of
CallNet Plc 500,000 500 -- -- 499,500 -- 500,000
Issuance of shares for cash 168,000 168 -- -- 184,042 -- 184,210
</TABLE>
(Continued)
See accompanying notes to these financial statements.
19
<PAGE>
<TABLE>
<CAPTION>
WORLD CALLNET, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIT)
(Expressed in U.S. Dollars)
FOR THE PERIOD FROM JANUARY 23, 1998 TO SEPTEMBER 30, 1999
(Continued)
Common Stock Treasury Stock Additional
-------------- -------------- Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of warrants in connection
with bridge loans -- -- -- -- 1,374,791 -- 1,374,791
Issuance of options and warrants
for services -- -- -- -- 393,406 -- 393,406
Issuance of shares to acquire
remaining 85% of CallNet Plc 2,544,560 2,545 500,000 (522,476) 4,450,436 -- 3,930,505
Issuance of shares for cash and
marketable securities 2,900,000 2,900 -- -- 3,262,506 -- 3,265,406
Assumption of options to directors
in connection with acquisition
of CallNet Plc -- -- -- -- 362,953 -- 362,953
Net loss for the year -- -- -- -- -- (4,587,408) (4,587,408)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance as of September 30, 1999 13,441,893 $ 13,442 500,000 $ (522,476) $10,737,002 $(4,970,976) $ 5,256,992
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to these financial statements.
20
<PAGE>
<TABLE>
<CAPTION>
WORLD CALLNET, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Expressed in U.S. Dollars)
FOR THE YEAR ENDED SEPTEMBER 30, 1999 AND THE PERIOD
JANUARY 23, 1998 TO SEPTEMBER 30, 1998
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,587,408) $ (383,568)
Stock compensation 756,359 --
Amortization of debt issuance costs 1,249,742 --
Depreciation and amortization 180,929 --
Expenses paid by stockholders -- 175,000
Minority interest in losses from CallNet Plc prior to consolidation 261,707 --
Increase in receivables (1,809,346) --
Increase in prepaid expenses (8,846) --
Increase in other assets (3,209) --
Increase in accounts payable and accrued expenses 678,445 208,606
Cash advances from and expenses paid by affiliate (10,486) 297
Increase in compensation due officers 29,462 --
Other (115,794)
----------- -----------
Net cash provided by (used in) operating activities (3,378,445) 335
Purchase of property and equipment (236,639) --
Operating advances to CallNet Plc prior to acquisition (701,584) --
Cash balance acquired from PLC 14,606 --
----------- -----------
Net cash used in investing activities (923,617) --
Proceeds from notes payable 1,700,000 --
Commissions paid on notes payable (70,000) --
Cash received in common stock issuances 2,884,310
----------- -----------
Net cash provided by financing activities 4,514,310 1,660
----------- -----------
212,248 1,995
NET INCREASE IN CASH
CASH, beginning of period
1,995 --
----------- -----------
CASH, end of period $ 214,243 $ 1,995
=========== ===========
</TABLE>
(Continued)
See accompanying notes to these financial statements.
21
<PAGE>
<TABLE>
<CAPTION>
WORLD CALLNET,INC.
CONSOLIDATED STATEMENT OF CASH FLOWS, Continued
(Expressed in U.S. Dollars)
FOR THE YEAR ENDED SEPTEMBER 30, 1999 AND THE PERIOD
JANUARY 23, 1998 TO SEPTEMBER 30, 1998
(Continued)
1999 1998
----------- ----------
<S> <C> <C>
NON CASH TRANSACTIONS:
Investment in marketable securities obtained for obligation to
provide services and for cash payment by affiliate $ -- $ 203,772
=========== ==========
Acquisition of intangible asset for common stock $ -- $ 19,500
=========== ==========
Net assets acquired in reverse acquisition $ 20,537 $ --
=========== ==========
Acquisitions of CallNet Plc for common stock $ 4,930,505 $ --
=========== ==========
Acquisitions of Keyclub.net equity securities for common stock $ 565,406 $ --
=========== ==========
</TABLE>
See accompanying notes to these financial statements.
22
<PAGE>
WORLD CALLNET, INC.
NOTES TO 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
September 30, 1999.
The accompanying financial statements include the accounts of the Company
and its two wholly owned subsidiaries, CallNet Plc and Overleaf Systems,
Limited ("Overleaf"). CallNet Plc became a wholly owned subsidiary of the
Company in September 1999 (see Note 3) and Overleaf has been inactive to
date. All significant balances and transactions have been eliminated in
consolidation.
The Company began operations as World Wide Communications (Holdings),
Limited ("WWCH") on January 23, 1998. On October 9, 1998, the stockholders
of WWCH exchanged all their shares for approximately 75% of General
American Royalty, Inc., ("GAR"), a public company, and became a wholly
owned subsidiary of GAR. The management of WWCH became the management of
the combined company. Although GAR was the acquiring entity for legal
purposes, WWCH was considered the acquirer for accounting purposes, and the
financial statements of the combined company reflect historical accounts of
WWCH and include the operations of GAR beginning October 9, 1998. However,
because GAR was the acquiring entity for legal purposes, all stockholders'
equity information in the accompanying financial statements and footnotes
has been restated to conform to GAR's capital structure. The Company
changed its name to World CallNet, Inc. in January 1999.
Investment in Marketable Securities
-----------------------------------
The Company's marketable securities at September 30, 1999 consist of equity
securities classified as available-for-sale. Available-for-sale securities
are carried at estimated market value and unrealized holding gains and
losses are reported in other comprehensive income. At September 30, 1999,
there was no unrealized gain or loss in these securities.
Foreign Currency Translation
----------------------------
The Company conducts its operations and maintains its accounts in its
functional currency of British pounds. The accompanying financial
statements are converted into U.S. dollars for the convenience of the users
at the prevailing exchange rate of (pound)1.00 to $1.6458 at September 30,
1999.
23
<PAGE>
WORLD CALLNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
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. At September 30,
1999, the Company had outstanding options for 2,000,000 shares of common
stock and outstanding warrants for 2,145,000 shares of common stock, which
are not included in the dilutive calculation as the effect would be
anti-dilutive.
Use of Estimates
----------------
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's management
to make estimates and assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual results could differ
from those estimates.
Income Taxes
------------
The Company accounts for income taxes under the liability method, which
requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the difference between the
financial statements and tax bases of assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to
reverse. The Company has a tax loss carryforward at September 30, 1999 of
approximately $2,600,000 that will expire if unused in 2019, for United
States tax purposes; and $2,200,000 for United Kingdom tax purposes; and
the Company has a deferred tax asset at September 30, 1999, which is fully
reserved, of approximately $1,560,000.
Property and Equipment
----------------------
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation has been provided using the straight-line method over the
estimated useful lives of the assets of four years. The Company recorded
depreciation expense of $32,193 and $0 for the year ended September 30,
1999 and the period from January 23, 1998 to September 30, 1998,
respectively.
Long-Lived Assets
-----------------
The Company's policy is to periodically review the net realizable value of
its long-lived assets, including goodwill, through an assessment of the
estimated future cash flows related to such assets. In the event that
24
<PAGE>
WORLD CALLNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
assets are found to be carried at amounts in excess of estimated
undiscounted future cash flows, then the assets will be adjusted for
impairment to a level commensurate with the estimated fair value of the
underlying assets. Based upon its most recent analysis, the Company
believes no impairment of long-lived assets exists at September 30, 1999.
Goodwill
--------
Goodwill represents the cost of acquired businesses in excess of their
identifiable net assets and is amortized by the straight-line method over
five years. The Company recorded amortization of goodwill of $82,150 and $0
for the year ended September 30, 1999 and the period from January 23, 1998
to September 30, 1998, respectively.
Other Intangible Assets
-----------------------
Other intangible assets consist of intellectual property, which is being
amortized by the straight-line method over five years. The Company recorded
amortization of other intangible assets of $66,586 and $0 for the year
ended September 30, 1999 and the period from January 23, 1998 to September
30, 1998, respectively.
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.
Stock-Based Compensation
------------------------
In January 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", which
requires recognition of the value of stock options and warrants granted
based on an option pricing model. However, as permitted by SFAS 123, the
Company continues to account for stock options and warrants granted to
directors and employees pursuant to Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees", and related
interpretations. See Note 5.
Fair Value of Financial Instruments
-----------------------------------
The carrying value of the Company's financial instruments, including cash
equivalents, accounts receivable, short-term borrowings and accounts
payable, approximate fair value due to their short maturities.
2. CONTINUED OPERATIONS
--------------------
The Company has incurred significant losses through September 30, 1999. In
addition, the Company will require significant additional capital to fully
implement its business plan. These factors raise substantial doubt about
25
<PAGE>
the Company's ability to continue as a going concern. Since January 23,
1998 (date of inception), the Company completed various debt placements and
private placements of common stock, in which it raised net proceeds
totaling approximately $6,700,000; including a private placement of
securities in January 2000 of $2,362,000. Management also intends to
attempt to raise additional capital in the near term. Management believes
these actions will permit the Company to implement its business plan and
attain profitable operations to allow the Company to continue as a going
concern.
3. ACQUISITION
-----------
Acquisition of CallNet Plc
--------------------------
On October 9, 1998, the Company acquired a 15% interest in CallNet Plc in
exchange for 500,000 newly issued shares of common stock, which were
recorded at their estimated value of $500,000. On September 2, 1999, the
Company acquired the remaining 85% interest in exchange for 2,544,560 newly
issued shares of common stock, which were recorded at their estimated value
of $4,450,436. The Company accounted for its investment under the equity
method until September 2, 1999 and applied the purchase method and
consolidated CallNet Plc thereafter. Due to the transaction being
accomplished in two steps, the accompanying consolidated statement of
operations for the year ended September 30, 1999 includes operations of
CallNet Plc for the entire year, offset by a reduction for the 85% outside
interests' share of CallNet Plc's operations until consolidation. The
following unaudited proforma information is presented as if the entire
acquisition had been completed at the beginning of the respective periods:
Period From
Year Ended January 23, 1998 to
September 30, 1999 September 30, 1998
------------------ -------------------
Revenues $ 697,000 $ 21,000
Net Loss $ 6,083,000 $ (115,000)
Net loss per share $ (0.58) $ (0.13)
Certain officers and directors of the Company were also officers and
directors of CallNet Plc and certain stockholders of the Company held a
minority interest in CallNet Plc prior to the transactions described above.
In connection with the acquisition of CallNet Plc, the Company assumed
stock options entitling three directors to purchase an aggregate of 440,000
shares of its common stock at $1.65 per share (Note 7).
26
<PAGE>
WORLD CALLNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
4. 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
approximately 50% 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 after closing and recorded as
stock subscription receivable in the accompanying balance sheet. The stock
of KeyClub.net was recorded by the Company at its estimated market value of
$565,406. The second phase is to involve the Company exchanging 11,600,000
shares of its common stock for $10,875,000 in cash and 1,812,500 shares of
KeyClub.net. This phase was set to close on December 31, 1999, but was
extended in December 1999 to February 29, 2000.
5. NOTES PAYABLE
-------------
In December 1998 and April 1999, the Company completed private placements
of notes payable totaling $1,150,000 and $550,000, respectively. The notes
bear interest at 10% and $850,000 of the notes are collateralized by the
Company's shares of Cherokee Leisure Plc., which is a bankrupt entity at
September 30, 1999. Interest is due monthly and principal is due in full on
December 1, 1999 and October 9, 1999, respectively, or earlier under
certain circumstances, including the raising by the Company of $3.5 million
or more of additional capital.
The holders of the notes were also issued stock purchase warrants entitling
them to purchase an aggregate of 1,675,000 shares of the Company's common
stock between March 1, 1999 and April 9, 2003 at prices ranging from $1.00
per share to $10.00 per share. The holders of these warrants have certain
demand and piggyback registration rights. The Company paid $70,000 in
consulting fees and issued stock purchase warrants, on the same terms
described above, to purchase 220,000 shares of common stock in connection
with the offering.
The Company has valued the aforementioned stock purchase warrants using the
Black Scholes options pricing model and allocated $1,374,791 to
stockholders' equity based on the relative fair market values of the
warrants and the notes payable. The value of the stock purchase warrants
has been treated as a discount to notes payable. Amortization of discount
was $1,249,742 for the year ended September 30, 1999.
27
<PAGE>
WORLD CALLNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
The remaining discount of $195,049 at September 30, 1999 is being amortized
on the interest method over the remaining lives of the related notes
payable.
6. STOCK PURCHASE WARRANTS
-----------------------
In March 1999, the Company granted warrants to purchase 100,000 shares of
common stock to a public relations consultant. The warrants are exercisable
at $5.00 per share until expiration in March 2001. The Company recorded an
expense of $196,110 based on the estimated fair value of the warrants at
the date of grant as determined by the Black Scholes pricing model.
In May 1999, a former director converted the 100,000 options granted to him
in November 1998 under the Company's 1998 Stock Option Plan into warrants
to purchase 150,000 shares of common stock. The warrants are exercisable at
$1.50 per share until expiration in December 2000. The Company recorded an
expense of $151,207 based on the difference in the estimated fair value at
the date of grant between the options granted under the Stock Option Plan
and the warrants as determined by the Black Scholes pricing model.
7. STOCK-BASED COMPENSATION
------------------------
1998 Stock Option Plan
----------------------
In January 1999, the 1998 Stock Option Plan (the "Plan") was adopted by the
Company's shareholders. Under the 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.
Generally, options granted under the Plan carry an exercise price equal to
fair market value at the date of the grant and are exercisable for a period
of three years from the date of the grant. The Plan provides for the
exercise of options for a period of ninety days after termination, if an
employee or director granted options leaves the Company.
In November 1998, March 1999 and June 1999, the Company granted options to
its key directors to purchase shares of common stock pursuant to the Plan.
The options were granted at exercise prices ranging from $1.25 per share to
$3.50 per share and expire three years from the date of the grant.
In connection with the acquisition of CallNet Plc, the Company assumed
stock options entitling three directors to purchase an aggregate of 440,000
shares of its common stock at $1.65 per share. The options were converted
under the terms of the existing stock option plan. Compensation expense of
28
<PAGE>
WORLD CALLNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
$362,953 was recognized for these converted options during the year ended
September 30, 1999, based on the excess of the fair market value of the
stock over the option exercise price.
The Company also recognized compensation expense of $46,089 for options
granted under the Plan to a consulting director in November 1998.
Compensation expense was estimated at the date of grant using the Black
Scholes pricing model.
The following is a summary of activity for the stock options granted during
the year ended September 30, 1999:
Weighted
Average
Number Exercise
of Shares Price
---------- ---------
Outstanding, September 30, 1998 -- $ --
Cancelled or expired (200,000) 2.50
Granted 2,200,000 1.50
Exercised -- --
---------- ---------
Outstanding, September 30, 1999 2,000,000 $ 1.40
========== =========
All of the above outstanding options at September 30, 1999 are fully
exercisable.
If not previously exercised, options outstanding at September 30, 1999 will
expire as follows:
Weighted
Average
Number Exercise
of Shares Price
---------- ---------
November 2001 500,000 $ 1.50
June 2002 1,060,000 1.25
September 2002 440,000 1.65
Presented below is a comparison of the weighted average exercise prices and
fair values on the measurement date for the stock options granted during
the year ended September 30, 1999:
Number of Exercise Fair
Shares Price Value
--------- -------- -------
Exercise price greater than market price 600,000 $ 1.50 $ 0.92
Exercise price equal to market price 1,160,000 1.33 0.94
Exercise less than market price 440,000 1.65 1.92
29
<PAGE>
WORLD CALLNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
Pro Forma Stock-Based Compensation Disclosures
----------------------------------------------
As discussed in Note 1, the Company applies APB Opinion No. 25 and related
interpretations in accounting for its stock options. Accordingly,
compensation cost of $362,953 has been recognized for grants of options to
directors during the year ended September 30, 1999. Had compensation been
determined based on the fair value at the measurement dates for the options
granted consistent with methods required by SFAS No. 123, the Company's
September 30, 1999 net loss and net loss per share would have been changed
to the pro forma amounts indicated below. There was no pro forma effect for
September 30, 1998.
Net loss:
As reported $ (4,587,408)
Pro forma $ (6,602,902)
Net loss per common Share
As reported $ (0.57)
Pro forma $ (0.81)
The estimated fair value of each director option and warrant granted during
the year ended September 30, 1999 was estimated on the grant date using the
Black Scholes option pricing model with the following weighted average
assumptions:
Expected volatility 184%
Risk free interest rate 6.0%
Expected dividends --
Expected terms (in years)
8. STOCKHOLDER MATTERS
-------------------
In January 1999, the Company's stockholders approved an increase in the
authorized shares to 30,000,000 shares of common stock and 10,000,000
shares of preferred stock. The preferred stock may be issued in series with
rights and preferences as designated by the Board of Directors.
9. RELATED PARTY TRANSACTIONS
--------------------------
Certain directors and stockholders of the Company are directors and/or
stockholders in other companies with which the Company had the transactions
set forth below. Also, see Note 3.
30
<PAGE>
WORLD CALLNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
o CallNet Plc paid salaries of officers/directors and employees and paid
certain other administrative costs of the Company during the period
ended September 30, 1998. Such amounts, which totaled $185,486, have
been recorded as general and administrative expense.
o Certain intellectual property rights related to e-mail functionality
were assigned to the Company in 1998 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 1998 in which
the Company was to license its system for the business of Internet
service provider in the United Kingdom and CallNet Plc was to
sub-license such system to other parties.
o The Company acquired CallNet Plc in two steps in fiscal year 1999 as
described in Note 3.
10. 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 $210,000, and provides that if the
agreement is terminated by either party during the term of the agreement,
the full salary and benefits are required to be paid to the officer until
the end of the term of the agreement.
The Company leases equipment and office facilities under the terms of
various non-cancelable rental agreements. Rental expenses from operating
leases for the year ended September 30, 1999 and the period from inception
through September 30, 1998 was $73,404 and $0, respectively.
Minimum future lease payments for non-cancelable operating leases for the
next five years and thereafter are as follows:
Years ending September 30,
2000 $ 399,000
2001 287,000
2002 122,000
2003 87,000
2004 and thereafter 151,000
-------------
$ 1,046,000
=============
31
<PAGE>
WORLD CALLNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
11. SUBSEQUENT EVENTS
-----------------
In January 2000, the Company completed a private placement of 1,350,000
shares of its common stock for proceeds of $ 2,362,500.
32
<PAGE>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
For the information required by Part III, Item 10, see the sections
entitled "Proposal One - Election of Directors" and "Compliance with Section
16(a) of the Exchange Act" in the Company's Proxy Statement for its Annual
Meeting of Stockholders to be filed with the Commission contemporaneously with
this Form 10-KSB, which is incorporated herein by reference.
EXECUTIVE COMPENSATION
See the information set forth in the sections entitled "Proposal One -
Election of Directors - Director Compensation" and "Executive Officer
Compensation" in the Company's Proxy Statement for its Annual Meeting of
Stockholders, which is incorporated herein by reference.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the information set forth in the sections entitled "Share Ownership
of Certain Beneficial Owners and Management" in the Company's Proxy Statement
for its Annual Meeting of Stockholders, which is incorporated herein by
reference.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the information set forth in the sections entitled "Certain
Transactions with Management" in the Company's Proxy Statement for its Annual
Meeting of Stockholders, which is incorporated herein by reference.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
2.1 The Plan of Acquisition with WWCH, which is incorporated
herein by reference as filed as exhibit to Form 8-K dated
October 23, 1998.
3.1 Certificate of Incorporation of the Company and amendments
thereto, which is incorporated herein by reference as Exhibit
3(i) to Form 10 filed on March 26, 1997.
33
<PAGE>
3.2 Amendment to Certificate of Incorporation, which is
incorporated by reference herein as Exhibit 3(i) to Form 8-K,
dated October 23, 1998.
3.3 By-laws of the Company, which are incorporated by reference
herein as Exhibit 3(ii) to Form 10 filed on March 26, 1997.
10.1 Stock Exchange Agreement, dated as of June 16, 1999 and
consummated on September 2, 1999, by and among World CallNet,
Inc., Paul Goodman-Simpson, Aaron Goodman-Simpson and Keith
Goodyer, which is incorporated by reference herein from
Exhibit 3.1 to the Company's Form 8-K, dated September 2,
1999.
10.2 Stock Exchange Agreement, dated as of June 16, 1999 and
consummated on September 2, 1999, by and among World CallNet,
Inc. and the parties listed on Exhibit A attached thereto,
which is incorporated by reference herein from Exhibit 3.2 to
the Company's Form 8-K, dated September 2, 1999.
10.3 Stock Purchase Agreement, dated as of September 30, 1999, by
and among World CallNet, Inc., MailTV Pty Ltd. and Paul
Goodman-Simpson, which includes form of Registration Rights
Agreement to be issued to MailTV Pty, which is incorporated by
reference herein from Exhibit 10.1 to the Company's Form 8-K,
dated October 15, 1999.
10.4 Agreements, dated December 15, 1999 and December 22, 1999,
between World CallNet, Inc., MailTV Pty Ltd. and
Paul Goodman-Simpson, to amend the Stock Purchase Agreement,
dated as of September 30, 1999, by and among World CallNet,
Inc., MailTV Pty Ltd. and Paul Goodman-Simpson which is
incorporated by reference herein from Exhibit 10.2 to the
Company's Form 8-K, dated December 22, 1999.
21 List of all the Company's subsidiaries, the state or other
jurisdiction of incorporation, and the names under which such
subsidiaries do business.
27 Financial data schedule.
(b) Reports on Form 8-K.
1. A Current Report on Form 8-K was filed with the Commission by the
Company on September 17, 1999, to report the acquisition of 100%
of CallNet Plc.
34
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
WORLD CALLNET, INC.
-------------------
(Registrant)
/s/ Paul Goodman Simpson
-------------------------------
Paul Goodman-Simpson, Director,
President and Chief Executive
Officer
Date January 12, 2000
----------------
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
/s/ Aaron Goodman-Simpson /s/ Paul Goodman-Simpson
- -------------------------------- ------------------------------------
Aaron Goodman-Simpson, Principal Paul Goodman-Simpson, President,
Financial and Accounting Officer Chief Executive Officer and Director
And Director
Date January 12, 2000 Date January 12, 2000
---------------- ----------------
/s/ Keith Goodyer
- ---------------------------------
Keith Goodyer, Vice President and
Director
Date January 12, 2000
----------------
35
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM WORLD
CALLNET, INC. REPORT ON FORM 10-KSB FOR THE YEAR ENDED SEPTEMBER 30, 1999, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FINANCIAL STATEMENTS.
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