UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington. D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the three months ended December 31, 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
--- ---
As of January 31, 2000 there were 14,821,324 shares of registrant's
common stock outstanding.
Transitional Small Business Disclosure Format (Check One): Yes No x
--- ---
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REGISTRANT'S DISCLAIMER STATEMENT RE: PRIVATE SECURITIES LITIGATION REFORM ACT
AND OTHER MATTERS
The statements in this Report on Form 10-QSB and in other filings by
World CallNet, Inc. (the "Company") with the Securities and Exchange Commission,
or in press releases issued by the Company that are not based on historical
information are considered forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including statements regarding the
Company's projections, hopes, expectations, intentions, beliefs or strategies
regarding the future. Forward-looking statements include, but expectations are
not limited to, plans discussed 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
projection that its working capital will be adequate until the end of 2000, (ii)
the projection that additional capital from the sale of debt or equity
securities will be necessary after the end of 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.
It is possible that the Company's projections, hopes, expectations,
intentions, beliefs, plans or strategies regarding the future and hopes outlined
above may not be achieved due to factors and circumstances discussed elsewhere
in this Form 10-QSB. See Part 1, Item 2, "Management's Discussion and Analysis
or Plan of Operation."
World CallNet, Inc. is not affiliated with, sponsored by or endorsed
by any of the following companies who have similar trade names, trademarks or
service marks: Worldcall Communications International, Inc.; Computer Calling
Technologies, Inc.; AT&T Corp.; Worldnet Communications, Inc.; Luckman
Interactive, Inc.; Allnet Communications Services, Inc.; West Coast
Telecommunications, Inc.; and Worldnet Communications, Inc.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Financial information required by Item 301(b) of Regulation S-B can be
found on the page following Item 2 below. The financial information contained
herein for the three months ended December 31, 1999 is unaudited but includes
all adjustments that the Company considers necessary for a fair presentation of
the results for such periods. The financial information should be read in
conjunction with the financial statements for the year ended September 30, 1999
included in the Company's Annual Report on Form 10-KSB. Operating results for
the three months ended December 31, 1999 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.
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
terms. In January 2000, the Company completed a private placement of common
stock totaling $2,362,500 at $1.75 per share. The Company used $500,000 of the
proceeds from the aforementioned placements of common stock to repay notes
payable. Notes payable of $1,200,000 due on December 1, 1999 were not paid and
the Company is in default for the payment of principal and accrued interest of
$30,000 as of December 31, 1999.
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.
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The Company has incurred significant net losses since inception 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.
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 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 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.
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RESULTS OF OPERATIONS
Revenues increased from $34,988 for three months ended December 31,
1998, to $379,210 for the three months ended December 31, 1999, due to increases
in licensing fees and telephone toll charges earned under the terms of CallNet
Plc's agreements with telecommunications companies.
General and administrative expenses increased from $454,180 for the
three months ended December 31, 1998, to $1,041,376 for the three months ended
December 31, 1999. The increase was due to the cost of additional personnel,
infrastructure and facilities necessary to meet the growth in the Company's
operations. 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.
Interest expense of $5,666 for the three months ended December 31,
1998, was incurred on $300,000 of bridge debt that was completed in November
1998. For the three months ended December 31, 1999, interest expense of $37,639
was incurred for the entire period on $1,200,000 of debt and $500,000 of debt
that was repaid in October 1999. Amortization of the discount related to such
debt was $195,049 for the three months ended December 31, 1999 and was $3,166
for the three months ended December 31, 1998.
Depreciation and amortization for the three months ended December 31,
1999, includes $246,450 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.
CAUTIONARY FACTORS
The success of the Company's plan of operation may be adversely
affected by several principal factors.
NEED FOR ADDITIONAL CAPITAL
The Company needs a substantial amount of capital to achieve its
business plan. Conditions in financial markets influence investors' attitudes
and willingness to invest in a particular industry issuer or type of security.
If the Company is unable to obtain additional capital through private or public
placement of its debt or equity securities, asset based or bank financing, or
through ventures with industry partners, its ability to achieve its business
objectives could be substantially impaired.
COMPETITION
The online services and Internet markets are highly competitive. The
Company believes that existing competitors, which include, among others,
commercial online services such as America OnLine and Dixon's FreeServe,
Internet-based services, including, among others, the Microsoft Network, and
Internet service providers, including various national and local independent
Internet service providers as well as long distance and regional telephone
companies, including, among others, British Telecommunications and Cable &
Wireless Communications and various other regional telephone operating
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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 or World
CallNet, thereby achieving greater market acceptance than MailTV. Many of World
CallNet's competitors, as well as potential competitors, have longer operating
histories, greater name recognition, larger installed customer bases and
significantly greater financial, technical and marketing resources than World
CallNet.
SUBSCRIBER ATTRITION RATES
World CallNet will devote considerable financial and human resources to
attract subscribers to its service; however, due to circumstances that may or
may not be beyond the control of the Company, these subscribers may discontinue
their affiliation with the Company. As a result of subscriber attrition, the
revenues generated from Internet usage may decline considerably, as may the
rates that the Company can charge from advertising on its service as well as the
revenues that the Company anticipates from e-commerce.
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
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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
One of the Company's goals is to increase market share by rapidly
growing its subscriber base. To achieve this goal, the Company has aggressively
promoted its service offerings and may implement other strategies designed to
facilitate subscriber growth. The costs associated with the rapid growth in its
subscriber base and investments in customer support have placed, and will
continue to place, pressures on the Company's operating margins.
The Company may adopt additional strategies designed to continue the
growth in its subscriber base, such as new marketing programs and promotional
offers. Such strategies may result in an increase in costs as a percentage of
revenues. In addition, acceleration in the growth of its subscriber base,
changes in usage patterns among members or continuing investments in content may
also increase costs as a percentage of revenues. As a result, the Company does
not believe its operating margins have stabilized. There can be no assurance
that the Company's operating margins will not be adversely affected in the
future by such strategies or other conditions.
SEASONALITY
Subscriber acquisition is expected to be highest in the second and
third fiscal quarters, when sales of new computers and computer software are
highest due to the holiday season. Customer usage is expected to be lower in the
summer months due largely to extended day light hours and competing outdoor
leisure activities.
MANAGING A RAPIDLY GROWING AND CHANGING BUSINESS
The Company continues to experience major changes in its operations
resulting from rapid expansion of its business and other factors which have
placed significant demands on its administrative, operational and financial
resources. The Company's future performance will depend in part on its ability
to manage its growth and to adapt its administrative, operational and financial
control systems to the needs of the expanded entity. The failure of management
to anticipate, respond to and manage changing business conditions could have a
material adverse effect on the Company's business and results of operations.
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ACCESS TO CONTENT PROVIDERS
As competition in the online services market intensifies, it may become
more difficult or expensive to secure and retain content and/ or content
providers. The Company generally pays royalties to its content providers under
short term renewable agreements, and there can be no assurance that the loss of
a number of content providers or significantly increased costs to maintain
certain content providers would not have a material adverse effect on the
Company's business.
NEW BUSINESSES AND INTERNATIONAL VENTURES
The Company pursues new products and services to diversify its sources
of revenue and leverage its technological and other competencies. There can be
no assurance that the Company will be able to successfully develop, or achieve
commercial acceptance for, these new products and services. The Company intends
to offer online services internationally through either wholly owned operations
or through joint ventures with existing Internet service providers of
telecommunications companies. There can be no assurance that the Company or its
partners will be able to successfully market, sell and deliver its services in
these markets. In addition, there are certain significant risks inherent in
doing business on an international level, such as laws governing content that
differ greatly from country to country, unexpected changes in regulatory
requirements, political risks, export restrictions, export controls relating to
encryption technology, tariffs and other trade barriers, fluctuations in
currency exchange rates, issues regarding intellectual property and potentially
adverse tax consequences, any or all of which could impact the Company's
international operations.
CHANGING TECHNOLOGIES
As online services evolve, the Company will be required to offer
technological advances such as improved data compression and delivery of voice
and full motion video. Currently, online services are accessed primarily by
personal computers via modem. As online services become accessible by screen
based telephones, television or other consumer electronic devices, and become
commercially deliverable over other wired conduits such as coaxial and fiber
optic cable, the Company may have to develop new technology or modify its
existing technology to keep pace with these developments. Pursuit of these
technological advances will require substantial expenditures, and there 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.
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RELIANCE ON KEY PERSONNEL
The Company's success depends in part upon the performance of its
executive officers and other key employees. The loss of the services of one or
more of its key personnel could have a material adverse effect on the Company.
The Company depends on its continued ability to attract and retain highly
skilled and qualified personnel. Competition for such personnel is intense, and
there can be no assurance that the Company will be successful in attracting and
retaining such personnel.
RELIANCE ON THIRD PARTIES
The Company depends substantially upon third parties for several
critical elements of its business, including 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. The Company will outsource the
manufacture of its MAILTV retrofit keyboards from an outside manufacturer
pursuant to purchase orders placed from time to time, will not carry significant
inventories of these keyboards and will have no guaranteed supply arrangements.
The Company relies on local telephone companies and other companies to provide
data communications capacity via local telecommunications lines and leased long
distance lines.
INTELLECTUAL PROPERTY ISSUES
The Company regards its patents, trademarks, trade dress, trade secrets
and similar intellectual property as critical to its success, and the Company
will rely upon patent law, trademark law, trade secret protection and
confidentiality and/or license agreements with its employees, customers,
partners and others to protect its proprietary rights. There can be no assurance
that the steps taken by the Company to protect any of its proprietary rights
will be adequate or that third parties will not infringe or misappropriate the
Company's patents, trademarks, trade dress and similar proprietary rights. In
addition, there can be no assurance that other parties will not assert
infringement claims against the Company.
VOLATILITY OF SHARE PRICE
The market price of the Company's Common Stock has a history of
volatility. Factors such as quarterly variations in financial results and
membership growth and usage, new pricing strategies, the announcement of
technological innovations, mergers, acquisitions, strategic partnerships or new
product offerings by the Company or its competitors, the entrance of new
competitors into the online services market and changes in content providers may
have a significant impact on the market price of the Common Stock. Moreover, the
Common Stock could experience price volatility based on market conditions. In
particular, a substantial short interest exists in the Company's Common Stock
which may tend to exacerbate volatility.
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SALES OF COMMON STOCK
Sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices of the Common Stock. The warrants that
have been issued by the Company since the reverse acquisition of WWCH have
provided for demand and piggyback registration rights. Exercise of such
registration rights could increase the number of shares of Common Stock sold in
the public markets.
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<TABLE>
<CAPTION>
WORLD CALLNET, INC.
CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. Dollars)
AS OF DECEMBER 31, 1999
(Unaudited)
ASSETS
- ------
<S> <C>
CURRENT ASSETS:
Cash $ 690,670
Trade accounts receivable, no allowance for doubtful accounts 566,496
Prepaid expenses --
Stock subscription receivable 132,097
------------
Total current assets 1,389,263
------------
Investment in marketable equity securities 565,406
Furniture and fixtures, at cost 298,130
Goodwill, net of accumulated amortization of $328,600 4,596,689
Other intangible assets, net of accumulated amortization of $66,586 212,193
Bonds, deposits and other assets 69,438
------------
Total other assets 5,741,856
------------
Total assets $ 7,131,119
============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Notes payable $ 1,200,000
Accounts payable and accrued expenses 2,131,872
------------
Total current liabilities 3,331,872
------------
COMMITMENTS (Note 7)
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:
13,471,324 shares issued and 12,971,324 shares outstanding 13,472
Additional paid-in capital 10,826,972
Accumulated deficit (6,518,721)
Treasury stock, 500,000 shares, at cost (522,476)
------------
Total stockholders' equity 3,799,247
------------
Total liabilities and stockholders' equity $ 7,131,119
============
</TABLE>
See accompanying notes to these financial statements.
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WORLD CALLNET, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Expressed in U.S. Dollars)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999
(Unaudited)
1999 1998
------------ ------------
REVENUES $ 379,210 $ 34,988
COSTS AND EXPENSES:
Production and development 379,032 --
General and administrative 1,041,376 454,180
Interest expense 37,639 5,666
Depreciation and amortization 468,908 325
------------ ------------
1,926,955 460,171
------------ ------------
NET LOSS $ (1,547,745) $ (425,183)
============ ============
NET LOSS PER SHARE (basic and diluted) $ (.12) $ (.06)
============ ============
WEIGHTED AVERAGE SHARES 12,971,893 7,245,043
============ ============
See accompanying notes to these financial statements.
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<TABLE>
<CAPTION>
WORLD CALLNET, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
(Expressed in U.S. Dollars)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999
(Unaudited)
Additional
Common Stock Treasury Stock Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance September 30, 1999 13,471,324 13,442 500,000 $ (522,476) $10,737,002 $(4,970,976) $ 5,256,992
Issuance of common stock for
services 30,000 30 -- -- 89,970 -- 90,000
Net loss for the period -- -- -- -- -- (1,547,745) (1,547,745)
Balance December 31, 1999 13,471,324 $ 13,472 500,000 $ (522,476) $10,826,972 $(6,518,721) $ 3,799,247
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to these financial statements.
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<TABLE>
<CAPTION>
WORLD CALLNET, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Expressed in U.S. Dollars)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(Unaudited)
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,547,745) $ (432,015)
Depreciation and amortization expense 273,859 --
Amortization of debt issuance costs 195,049 3,166
Decrease in receivables 1,214,494 --
Decrease in prepaid expenses 99,159 --
Decrease in bonds, deposits and other assets 149,381 --
Increase in accounts payable and accrued expenses 638,285 2,500
Other 66,369 1,436
----------- -----------
Net cash used by operating activities 1,088,851 (424,588)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase furniture and fixtures (112,424) --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term indebtedness, net of financing costs -- 334,838
Repayment of short-term indebtedness (500,000) --
Cash received in common stock issuances -- 167,560
Decrease in amount due from affiliate -- 10,486
----------- -----------
500,000 512,884
----------- -----------
NET INCREASE IN CASH 476,427 87,971
CASH, beginning of period 214,243 1,995
CASH, end of period $ 690,670 $ 89,966
=========== ===========
NON CASH TRANSACTIONS:
Purchase of net assets in reverse acquisition for common stock -- 14,872
Issuance of common stock for services 90,000 --
----------- -----------
$ 90,000 $ 14,872
=========== ===========
</TABLE>
See accompanying notes to these financial statements.
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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
December 31, 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 December 31, 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 December 31, 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 $1.6165 at December 31,
1999.
15
<PAGE>
WORLD CALLNET, INC.
NOTES TO UNAUDITED 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 December 31,
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.
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
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 December 31, 1999.
16
<PAGE>
WORLD CALLNET, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Expressed in U.S. Dollars
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 $246,450 and
$0 for the three months ended December 31, 1999 and 1998.
Other Intangible Assets
-----------------------
Other intangible assets consist of intellectual property, which is being
amortized by the straight-line method over five years.
Statement of Cash Flows
-----------------------
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
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 December 31, 1999. In
addition, the Company will require significant additional capital to fully
implement its business plan. These factors raise substantial doubt about
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.
17
<PAGE>
WORLD CALLNET, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Expressed in U.S. Dollars
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. The accompanying consolidated
statement of operations for the three months ended December 31, 1999
includes operations of CallNet Plc for the entire period.
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).
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
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 after closing and recorded as
stock subscription receivable in the September 30, 1999 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
-------------
At December 31, 1999, the Company had notes payable of $1,200,000 which
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
December 31, 1999. The principal was due in full on December 1,1999 and the
Company is in default for nonpayment of principal and $30,000 of accrued
interest as of December 31, 1999.
18
<PAGE>
WORLD CALLNET, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Expressed in U.S. Dollars
The Company issued 1,675,000 stock purchase warrants to the note holders at
the time the notes payable were incurred. These Company has valued these
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 $195,049 and $0 for the three months ended
December 31, 1999 and 1998, respectively.
6. 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. At
December 31, 1999 there were 2,000,000 options outstanding, all of which
are fully exercisable.
If not previously exercised, options outstanding at December 31, 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
19
<PAGE>
WORLD CALLNET, INC.
NOTES TO UNAUDITED 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. During the three
months ended December 31, 1999, the Company made no grants of stock options
to employees and accordingly no compensation cost has been recognized for
the period.
7. COMMITMENTS
-----------
The Company has employment agreements with three officers who are also
directors. Each of these employment agreements requires an annual salary
through September 2001 of approximately $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. 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
============
8. 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.
20
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities.
Not Applicable
Item 3. Defaults on Senior Securities.
On December 1, 1999, $1,200,00 in principal of notes payable and
$20,000 of accrued interest was due and the Company is in default for
nonpayment. Additional interest accrues at $10,000 per month until the
principal has been repaid. The Company has no other outstanding debt
arrangements and the Company believes this default has not had any
effect on any other of its agreements.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3.1 Certificate of Amendment to the Certificate of Incorporation
of the Company, which is incorporated by reference herein from
Exhibit 3.1 to the Company's Form 8-K, dated January 5, 1999.
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.
27.1 Financial Data Schedule.
21
<PAGE>
(b) Reports on Form 8-K.
1. A Current Report on Form 8-K was filed with the Commission by the
Company on October 14, 1999, to report the sale of 2,900,000 shares of
common stock to MailTV Pty for $2,718,750 in cash and 453,125 shares
of KeyClub.net, a publicly traded company affiliated with MailTV Pty.
2. A Current Report on Form 8-K/A was filed with the Commission by the
Company on October 15, 1999, to amend the Company's October 14, 1999
Report on Form 8-K.
3. A Current Report on Form 8-K/A was filed with the Commission by the
Company on November 16, 1999, to report certain pro forma financial
information regarding the Company's acquisition of 100% of CallNet
Plc.
4. A Current Report on Form 8-K/A was filed with the Commission by the
Company on December 27, 1999, to report modifications of the terms of
the Company's agreement with MailTV Pty.
22
<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: February 21, 2000
/s/Aaron Goodman-Simpson
--------------------------------
Aaron Goodman-Simpson, Vice
President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
Date: February 21, 2000
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM WORLD
CALLNET, INC. REPORT ON FORM 10-QSB FOR THE THREE MONTHS ENDED DECEMBER 31,
1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FINANCIAL STATEMENTS
</LEGEND>
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<NAME> World CallNet, Inc.
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