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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 10, 1999
COMMISSION FILE NO________________
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM SB-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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QUEST NET CORP.
(Exact Name of Registrant As Specified In Its Charter)
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Florida [4813] 84-1331134
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(State of Incorporation) Primary Standard Industrial IRS Employer I.D.
(Classification Code Number) Number)
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2999 NE 191st Street, PH-8
Aventura, Florida 33180
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(Address, including zip code,
and telephone number, including area code of
registrant's principal executive offices)
Camilo Pereira, Chairman QUEST NET CORP.
2999 NE 191ST STREET, PH-8
AVENTURA, FLORIDA 33180
(305) 935-1080
(Name, address and telephone number of Agent for Service)
Please send a copy of all communications to:
Rebecca J. Del Medico, Esq.
2999 NE 191ST STREET, PH-8
AVENTURA, FLORIDA 33180
(305) 935-1080
(561) 734-9785
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time, at the discretion of the selling shareholder after the effective date of
this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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TITLE OF SECURITIES BEING REGISTERED AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
REGISTERED OFFERING PRICE PER AGGREGATE REGISTRATION FEE
SHARE (1) OFFERING PRICE(1)
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COMMON STOCK, $.0 PAR VALUE 1,700,000 $3.50 $5,950,000 $1,803.03
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TOTAL (4) 1,700,000 $3.50 $5,980,000 $1,803.03
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) of the Securities Act of 1933, as amended, on the basis of the
closing price of our common stock on the NASDAQ Electronic Bulletin Board on
August 9, 1999. (2) Pursuant to Rule 416 promulgated under the Securities Act of
1933, as amended, this Registration Statement also covers such indeterminable
additional shares of common stock as may be issuable, to prevent dilution
resulting from Stock splits, or stock dividends. (3) The amount being registered
is the Company's good faith estimate, based on the fluctuation in the price of
the Company's Common stock during the 90 days immediately preceding the filing
of this Registration Statement, of the shares required to be issued pursuant to
the terms of the Subscription Agreement, and is subject to adjustment and could
be materially less than such estimated amount depending upon factors that cannot
be predicted by us at this time, including, among others, the future market
price of the common stock. This presentation is not intended to constitute a
prediction as to the future market price of the common stock or as to the number
of shares of common stock, which, will be required to be issued pursuant to the
Registration Rights Agreement
We hereby amend this Registration Statement on such date or dates as may be
necessary to delay its effective date until we file a further amendment which
specifically states that this Registration Statement shall become effective in
accordance with Section 8(A) of the Securities Act Of 1933 or until this
Registration Statement shall become effective on such date as the Commission may
determine.
ii
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QUEST NET CORP.
CROSS REFERENCE SHEET
Form SB-2 Item Numbers and Caption Heading in Prospectus
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1. Front of the Registration Statement and
Outside Front Cover of Prospectus......................................Cover Page of Form SB-2 and of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus...........................................................Inside Front and Outside Back Cover Pages of
Prospectus
3. Summary Information and Risk Factors...................................Prospectus Summary, Selected Financial
Information and Risk Factors
4. Use of Proceeds........................................................Not Applicable
5. Determination of Offering Price........................................Cover page of Prospectus and Selling Security
Holders
6. Dilution...............................................................Not Applicable
7. Selling Security Holders...............................................Selling Security Holders
8. Plan of Distribution...................................................Cover Page of Prospectus, Selling Security Holders
and Plan of Distribution
9. Legal Proceedings......................................................Business-Legal Proceedings
10. Directors, Executive Officers, Promoters, and Control Persons Management
11. Security Ownership of Certain Beneficial Owners and Management ........Principal Stockholders
12. Description of Securities. ............................................Description of Securities
13. Interest of Named Experts and Counsel..................................Legal Matters and Experts
14. Disclosure of Commission Position on Indemnification for Securities
Act Liabilities......................................................Indemnification of Officers and Directors
15. Organization Within Last Five Years ...................................Business
16. Description of Business................................................Business
17. Management's Discussion and Analysis or Plan of Operation. ............Management's Discussion and Analysis or Plan of
Operation.
18. Description of Property. ..............................................Business-Property
19. Certain Relationships and Related Transactions. .......................Certain Transactions
20. Market for Common Equity and Related Stockholder Matters. .............Market Price of Securities
21. Executive Compensation. ...............................................Management-Executive Compensation
22. Financial Statements. .................................................Financial Statements
23. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure ................................................Not Applicable
24. Indemnification of Directors and Officers. ............................Part II
25. Other Expenses of Issuance and Distribution............................Part II
26. Recent Sales of Unregistered Securities. ..............................Part II
27. Exhibits...............................................................Part II
28. Undertakings ..........................................................Part II
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SUBJECT TO COMPLETION, DATED ________________1999
The information in this Prospectus is not complete and may be changed. We may
complete or amend this Prospectus without notice. These securities may not be
sold until the registration statement filed with the Securities and Exchange
Commission is effective. This Prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
PROSPECTUS
QUEST NET CORP.
[LOGO]
1,700,000 SHARES OF COMMON STOCK
This Prospectus ("Prospectus") relates to an aggregate of 1,700,000 shares of
our common stock. Quest Net Corp. and unless otherwise noted, its wholly owned
subsidiaries IPQuest Corp., Quest Wireless Corp., Globalbot Corp., QuesTel Corp.
and Quest Fiber Corp. are is referred to in this Prospectus as the "Company,
our, we or us".
James, LLC., who is referred to as the "Selling Security Holder", is selling up
to 1,700,000 shares of common. There will be no general offering of shares to
the public by us. We will not receive any of the proceeds from the sale of
common stock by the Selling Security Holders. All expenses of registration
incurred in connection with this offering are being borne by us, but all selling
and other expenses will be borne by the Selling Security Holders. No underwriter
is being used.
The Shares offered will be sold from time to time at the then prevailing market
prices, at prices relating to prevailing market prices or at negotiated prices.
The common stock is traded on the OTC Bulletin Board under the symbol "QNET". On
August 6, 1999, the closing bid and asked price of the common stock as reported
on the OTC Bulletin Board was $4.16 and $4.00 respectively.
The Shares have not been registered for sale by us or by the Selling Security
Holders under the securities laws of any state as of the date of this
Prospectus. Brokers or dealers effecting transactions in the Shares should
confirm the registration of the Shares under the securities laws of the States
in which transactions occur or the existence of any exemption from registration.
The Selling Security Holder, or any broker-dealer who may participate in sales
of the common stock covered hereby may use this Prospectus.
Investing in the common stock involves a high degree of risk. You should invest
in the common stock only if you can afford to lose your entire investment. We
urge you to read the "Risk Factors" section beginning on page 3, along with this
Prospectus before you make your investment decision.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
QUEST NET CORP.
2999 NE 191ST STREET, PH-8
AVENTURA, FLORIDA 33180
(305) 935-1080
THE DATE OF THIS PROSPECTUS IS ________, 1999
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PROSPECTUS SUMMARY
This brief summary highlights selected information from the Prospectus. It does
not contain all of the information that is important to you. We urge you to read
the entire Prospectus before considering investing in any common stock of our
Company. See Appendix A for the definitions of certain terms used in this
Prospectus.
THE COMPANY
We were incorporated in the State of Colorado in November 1995, under the name
A.P. Sales Inc. Its proposed business was to engage in the purchasing,
reconditioning, selling, moving, and repairing of office equipment and
furniture, including, primarily, filing and storage cabinets, and workstations.
Until July of 1998, its operations were primarily organizational in nature or
related to raising capital.
In July 1998, we acquired certain of the assets of Pact Communication Group,
Inc. ("Pact"), a privately held Florida corporation. The assets that were
purchased were related to Pact's Internet provider business. The purchase price
for the assets was the issuance of 2,000,000 shares of our common stock. We then
changed our name to Quest Net Corp. and in December 1998 domesticated in the
State of Florida.
After the acquisition of Pact's assets, we became a provider of Internet system
and network management solutions for enterprises with mission-critical Internet
operation, including server hosting, Internet connectivity, collaborative
management, and Internet technology services.
We are a provider of secure, full-service global Internet and Intranet broadband
digital networking solutions for businesses and individuals. We have an a high
bandwidth low-delay connection to the Internet Web (referred to as an ATM),
offer dedicated high speed Internet access, metropolitan and wide area network
data transport services, including virtual private networks, to several
commercial and industrial clients and other ISPs (Internet Service Providers)
and wireless Internet connection at a speed of up to 16 Mbps to a distance of 20
miles on a license free spectrum. We believe that we offer one of the fastest
and cleanest routing systems for the transfer and delivery of voice, video, and
data streams at several speed ranges. The solutions provided by us include
co-location, hosting, dedicated and wireless Internet connectivity, content,
e-commerce, and search engine services. We anticipate that in the future we will
be able to provide discounted long distance services and offshore optical fiber
capacity.
We provide or will provide these services through five subsidiaries, each with
its own market and customer base. We sell dial-up and dedicated Internet access
services through IPQuest Corp. and wireless Internet services through Quest
Wireless Corp. It also provides Internet content, e-commerce (electronic
commerce), and search engine development through Globalbot Corp. and its wholly
owned subsidiary Wings Online, Inc., and will provide long distance phone
services through QuesTel Corp. In addition, we plan to provide optical fiber
capacity to the islands in the Caribbean Sea, including Cuba, through Quest
Fiber Corp. For more information regarding our business, our finances and the
risk associated with a purchase of our common stock, see " Business",
""Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Risk Factors",
Our executive offices are located at 2999 NE 191st Street, PH-8, Aventura,
Florida 33180. Its telephone number is (305) 935-1080
THE OFFERING
Securities Offered by Selling
Security Holders
Common Stock(1) 1,700,000
EQUITY SECURITIES OUTSTANDING
Common Stock(2), ......... 22,205,522
Preferred Shares(3) ......... -0-
Warrants(4) ......... 47,000
Options(4) ......... 87,999
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1 The amount being registered is our good faith estimate, based on the
fluctuation in the price of our Common stock during the 90 days immediately
preceding the filing of this Registration Statement, of the shares required
to be issued pursuant to the terms of the Subscription Agreement
2 Does not include warrants to purchase 47,000 shares and options to purchase
87,999 shares.
3 We redeemed the 100,000 shares of Preferred in July 1999, at a redemption
price of $10.00 per share.
4 The options were issued in connection with Employment Agreements, grants to
our Board of Directors and grants to our consultants. The exercise price of
the options range from $6.00 to $7.25 per share. The warrants were issued to
private placement investors, their attorneys and consultants and are
exercisable at $9.40 per share.
2
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TRADING SYMBOL QNET
USE OF PROCEEDS We will not receive any proceeds from the
sale of common stock by the Selling Security
Holders.
RISK FACTORS An investment in the securities
offered hereby involves a high degree of
risk. You should review carefully and
consider the factors described in "Risk
Factors".
RISK FACTORS
In making an investment decision, prospective purchasers should carefully
consider the following factors. Also see "Management's Discussion And Analysis
Of Financial Condition And Results Of Operations".
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, IT IS DIFFICULT TO EVALUATE OUR
BUSINESS AND PROSPECTS We have had a limited history of operations. From our
inception in November 1995 until July 1998, we conducted very limited
operations. In July 1998, after our acquisition of certain assets of Pact, we
began to provide Internet services. At June 30, 1999, we had an accumulated
deficit of approximately 8,019,883 after discounts and dividends. From inception
to June 30, 1999, we generated revenues of approximately $1,070,198 and incurred
operating expenses of $ 9,085,240. See "Financial Statements". As a new
business, we are subject to all of the substantial risks inherent in the
commencement of a new business enterprise. These include, but are not limited
to, unexpected product development, marketing and customer support problems,
increased competition and lack of credibility with customers and suppliers.
There can be no assurance that we will be able to achieve market acceptance or
that we will be able to generate the necessary revenues or prove to be
profitable. Additionally, we have minimal business history that investors can
analyze to help them decide whether or not to invest in us. Any investment in us
should be considered a high-risk investment because investors will be placing
their funds at risk in an unseasoned development stage company with unforeseen
costs, expenses and problems often experienced by development stage companies.
Potential investors should be aware of the difficulties encountered by any new
enterprise in its early stages particularly companies in new and rapidly
evolving markets such as online commerce and the Internet. Set forth below is a
brief summary of risks, expenses, and problems frequently encountered by
companies such as Quest Net Corp.:
(i) Our inability to develop, maintain and/or increase levels of traffic on
our Internet sites; our inability to attract or retain customers; our
inability to generate significant Web-based revenue from our Customers;
our failure to anticipate and adapt to a developing market; and the
level of use of the Internet and online services for the purchase of
consumer products and in general.
(ii) Our ability to upgrade and develop competitive systems and
infrastructures and ability to attract new personnel in a timely and
effective manner; the inability to effectively manage rapidly expanding
operations; the level of traffic on our Web site; the failure of our
servers and networking systems to efficiently handle our Web traffic;
technical difficulties and system downtime or Internet brownouts; and
the amount and timing of operating costs and capital expenditures
relating to expansion of our business, operations and infrastructure.
(iii) The introduction and development of different or more extensive
electronic-commerce networks by direct and indirect competitors,
particularly in light of the fact that most of such competitors are
much larger and have greater financial, technical, and marketing
resources than we do.
(iv) Governmental regulation and general economic conditions and economic
conditions specific to the Internet and the online commerce industry.
3
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To address these risks we must, among other things, develop, maintain and
increase our customer base, continue to develop and upgrade our technology,
respond to competitive developments, and attract, retain and motivate qualified
personnel. There can be no assurance we will be successful in addressing such
risks, and any failure to do so could have a material adverse effect on our
business, results of operations and financial condition. For more information
about the Company, and its financial condition, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations", "Business", and
"Financial Statements".
WE MUST MANAGE OUR POTENTIAL GROWTH
We are currently experiencing a period of significant growth. If we cannot
manage our growth effectively, we may not be able to coordinate the activities
of our technical, accounting, finance, marketing, sales staff, and our business
could be harmed. We intend to expand our wireless network throughout Florida and
into other states, hire additional staff, expand existing offices and open new
offices. As part of this growth, we will have to implement new operational
procedures and controls to train and manage our employees and to expand and
coordinate the operations of our various subsidiaries. If we acquire new
businesses, we will also need to integrate new operations, technologies and
personnel. If we cannot manage the growth of our network, staff, offices, and
business generally, our business could be harmed.
We may not be able to successfully integrate our acquisitions. Acquisitions and
business combinations entail numerous operational risks, including: (i)
difficulty in the assimilation of acquired operations, technologies or products;
(ii) diversion of management's attention from other business operations; (iii)
risks of entering markets in which we have limited or no experience; and (iv)
potential loss of key employees of acquired businesses.
We will need more working capital to expand our operations. If we raise
additional capital by issuing equity or convertible debt securities, the
percentage ownership of our then-current stockholders will be reduced, and such
securities may have rights, preferences, or privileges senior to those of our
current stockholders. Additionally, we may not be able to obtain additional
financing on favorable terms, or at all. If adequate capital were not available
on acceptable terms, our ability to expand, take advantage of unanticipated
opportunities, develop or enhance services or otherwise respond to competitive
pressures would be significantly limited. This limitation could harm our
business. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" for a discussion of our
working capital and capital expenditures.
IF USE OF THE INTERNET DOES NOT GROW, OUR BUSINESS COULD BE HARMED Our success
is highly dependent upon continued growth in the use of the Internet generally.
Internet use by consumers is in an early stage of development, and market
acceptance of the Internet as a medium for content, advertising and electronic
commerce is highly uncertain. A number of factors may inhibit the growth of
Internet usage, including: (i) inadequate network infrastructure; (ii) security
concerns; (iii) inconsistent quality of service, and (iv) limited availability
of cost-effective, high-speed access.
If these or any other factors cause use of the Internet to slow or decline, our
results of operations could be adversely affected.
ACCEPTANCE AND EFFECTIVENESS OF INTERNET ADVERTISING AND ELECTRONIC COMMERCE IS
UNPROVEN Our success is highly dependent on an increase in the use of the
Internet in general and somewhat dependent on an increase in the use of the
Internet for advertising and electronic commerce. If the use of the Internet
does not continue to increase, our business may be severely harmed.
The Internet advertising market is new and rapidly evolving, and the
effectiveness of Internet advertising cannot be accurately measured. As a
result, demand and market acceptance for Internet advertising is uncertain and
may not increase as necessary for our business to grow or succeed. Many
advertisers have little or no experience using the Internet for advertising
purposes. The adoption of Internet advertising, particularly by companies that
have historically relied on traditional media, requires the acceptance of a new
way of conducting business, exchanging information and advertising products and
services. Potential advertisers may believe Internet advertising to be
undesirable or less effective for promoting their products and services relative
to traditional advertising media. If the Internet advertising market fails to
develop or develops more slowly than we expect, our business could be harmed.
Moreover, "filter" software programs that limit or prevent advertising from
being delivered to an Internet user's computer are commonly available.
Widespread use of this software could adversely affect the commercial viability
of Internet advertising and our business.
4
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OUR DATA CENTERS AND THE NETWORKS ON WHICH WE RELY ARE SENSITIVE TO HARM FROM
HUMAN FACTIONS AND NATURAL DISASTERS. ANY RESULTING DISRUPTION COULD
SIGNIFICANTLY DAMAGE OUR BUSINESS AND REPUTATION. Our reputation for providing
reliable service largely depends on the performance and security of our data
centers equipment and the network infrastructure on which we rely. In addition,
our customers often maintain confidential information on our servers. However,
our data centers, equipment and networks, and our customers' information are
subject to damage and unauthorized access from human error and tampering,
breaches of security, natural disasters, power loss, capacity limitations,
software defects, telecommunications failures, intentional acts of vandalism,
including computer viruses, and other factors that have caused, and will
continue to cause, interruptions in service or reduced capacity for our
customers, and could potentially jeopardize the security of our customers'
confidential information such as credit card and bank account numbers. Despite
precautions we have taken and plan to take, the occurrence of a security breach,
a natural disaster, interruption in service or other unanticipated problems
could seriously damage our business and reputation and cause us to lose
customers. Additionally, the time and expense required to eliminate computer
viruses and alleviate other security problems could be significant and could
impair our service quality. In the event of any resulting harm to customers, we
could be held liable for damages. Awards for such damages might exceed our
$1,000,000 liability insurance policy by an unknown but significant amount and
could seriously harm our business.
We could not provide adequate service to our customers if we were unable to
secure sufficient network capacity to meet our future needs on reasonable terms
or at all.
We must continue to expand and adapt our network arrangements to accommodate an
increasing amount of data traffic and changing customers' requirements. We have
entered into a two-year network services agreement with Qwest Internet
Solutions, Inc. ("Qwest") to provide us with certain network transit capacity
which we believe to be adequate for our capacity requirements until such time as
we complete our own backbone and wireless systems, of which there can be no
assurance. This Agreement terminates July 2001. However, if our future network
capacity requirements exceed the capacity Qwest has committed to provide to us,
we may have to pay higher prices for such additional network capacity or such
capacity might not be available at all. Our failure to achieve or maintain high
capacity data transmission could negatively impact service levels to our
existing customers and limit our ability to attract new customers, which would
harm our business.
At present, our business, in large part, depends on Internet network access
services we receive from others. Any disruption of these services or their
inability to maintain their peering relationships could be costly and harmful to
our business.
The Internet is composed of many ISPs that operate their own networks and
interconnect with other ISPs at various peering points. Peering relationships
are arrangements that permit ISPs to exchange traffic with one another without
having to pay for the cost of transit services. Peering relationships are a
competitive factor that allows some Internet companies to provide faster data
transmission than others. We believe Qwest's tier-one status and numerous
peering relationships enable it to provide us faster data transmission than many
other ISPs provide. If Qwest fails to adapt its network infrastructure to meet
industry requirements for peering or loses its peering relationships for any
other reason, then our transmission rates could be reduced, resulting in a
decrease in service quality we provide to our customers.
WE ARE DEPENDENT ON OUR SUPPLIERS
We rely on third-party networks, local telephone companies, and other companies
to provide data communications capacity. Although management feels alternative
telecommunications facilities could be found in a timely manner, any disruption
of these services could harm our business and have an adverse effect on our
operating results.
THE "GOING CONCERN" QUALIFICATION ON THE REPORT OF OUR INDEPENDENT ACCOUNTANTS
MAY REDUCE OUR ABILITY TO RAISE ADDITIONAL FINANCING. The report of our
independent accountants on our June 30, 1999 consolidated Financial Statements
contains an explanatory paragraph regarding our ability to continue as a going
concern. Our independent accountants cited our history of operating losses
limited operating history and negative cash flow from operations, which raised
substantial doubt as to our ability to continue as a going concern. This "going
concern" qualification may reduce our ability to raise additional financing.
WE COULD LOSE REVENUES AND OUR REPUTATION MAY BE DAMAGED IF OUR SYSTEMS OR THOSE
OF OUR CUSTOMERS OR OUR SUPPLIERS ARE NOT YEAR 2000 COMPLIANT. The "Year 2000"
issue concerns the potential exposures related to the automated generation of
business and financial misinformation resulting from the application of computer
programs which have been written using two digits, rather than four, to define
the applicable year of business transactions.
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We established a program during 1998 to ensure that, to the extent reasonably
possible, all systems are or will be Year 2000 compliant prior to the end of
1999. The Year 2000 Program ("Y2K Program"), designed with the assistance of an
outside consultant, consists of five phases: (i) inventory of systems,
equipment, software and hardware including those of significant third-party
suppliers and customers (the "Systems"), (ii) analysis of the Systems to
determine compliance or non-compliance, (iii) remediation and contingency plan
development, (iv) remediation, and (v) testing and remediation of affected
Systems.
The failure to correct a Year 2000 problem could result in the interruption or
failure of certain normal business activities or operations. We believe that the
most reasonably likely worst-case scenario would be as a result of third party
services. Specifically we are dependent on a number of third party vendors to
provide network services. A significant Year 2000-related disruption of these
network services could cause customers to consider seeking alternate service
providers or cause a significant burden on customer service and technical
support. We are not presently aware of any vendor related Year 2000 issue that
is likely to result in any disruption of this type. Although there is inherent
uncertainty in the Year 2000 issue, wet expect that as we progress in our Y2K
Program, the level of uncertainty about the impact of the Year 2000 issue will
be reduced significantly. See "Business-Year 2000".
THE PRICE OF OUR COMMON STOCK IS HIGHLY VOLATILE.
The price of our common stock and Internet and Telecommunication stock in
general, is highly volatile. During the period from July 10, 1998 to July 30,
1999 the bid and ask price of our common stock has ranged from a high of $30.71
to a low of $.43. Following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted against such a company. If similar litigation were instituted against
us, it could result in substantial costs and a diversion of our management's
attention and resources, which could have an adverse effect on our business. The
volatile fluctuations of the market price are based on (1) the number of shares
in the market at the time as well as the number of shares we may be required to
issue in the future, compared to the market demand for our shares; (2) our
performance and meeting expectations of our performance, including the
development and commercialization of our products and proposed products; and (3)
general economic and market conditions.
Our stock is currently traded on the OTC Bulletin Board. We are applying for
listing on the NASDAQ SmallCap Market. The trading of our common stock on the
NASDAQ SmallCap Market is conditioned upon us meeting certain quantitative
criteria related to the market price of the common stock, net tangible assets,
market capitalization, and certain other quantitative and non-quantitative
requirements established by such stock market. To maintain eligibility for
trading on the NASDAQ Small-Cap Market, among other requirements, we are
required to have net tangible assets in excess of $4,000,000 and have a minimum
bid price of $3 per share for initial inclusion and then maintain a bid price of
$ 1 per share. Our failure to meet such requirements could result in the
de-listing of the common stock from trading on the NASDAQ SmallCap Market. If,
however, we did not meet the requirements of the NASDAQ SmallCap Market, trading
of the common stock would continue to be conducted on an electronic bulletin
board (OTC BB) established for securities that do not meet the NASDAQ listing
requirements or in what is commonly referred to as the "pink sheets." Our
failure to be listed or to maintain listing on the NASDAQ SmallCap may restrict
investors' interest in the common stock and materially adversely affect the
trading market and prices for the common stock and our ability to issue
additional securities or to secure additional financing. Also see "Risk
Factors".
WE ARE SUBJECT TO PENNY STOCK REGULATIONS AND RESTRICTIONS The Securities
Exchange Commission (the "Commission") has adopted regulations, which generally
define Penny Stocks to be an Equity Security that has a market price less than
$5.00 per share or an exercise price of less than $5.00 per share, subject to
certain exemptions. As of August 6, 1999, the market price of our common stock
was $4.39 per share and therefore is designated as a "penny stock." pursuant to
the rules under the Securities Exchange Act of 1934, as amended. Such a
designation requires any broker or dealer selling such securities to disclose
certain information concerning the transaction, obtain a written agreement from
the purchaser, and determine that the purchaser is reasonably suitable to
purchase such securities. These rules may restrict the ability of Broker /
Dealers to sell our common stock and may affect the ability of Investors to sell
their shares. The issuance of large amounts of common stock upon conversion and
the subsequent sale of such shares may further depress the price of the common
stock. In addition, since each new issuance of common stock dilutes existing
shareholders, the issuance of substantial additional shares may effectuate a
change of control of the Company. Moreover, since our common stock is traded on
the NASDAQ over-the-counter bulletin board market, investors may find it
difficult to dispose of or obtain accurate quotations as to the value of our
common stock. See "Market Price of Securities".
WE HAVE A SUBSTANTIAL AMOUNT OF STOCK THAT WILL BECOME AVAILABLE FOR RESALE
UNDER RULE 144 We have issued and outstanding 22,205,522 shares of common stock
of which 19,813,562 shares are "restricted securities" as that term is defined
under Rule 144 promulgated under the Securities Act. Future sales of such shares
made under
6
<PAGE>
Rule 144 may have an adverse effect on the then prevailing market price of the
common stock and adversely affect our ability to obtain future financing in the
capital markets and may create a potential market overhang
OUR ARTICLES OF INCORPORATION ALLOW AUTHORIZATION AND DISCRETIONARY ISSUANCE OF
PREFERRED STOCK/BARRIERS TO TAKEOVER Our Articles of Incorporation authorize the
issuance of "blank check" preferred stock with such designations, rights, and
preferences as the Board of Directors may determine from time to time.
Accordingly, the board of directors is empowered, without stockholder approval,
to designate and issue additional series of preferred stock with dividend,
liquidation, conversion, voting or other rights, including the right to issue
convertible securities with no limitations on conversion, which could adversely
affect the voting power or other rights of the holders of our common stock,
substantially dilute the common shareholder's interest and depress the price of
our common stock. In addition, issuance of the preferred stock could be
utilized, under certain circumstances, as a method of discouraging, delaying or
preventing a change in control of the Company. We have, in the past, issued
Convertible Preferred Stock without a limit on the number of shares that can be
issued upon conversion and may continue to do so in the future. See "Description
of Securities"
REGULATORY AND LEGAL UNCERTAINTIES COULD HAVE SIGNIFICANT COSTS OR OTHERWISE
HARM OUR BUSINESS. The law in the United States relating to the liability of
on-line and Internet service providers for information disseminated through
their systems remains largely unsettled. It may also take years to determine
whether and how existing laws, such as those governing intellectual property,
privacy, libel, and taxation, apply to the Internet. The growth and development
of the market for on-line commerce may also prompt calls for more stringent
consumer protection laws that may impose additional burdens on companies
conducting business on-line. The application of existing laws or promulgation of
new laws could require us to expend substantial resources to comply with such
laws or discontinue certain service offerings. Increased attention to liability
issues could also divert management attention, result in unanticipated expenses,
and harm our business. Regulation of the Internet may also harm our customers'
businesses, which could lead to reduced demand for our services. At present
there are few government laws or regulations that would adversely effect our
Internet business, however there can be no assurance that the government will
not enact laws that that address issues including user privacy, pricing, and the
characteristics and quality of products and services. An increase in regulation
or the application of existing laws to the Internet could significantly increase
our costs of operations and harm our business. For example, the Communications
Decency Act of 1996 sought to prohibit the transmission of certain types of
information and content over the Web. Additionally, several telecommunications
companies have petitioned the Federal Communications Commission to regulate
Internet service providers and online service providers in a manner similar to
long distance telephone carriers and to impose access fees on these companies.
Imposition of access fees could increase the cost of transmitting data over the
Internet.
We are subject to applicable provisions of Federal and state securities laws as
well as to regulations normally incident to business operations (e.g.,
telemarketing regulation, occupational safety and health acts, workmen's
compensation statutes, unemployment insurance legislation and income tax and
social security related regulations). Although we will make every effort to
comply with applicable laws and regulations, we can provide no assurance of our
ability to do so, nor can we predict the effect of these laws and regulations on
our proposed activities.
In addition, we will need the approval of the Foreign Asset Control, the Federal
Communications Commission, the State and Commerce Department and the Cuban
government in order to complete our proposed Project Unidad. Although we are
confident that there is no violation of the Cuban Democratic Act in our proposal
as Internet traffic is already widely available between the United States and
Cuba we cannot begin construction until such time as permission has been secured
and the proper licenses have been obtained from both governments. Although no
assurances can be given, we believe that we will be able to comply with all
requirements in order to complete this project.
Our business plan contemplates future international operations but there are
numerous risks and uncertainties in offering services outside of the United
States.
We intend to expand into international markets. We cannot be sure that we will
be able to successfully sell our services or adequately maintain operations
outside the United States. In addition, there are certain risks inherent in
conducting business internationally. These include:
Unexpected changes in regulatory requirements;
Ability to secure and maintain the necessary physical and
telecommunications infrastructure;
Challenges in staffing and managing foreign operations; and
7
<PAGE>
Employment laws and practices in foreign countries.
Any of these could adversely affect our international operations. Furthermore,
some foreign governments have enforced laws and regulations on content
distributed over the Internet that are more restrictive than those currently in
place in the United States. Any one or more of these factors could adversely
affect our contemplated future international operations and, consequently, our
business.
We may be unable to protect our intellectual property rights or to continue
using intellectual property that we license from others.
We rely on a combination of copyright, trademark, service mark, and trade secret
laws and contractual restrictions to establish and protect certain of our
proprietary rights. We have no patented technology that would bar competitors
from our market. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use our data or
technology.
THE UNCERTAINTY ASSOCIATED WITH UNPROVEN BUSINESS MODELS
Since Quest Net's business model is relatively new and unproven, we may not be
able to anticipate and adapt to a developing market, or may be unable to manage
its network infrastructure (including server, hardware and software) to handle
its Internet traffic, or to effectively manage its rapidly expanding operations.
THE COMPANY HAS LIMITED MARKETING AND SALES CAPABILITY. Because of our limited
working capital in the past, we have not had the resources to develop a
marketing and sales force. In order to increase our revenues, we will have to
develop a marketing and sales force with technical expertise and marketing
capability. There can be no assurance that we will be able to establish such
sales force or that we will be successful in gaining market acceptance for our
services. There can be no assurance that we will be able to obtain and retain a
qualified Director of Sales, further develop our sales force or obtain and
retain qualified sales personnel on acceptable terms, if at all or that any of
our proposed marketing schedules or plans can or will be met. To the extent that
we arrange with third parties to market our services, the success of such
products may depend on the efforts of such third parties See "Business-Sales and
Marketing".
DEPENDENCE ON QUALIFIED PERSONNEL.
Due to the specialized nature of our business, we are highly dependent upon our
ability to attract and retain qualified technical and managerial personnel.
Therefore we have entered into employment agreements with certain of our
executive officers. The loss of the services of existing personnel, especially
Mr. Pereira, our president, as well as the failure to recruit key technical and
managerial personnel in a timely manner would be detrimental and could have an
adverse impact upon our business affairs or finances. Our anticipated growth and
expansion into areas and activities requiring additional expertise, such as
marketing, will require the additional of new management personnel. Competition
for qualified personnel is intense and there can be no assurance that we will be
able to continue to attract and retain qualified personnel necessary for the
development of its business. See "Management".
OUR EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS, TOGETHER, MAY BE
ABLE TO EFFECTIVELY EXERCISE CONTROL OVER ALL MATTERS SUBMITTED TO A VOTE OF
STOCKHOLDERS.
Our executive officers, directors, and principal stockholders beneficially
owned, in the aggregate, approximately 79.9% of our outstanding shares of common
stock. In addition, relatives of the executive officers, directors, and
principals own approximately 4.5% of the outstanding shares of common stock and
most likely would vote their shares with such officers, directors, and principal
stockholders. These stockholders, if acting together, may be able to effectively
control most matters requiring approval by our stockholders. The voting power of
these stockholders under certain circumstances could have the effect of delaying
or preventing a change in control of Quest Net Corp.
ANTI-TAKEOVER MEASURES IN OUR CERTIFICATE OF INCORPORATION COULD ADVERSELY
AFFECT THE VOTING POWER OF THE HOLDERS OF THE COMMON STOCK. Our Certificate of
Incorporation authorizes anti-takeover measures like the authority to issue
"blank check" preferred stock. Those measures could have the effect of delaying,
deterring, or preventing a change in control without any action by the
shareholders. In addition, issuance of preferred stock, without shareholder
approval, on such terms as the board of directors may determine, could adversely
affect the voting power of the holders of the common stock, including the loss
of voting control to others. See "Description of Securities".
8
<PAGE>
THIS PROSPECTUS INCLUDES FORWARD-LOOKING STATEMENTS, WHICH COULD DIFFER FROM
ACTUAL FUTURE RESULTS. Some of the information in this Prospectus may contain
forward-looking statements. Such statements can be identified by the use of
forward-looking terminology such as "may," "will," "expect", "anticipate",
"continue", or other similar words. These statements discuss future
expectations, contain projections of results of operations or of financial
condition, or state other "forward-looking" information.
Examples of forward-looking statements include discussions relating to:
Plans to expand our existing wireless operations;
Plans to enter the international optical fiber market;
Introductions of new products and services;
Estimates of market sizes and addressable markets for our services and
products;
Anticipated revenues from designated markets during 1999 and later
years;
Statements regarding the Year 2000 issue; and
We wish to caution you that all the forward-looking statements contained in this
Prospectus are only estimates and predictions. Our actual results could differ
materially from those anticipated in the forward-looking statements due to
risks, uncertainties, or actual events differing from the assumptions underlying
these statements. Such risks, uncertainties, and assumptions include, but are
not limited to, those discussed in this Prospectus.
NO PAYMENT OF DIVIDENDS IN FORESEEABLE FUTURE
Although we declared a three-for- one stock dividend in December 1998, we do not
intend to pay dividends on our common stock in the foreseeable future. Our board
of directors does not intend to declare any dividends in the foreseeable future,
but intends to retain all earnings, if any, for use in our business operations.
As a result, the return on your investment in us will depend upon any
appreciation in the market price of the common stock. The holders of common
stock are entitled to receive dividends when, as and if declared by the board of
directors out of funds legally available for dividend payments. The payment of
dividends, if any, in the future is within the discretion of our board of
directors and will depend upon our earnings, capital requirements and financial
condition, and other relevant factors. See "Business-Dividend Policy".
CAPITALIZATION
The following table shows our capitalization at June 30, 1999.
June 30, 1999
-------------
Notes Payable -0-
Long Term Debt -0-
Capitalized lease obligations -0-
Stockholders' Equity
Common Stock --no par value, authorized
50,000,000, issued and outstanding;
22,045,500, 47,000 warrants $7,191 12,442,327
Preferred Stock -- no par value,
authorized 5,000,000 shares issued and
outstanding at June 30, 1999 100,0001
Additional Paid in Capital -0-
Accumulated Deficit $(8,019,883)
Total Stockholders' Equity $ 4,422,444
- ---------------
1 The Preferred Shares were redeemed in July 1999 at a redemption price of
$10.00 per share.
9
<PAGE>
SELECTED FINANCIAL INFORMATION
The following selected financial information is derived from the Financial
Statements appearing elsewhere in this Prospectus and should be read be read in
conjunction with the Financial Statements and Notes. Financial Information is
for the period from June 30, 1998 to June 30,1999. <TABLE> <CAPTION>
Year Ended June 30
----------------------------------------------
1998 1999
----------------------------------------------
<S> <C> <C>
Selected Income Statement Data:
Net Revenues...........................................................$ 1,070,198 -0-
Income (Loss) from Operations..........................................$(8,015,042) $(4,761
Income (Loss) before Income Taxes and
Extraordinary Item...................................................$(8,012,419) $(4,761
Net Income (Loss) per Share
Basic................................................................$ (0.71) $ (0.02)
Diluted..............................................................$ (0.71) $ (0.02)
Shares Used for Computing Net Loss Per Share
Basic................................................................ 11,351,263 240,000
Diluted.............................................................. 11,351,263 240,000
</TABLE>
Selected Balance Sheet Data:
June 30, 1999
-------------
Cash..............................................$3,298,289
Total Current Assets..............................$3,340,804
Total Assets......................................$5,675,143
Current Liabilities...............................$1,252,699
Stockholders' Equity (1)..........................$4,422,444
- --------------------
1 Gives effect to the 10 to 1 reverse stock split in October 1998 and the 3 for
1 stock dividend in January 1999.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following information should be read in conjunction with our Financial
Statements and Notes, included elsewhere in this Prospectus.
Overview
We provide Internet system and network management solutions for enterprises with
mission-critical Internet operations, including server hosting, Internet
connectivity, collaborative management, and Internet technology services.
We earn revenue primarily from subscriptions from our customers for Internet
connection and access. Subscription fees among our Internet service providers
vary between $19.95 and $150.00 per month, depending upon the type of service
each customer selects. Customers generally pay us directly on a per-service
basis for these services.
From time to time we have generated revenue from the sale of internet-related
software and the subsequent modifications to the software.
Or costs and expenses primarily fall into the following categories:
>> Telecommunications and operations;
>> Employee stock compensation plans;
>> Sales and marketing;
>> General and administrative;
>> Amortization and depreciation.
Our telecommunications and operating expenses consist of our cost of
telecommunications, including the cost of local telephone lines and costs
of leased lines connecting the Internet and our operations centers. We expect
these expenses to increase over time to support our growing subscriber base.
Our operating expenses also include employee salaries and benefits, equipment
costs, office rent and utilities and customer service and technical support
costs. We expect customer service and support expenses to increase over time to
support new and existing subscribers.
Our sales and marketing expenses to date have been minimal due to the start of
our operations. We expect those expenses to increase as we implement our
business plan in the coming year. We anticipate those expenses to include
advertising and commissions and bonuses paid to our sales and marketing
personnel. We also anticipate hiring additional sales and marketing personnel to
assist us in our rapid growth plans.
Our employee stock compensation plans consist of restricted common stock awards
and options. We have utilized our restricted stock as an incentive to attract
and keep qualified experienced key personnel. We plan to look at certain
employment agreements currently in place to determine the need, if any for
modification. We also plan to develop an employee stock compensation/option plan
that will attract new employees, retain current employees, and will not be
disproportionate to our income from operations.
Our general and administrative expenses consist primarily of administrative
staff and related benefits. We expect our general and administrative costs to
increase to support our growth.
Our amortization expense primarily relates to the amortization of goodwill and a
non-compete agreement acquired in our purchase of a e-commerce provider and
certain equipment and licenses related to our proposed plans to offer Internet
kiosks. Amortization expense is based on our best estimate of the useful lives
of the intangible assets.
Our depreciation expense primarily relates to our equipment and is based on the
estimated useful lives of the assets ranging from three to five years using the
straight-line method for the equipment. Depreciation expense is expected to
increase as we place in service equipment already purchased and as we acquire
additional equipment to support our intended growth.
We made an acquisition of an e-commerce provider, which has been accounted for
using the purchase method of accounting. As a result, the amount by which the
fair value of the consideration we paid in the acquisition exceeded the fair
value of the net tangible assets we bought of $3,372. We allocated the excess of
$331,628 to the non-compete agreement, which was acquired as part of the
purchase. The non-compete agreement will be amortized over the life of the
agreement, which is three years.
Reverse Split
Unless otherwise stated, all share and per share information contained in this
prospectus gives retroactive effect to a 1-for-10 reverse split of all
outstanding shares of our common stock on October 16, 1998.
Common Stock Dividend
We issued a stock dividend to shareholders of record on January 6, 1999 giving
three shares of our common stock for every one share held. The dividend of
15,525,081 shares was greater than twenty five percent of our pre-dividend
outstanding shares; therefore it was accounted for as a forward three for one
split.
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<PAGE>
RESULTS OF OPERATIONS
Twelve Months Ended June 30, 1999 and June 30, 1998.
- ----------------------------------------------------
The discussion of our historical results set forth below addresses our
historical results of operations and annual conditions as shown on our
Consolidated Financial Statements for the fiscal year ended June 30, 1999, as
compared to the fiscal year ended June 30, 1998. However, this information is
not necessarily indicative of our operating results since we had no significant
operations until July 1998, when we purchased the assets of Pact Communication
Group, Inc. and began our Internet operations.
Revenue
For the year ended June 30, 1999, we had $136,361 of revenue consisting
primarily of subscriber revenues received for Internet access and Internet
related services and revenues from our sale, installation and modifications of
software to one customer totaling $933,837, resulting in total revenues from
continuing operations of $1,070,198. We had no revenues from continuing
operations for the year ended June 30, 1998.
Expenses and Net Loss from Operations
Stock based compensation for the year ended June 30, 1999 increased to
$6,109,110 form $-0- for the period ended June 30, 1998. The increase was
primarily due to common stock issued to our executive officers pursuant to their
employment agreements and performance bonuses.
Bad debt expense for the year ended June 30, 1999 increased to $893,095 from
$-0- for the period ended June 30, 1998. The increase was primarily due to
software sales to one customer who is in default of the Software Sales Agreement
with respect to the payment provisions of the Agreement.
Salaries expense for the year ended June 30, 1999 increased to $383,160 from
$-0- for the period ended June 30, 1998. The increase was due to the hiring of
employees and commencing our start-up activities and operations.
General and Administrative expenses consist primarily of office and equipment
rent, costs associated with operating our offices, such as telephones, utilities
and supplies, insurance and professional fees, such as legal, accounting and
consulting. These expenses increased to $634,861 for the year ended June 30,
1999 as compared to $4,761 for the year ended June 30, 1998, primarily as a
result of our start-up activities and beginning minimal operations
Depreciation and amortization for the year ended June 30, 1999 increased to
$313,367 from $-0- for the period ended June 30, 1998. The increase was due to
our placing in service equipment acquired during the year and intangible assets
acquired in our purchase of Wings Online, Inc.
Loss of disposal of assets for the year ended June 30, 1999 increased to $56,559
from $-0- for the year ended June 30, 1998, primarily as a result of our
replacing equipment acquired at June 30, 1998, which was not placed in service
with new equipment acquired during the year ended June 30, 1999.
These activities resulted in a net loss for the year ended June 30, 1999 of
$8,012,419
Liquidity and Capital Resources
Since our inception, we have relied principally upon the proceeds of private
equity financings to fund our working capital requirements and capital
expenditures. We have generated only minimal revenues from operations to date.
During the year ended June 30, 1999, we offered and sold $1,039,248 shares of
our common stock for total cash proceeds of $925,000, equipment valued at 42,400
and consulting services valued at $32,600. We paid a total of $2,950 in cash for
legal fees related to the cost of the offering and issued an additional 24,000
shares of our comm. Stock for other costs of the offering valued at 15,000.
In July 1998, we issued 60, 000 shares of our $10.00 stated value convertible
preferred stock in exchange for software. The 60,000 preferred shares were
converted in November 1998 for 300,000 shares of our common stock. The
conversion rate of $2.00 per share was based on 80% of the three-day average bid
price for the common stock prior to the date of conversion.
In December 1998, we issued 100,000 share of our $10.00 stated valued
convertible redeemable preferred stock and 2,607,666 of our common stock to one
shareholder in exchange for computer equipment valued at the fair valued of the
equipment of $1,724,520. In July 1999, we redeemed our preferred stock at its
stated value of $1,000,000. In February 1999, we acquired all of the outstanding
12
<PAGE>
stock of Wing Online, Inc. for $335,000. The purchase price was paid in $135,000
cash and 29,326 shares of our common stock valued at $200,000. To date, Wings
Online has generated positive cash flows from operations.
In May of 1999, we sold to one accredited investor, 910,747 shares of our common
stock for gross proceeds of $5,000,000 less $350,000 in offering costs,
resulting in net proceeds of $4,650,000.
At June 30, 1999 we had cash on hand of $3,298,289. We believe we have
sufficient liquidity to meet our near-term obligations and to continue with our
proposed operations. If we are unable to generate and sustain positive cash flow
from our operations and if we incur penalties and interest due to our inability
to register certain shares, our liquidity and our planned rate of growth will be
adversely affected.
Although; we cannot accurately predict the precise timing of our future capital,
we estimate that we will need to expend approximately $1,000,000 on our wireless
expansion to Tampa Florida, $500,000 for T-3 lines and $700,000 in equipment. In
addition, our present operating costs are approximately $60,000 per month. If
the United States and Cuban government approve Project Unidad (the installation
of undersea cable to Cuba), we estimate that the cost of the project will be
approximately $11,000,000 over a two-year period. We have received preliminary
indications of interest to finance this project. However, if and when the time
comes to begin Project Unidad, we may not be able to get financing or if we do,
it may not be on terms favorable to the Company.
We are in the planning stages of an additional $5,000,000 equity offering which
may be dilutive to our existing shareholders. We are also negotiating operating
and/or capital leases, which may involve pledging some or all of our assets and
may contain restrictive covenants with respect to raising future capita and
other financial and operational matters.
If we are unable to obtain necessary additional capital, we may be required to
change our proposed business plan and decrease our planned operations, which
would have a material adverse effect upon our business, financial condition, or
results of operations.
BUSINESS
EXPLANATION AND BACKGROUND OF THE INTERNET
The Internet is a collection of computer networks connecting millions of public
and private computers around the world. In its formative stages over a span of
20 years, the Internet was used by government agencies and academic institutions
to exchange information, publish research, and transfer e-mail. It was only in
1991 that the U.S. government opened the Internet to private enterprise. That
was the same year that Tim Berners-Lee at CERN Labs in Geneva developed the
World Wide Web ("www"), which made the graphical presentation of information on
the Internet possible. Since then, a number of factors, including the
proliferation of communication-enabled personal computers, the availability of
intuitive graphical user interface software and the wide accessibility of an
increasingly robust network infrastructure have combined to allow users to
easily access the Internet. This, in turn, produced rapid growth in the number
of both commercial and personal Internet users. In 1994, Netscape and America
Online still had fewer than one million subscribers. Only in 1995 did the Web
begin to capture the attention of a significant portion of the general public
and of the media.
In its early days the Web was used to provide information in a relatively
passive way. This has been referred to as publishing "electronic brochures".
Eventually, many sites became more interactive, allowing searches and retrieval
from extensive databases. While the interactive capabilities of the Web made
purchasing items technically possible, concerns about the security of
transmitting credit card information over public data channels inhibited the
growth of online commerce. Only in the past 18 to 24 months has electronic
commerce begun to find acceptance among consumers. While the credit card and
banking industries are continuing to work on solutions to the security
weaknesses of the Internet, a growing percentage of the public has grown
comfortable purchasing online using the available Secure Socket Layer ("SSL")
technology.
Within the past year, growth has been dramatic. In its Internet survey, Nielsen
found a "startling increase" in Web users actively shopping on the Internet.
That survey found that 39% of all Web Users had searched for product information
online prior to making a purchase, compared to only 19% last year. More
importantly, the number of Web users who actually purchased a product on line
reached 20 million. In a January 1998 special report prepared by Ernst & Young
and the National Retail Federation, the authors found that 32% of consumers with
online access have purchased products or services on the Internet. Twice that
amount (64%) research products online and later buy them through traditional
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<PAGE>
channels. Other research by Nielsen indicates that long-time Internet users are
more than twice as likely to purchase as newcomers. This indicates that Internet
commerce should increase rapidly as people gain experience using the Web.
The emergence of the Web, the graphical, multimedia environment of the Internet,
has resulted in the development of the Internet as a new mass communication
medium. The ease and speed of publishing, distributing and communicating text,
graphics, audio and video over the Internet has led to a proliferation of
Internet-based services, including chat rooms, online magazines, news feeds,
interactive games and a wealth of educational and entertainment information, as
well as the development of online communities. In addition, by eliminating many
of the costs involved in executing routine commercial transactions, such as
simple banking services and retail purchases, the Internet is rapidly providing
individuals and organizations with a new medium for conducting business.
The table below defines the number of worldwide Internet users in 1998 by
continent.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1998 Worldwide Internet Users
-----------------------------
Continent Number of Users
--------- ---------------
(Thousands)
<S> <C>
North America 79,000
Europe 23,000
Asia/Pacific Rim 15,000
South America 2,000
Africa 1,000
Middle East 541
------------
Total 121,000
- -----------------------------------------------------------------------------------------------------
</TABLE>
According to International Data Corporation, the total number of worldwide
Internet users in the year 2002 will approximate 320 million, reflecting over a
two and one-half fold user increase over the next 5 years.
Morgan Stanley Research estimates that demand for online and Internet services
will closely follow personal computer (PC) penetration within the home and
office. PC penetration recently reached a rate of nearly one-third of all United
States households. This penetration rate is similar to the household TV
penetration level in the early 1960s and is expected to increase to a level
close to the current TV household penetration level of 98% within the next 10 to
20 years.
This estimate projections that the use of the Internet will continue to grow as
it continues to provide more and more of the functions now provided by mail,
telephone and television, performed in a more cost and time-effective manner.
THE INTERNET INDUSTRY
Our business operations are dependent on the Internet. According to a Nielsen
Media Research survey released in September 1997, 58 million adults are using
the Internet in the United States and Canada with over one half of this number
on line during the 24 hours prior to the survey. A new Nielsen Study released in
June 1998 reported that this number has now reached 79 million, representing a
growth rate of 36.2 percent.
The Nielsen study revealed that the number of people buying products and
services via the Web has hit 20 million. The number of Web shoppers, i.e.,
people checking out or comparing products and services on the Web, is now 48
million, representing a 37 percent increase that is roughly in line with the
overall Internet population growth. The number of people making purchases via
the Web has doubled. Using results from a January 1997 study as a baseline, this
amounts to a robust compounded rate of 2.5 percent a month through June of 1998.
In that same 18-month period, the number of on-line buyers increased even more
dramatically. From January 1997 to September 1997, the number of on-line buyers
grew at a rate of 3.5 percent per month. From September through June 1998, the
growth in on-line buyers accelerated to 8 percent per month. Nielsen advises
that, while technological innovations have definitely broken through, they are
generally transparent to the user. The dramatic increase in on-line purchasing
is primarily attributed to people realizing how quick and easy it is to shop on
the Web. This is the impact of branding, word-of-mouth and consumer trust.
The Nielsen Report also highlighted some of the demographics centered on the
Internet population in the United States and Canada. These include:
o More than 50 percent of Internet users fall with the age population
between 16 and 34. This approximates 40 million people.
o The number of people of age 50 or greater represents 17 percent of
Internet users, or 13 million persons.
o Approximately 43 percent of Internet users, or 34 million persons, are
women.
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o Most on-line shoppers (69 percent) and purchasers (71 percent) are men.
Morgan Stanley's High Technology Group projects that by the year 2000, there
will be 150 million people with Internet access worldwide. They believe that
this may be conservative, since there are already 230 million PCs in the world.
Sales of PCs have exceeded those of television sets every year since 1996.
The actual and forecasted growth of Internet use from 1998 through 2002 is
displayed in the following table.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Worldwide Internet Population
(Millions)
Av. Annual Growth Rate
1997 2002
---- ----
<S> <C> <C> <C>
(`97-`02)
US Internet users 38.7 135.9 23.3%
Worldwide Web users 68.7 319.8 29.2%
Source: Industry Standard Magazine, July 10, 1998
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Although there can be no assurances, as the table indicates, the Internet should
continue its growth as a communications, research, entertainment, and commercial
medium into the 21st century.
INTERNET MARKET SECTORS
The table below highlights the different sectors of the Internet market in the
United States and values each.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market Sectors Market Size
($ Millions)
1998 2002
---- ----
<S> <C> <C>
Connection (Access) Services $4,333 $12,348
E-Commerce - Goods and Services- 14,000 268,817
Advertising 940 7,700
Fiber Optic Cable (Worldwide) 6,480 13,437
Internet Wireless Services (U.S.) 30,000 74,650
Community Developers 816 1,692
Content Providers 338 701
Commercial Software 5,230 10,845
----- ------
Total $62,137 $390,190
Source: IDC, The Global Market for Internet Usage and Commerce, June 1998; the Oaktree Group.
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Although no assurances can be given, as the table indicates, sales to the
Internet market are predicted to increase over six-fold during the next 5 years.
Of the eight market segments listed above, we participate in all except
Commercial Software Development. Our target markets are defined below. There can
be no assurance that we will be able to enter into or compete in the target
markets or be able to obtain any market share
The Internet Connection (Access) Market
- ---------------------------------------
The market for Internet connection services was estimated at $4.3 billion in
1998 and is forecast to nearly triple by the year 2002 to over $12 billion.
Connection services are needed by both business and residential customers,
including vendors and consumers, so they can hook up to the Internet and
participate in the other services available through this interactive medium,
such as web hosting, advertising and e-commerce. U.S. Internet usage is
estimated at over 70 million in 1998 and is forecast to grow to nearly 136
million by the year 2002.
According to International Data Corporation (IDC), a market research company,
growth in Internet access is a universal phenomenon and not limited to the U. S.
High Internet activity was found in homes in certain Asia-Pacific countries,
where access often costs more and fewer PCs are equipped with modems. For
instance, Japan had a higher utilization rate than the U.S., with more than 18%
of households with PCs were using them to access the Internet. Hong Kong's
utilization rate was also high, with 12% of PC households accessing the
Internet. This is the same percentage-accessing rate as in the U.S. in 1995.
ICD's study also revealed a substantial amount of commerce being conducted on
the Internet, both within and beyond the U.S. borders. In Western Europe, 34% of
households accessing the Internet said they used the Internet to purchase goods
and services. In Japan, the number of persons engaged in commerce over the
Internet was 17%; and for the rest of Asia it was also 17%. By contrast, the
percentage of U.S. households accessing the Internet that used it for purchasing
goods and services was 22%. The table below lists the percentage of universal
households with PCs that access the Internet.
15
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Universal Internet Usage by PC Households
Country Percent of PC Households
-------- ------------------------
<S> <C> <C>
U.S. 16.0%
U.K. 9.5
France 6.5
Germany 11.7
Italy 5.8
Japan 18.4
Australia 8.9
Hong Kong 11.7
Singapore 7.0
South Korea 6.3
Taiwan 10.3
Source: International Data Corporation
----------------------------------------------------------------------------------------------------------
</TABLE>
The Internet Advertising Market
- -------------------------------
The Internet Advertising Bureau (IAB) announced that in the first Quarter 1998
spending on advertising reached $351 million, an increase of 27% over the first
Quarter of 1997, and the eighth consecutive quarter of positive growth.
According to the report, a trend is developing toward a traditional media model
for Internet advertising, with computer and consumer-related advertising leading
the way. This market is new and rapidly evolving. Many companies now consider
the Internet an integral component of the overall media mix and view a strong
presence on the Internet as key to their overall branding. Use of the Internet
by consumers is growing at an enormous rate. The consumer online and Internet
service industry is now in its second stage of evolution that is embracing both
consumers and businesses. Morgan Stanley Research and CommerceNet estimates that
the number of global Internet users exceeds 120 million, will grow to
approximately 152 million by the year 2000, and will reach nearly 320 million by
2002.
The Internet Wireless Market
- ----------------------------
Today's telecommunications ("telecom") systems deliver voice, video, and data
via a variety of wired and wireless methods. Annual global spending on telecom,
already at $726 billion, is expected to grow to $1 trillion by 2001. There are
more than 68.3 million wireless phone users in the U.S., representing a market
penetration of about 17%. Revenues derived from this "wireless umbrella" over
the U.S. amounts to approximately $30 billion in 1998. There are approximately
180 million wireless customers worldwide, which is only a 3% market penetration.
That leaves a lot of room for growth.
One major trend in today's market is the conversion of cellular networks to
digital, which allows asynchronous data transmission required by today's
computers. In fact, data communications, driven by the Internet, are replacing
voice communications. Today's networks already carry as much fax and data
traffic as they do voice traffic. By 2001, some analysts believe that 90% of all
traffic carried on telecommunications network will be data-driven. However,
phone networks were designed to handle voice, not data, and thus fiber optic
networks incorporating the latest data transfer technologies are poised to serve
this new traffic.
For areas that are too remote to install fiber optic cable lines, wireless LANs
(Local Area Networks) have been developed and are taking their rightful place in
the Internet market. As computers become, smaller, more powerful, and more
mobile, people are no longer tethered to one location. Offices, work areas, and
service locations are continuously changing and the available connectivity and
Internet access capabilities need to parallel this change. The Oaktree
Consulting Group forecasts that the current $ 30 billion U.S. market will grow
to $74.6 billion by the year 2002, amounting to an average annual growth rate of
25.5%.
The Fiber Optics Market
- -----------------------
Fiber Optics is the art of transmitting light and optical images through
transparent fibers, either clear plastic or glass. This technology offers myriad
advantages to copper-based cable, which has been used extensively to date for
transmission purposes. One major advantage is the creation of higher bandwidth
that makes possible the transmission of high capacity images over the Internet.
According to Pioneer Consulting, the worldwide market for fiber optic cable in
1996 was approximately $5.9 billion, reached $6.5 billion in 1998, and is
forecast to grow to over $13 billion by the year 2002. The development of
high-speed backbone technologies such as ATM and Gigabit Ethernet, that require
ever-increasing bandwidth, is driving the growth of this market.
The advantages of optical fiber as a communications medium has been recognized
since the technology was introduced in the mid-1970s, but the cost of the
optical fiber and the associated electronics prevented its deployment until the
16
<PAGE>
mid-1980s when single-mode fiber optic systems began to be installed in the long
distance transmission facilities of the telephone companies. Essentially, all
terrestrial and submarine communications systems now use fiber optic cables and,
as the economics continue to improve and the demand for bandwidth continues to
increase, fiber optic cable will be used in more and more applications. Thus,
the increasing use of fiber optics transmission facilities in communications
networks is well established.
As use of the Internet continues to become a major tool of commerce, and as
world economies continue to grow and U.S. trade and communications are initiated
with under-developed and otherwise strategically isolated nations, we recognize
an opportunity to bring fiber optic capabilities to Cuba and to the tourist rich
islands of the Caribbean. To this end we are in the process of implementing the
strategy described in its "Project Unidad", which is a high capacity (up to
OC-192 or 10 Gbps), fiber optic communications network connecting Cuba's major
population centers with the U.S. and the world. See "Business-Project Unidad".
The E-Commerce Market
- ---------------------
Shopping is rapidly increasing as a common activity among Internet users.
According to PC Meter, which tracks the web surfing habits of a sample of about
9,000 to 10,000 households, the percentage of its sample that visits
shopping-specific sites had been rising. In February 1997, shopping-specific
sites as a category had a reach (defined as the percentage of user sample that
visited a shopping- related site) of 31% among U.S.-based consumers surveyed,
and ranked eighth among the 12 most used categories of web service. In terms of
percentage growth in one year, only travel (93%) saw a greater increase than
shopping (54%). In a June 1998 report, IDC Consulting estimates that the Global
Market for Internet commerce topped $14 billion in 1998, forecast to grow to
$268.8 billion by 2002. In a 1997 report, Morgan Stanley forecasted the 2002
e-commerce market in the U.S. to be at least $112 billion or 42% of the
worldwide market. It based this forecast on the assumption that the e-commerce
market will continue to grow at nearly 24% per year, the percentage of web users
making online purchases will grow from 20% to 45%, and the average annual
spending will grow from $250 today to nearly $800. By way of comparison, average
annual spending per mail order customer was approximately $1,000 in 1997.
As the total number of web users increases, and as consumers become more
comfortable shopping over the Internet, we believe that there will be tremendous
opportunities for Internet retail companies with the products that satisfy
consumer needs and the know-how to manage online selling and distribution
systems.
The Long-Distance Telecom Market
- --------------------------------
In the U.S., local calling revenue was $96.6 billion in 1997. Long distance
revenue amounted to $92.7 billion in the same year and is estimated at $102
billion in 1998. Future growth rates are forecast at 10%. The defining feature
of today's telecom market is change, spurred by technological advances and
deregulation.
Today, about 94% of all U.S. households have telephone service. With the
dissolution of AT&T's national monopoly in 1982, a new era of competition began,
one with cheaper rates, sophisticated pricing management, and barrage of
telemarketing tactics. Mega-mergers have now become the norm in this industry,
as competitors buy their customers through acquisition rather than build new
networks. In 1996, these mergers totaled $77 billion. In 1998, the MCI-WorldCom
merger alone was valued at $37 billion. This deal highlights how a formerly
obscure company such as WorldCom, which started life in 1983 as a cut-rate
long-distance carrier called LDDS, can grow into a dangerous rival through
acquisitions. WorldCom has acquired approximately 40 competitors over the years.
The marriage of MCI to WorldCom created the third largest U.S.
telecommunications company, behind AT&T and Sprint.
A developing trend in the long distance phone market is the reselling of long
distance services bought, under high volume contracts and at deeply discounted
rates from major telecommunications carriers such as those mentioned above.
These services are resold to commercial customers too small to receive the
discounts directly from the major firms. The resellers operating in this area of
long distance activity (both regional, national and international) are high
growth companies with incomes between $10 million and $100 million, are
experiencing double digit growth rates, and are lean staffed. We plan to enter
this market through our Questel division.
HISTORICAL OVERVIEW OF OUR COMPANY
We were incorporated in the State of Colorado in November 1995, under the name
A.P. Sales Inc. Its proposed business was to engage in the purchasing,
reconditioning, selling, moving, and repairing of office equipment and
furniture, including, primarily, filing and storage cabinets, and workstations.
Until July of 1998, its operations were primarily organizational in nature or
related to raising capital.
17
<PAGE>
In July 1998, we acquired certain of the assets of Pact Communication Group,
Inc. ("Pact"), a privately held Florida corporation. The assets that were
purchased were related to Pact's Internet provider business and valued at
$125,274. The purchase price for the assets was the issuance of 2,000,000 shares
of our common stock. We then changed our name to Quest Net Corp. and, in
December 1998, domesticated in the State of Florida.
After the acquisition of Pact's assets, we became a provider of Internet system
and network management solutions for enterprises with mission-critical Internet
operation, including sever hosting, Internet connectivity, collaborative
management and Internet technology services.
We utilize our proprietary technology and equipment to provide a total solution
for Internet connections to commercial entities, most of which provide some form
of Internet value-added service to others and to individuals. We accomplish this
through a wholesale business model in which we do not offer consulting services
and systems integration, but only provide bulk dial-up Internet access, and
dedicated Internet access.
We are a provider of secure, full-service global Internet and Intranet broadband
digital networking solutions for businesses and individuals. We have a
high-speed low delay connection (referred to as an ATM) and several backup
connections to the Internet. We offer dedicated high speed Internet access,
metropolitan and wide area network data transport services, including virtual
private networks, to several commercial clients and other ISPs (Internet Service
Providers) and wireless Internet connection at a speed of up to 16 Mbps to a
distance of 20 miles on a license free spectrum. We believe that we offer one of
the fastest and cleanest routing systems for the transfer and delivery of voice,
video, and data streams at several speed ranges. The solutions provided by us
include co-location, hosting, dedicated and wireless Internet connectivity,
content, electronic commerce (e-commerce), and search engine services. We
anticipate that in the future we will be able to provide discounted long
distance services and offshore optical fiber capacity.
We provide or will provide these services through five subsidiaries, each with
its own market and customer base. We sell dial-up and dedicated Internet access
services through IPQuest Corp. and wireless Internet services through Quest
Wireless Corp. We also provide Internet content, e-commerce and search engine
development through Globalbot Corp. and will provide long distance phone
services through QuesTel Corp. In addition, we plan to provide optical fiber
capacity to the islands in the Caribbean Sea, including Cuba, through Quest
Fiber Corp. Our operating structure is depicted in the figure below.
<TABLE>
<CAPTION>
[GRAPHIC HERE]
Quest's Operating Structure
Quest Net Corp.
<S> <C> <C> <C> <C>
IP Quest Corp. Globalbot Questel Corp. Quest Wireless Corp. Quest Fiber Copr.
Dial-up Services Fiber Optic
Web Hosting Services Services
Dedicated Services Advertising Services Long Distance Wireless Internet
Search Engine Services Services Services
Content Services
E-Commerce Services
Wings Online
E-Commerce Services
</TABLE>
Until July 1999, when we terminated our agreement, we serviced our dial-up
customers nationwide through more than 228 points of presence (POPs) that were
provided through contractual agreements with PSINet. In September 1999 and
February 1999, we entered into two four- year contract with World Com Network
Services to provide us with certain network transit capacity to make the long
distance metropolitan area connection to MAE (Metropolitan Area Exchange) in
Dallas, Texas and San Jose, Puerto Rico. Due to lack of bandwidth World Com was
unable to timely provide the services.
After an intense review of our operations, revenues and costs, we decided that
our operations were to wide-spread and that were expending substantial
management, sales and marketing efforts and money to service, maintain and
market to customers in large a geographic area. In June 1999, we decided to
streamline our operations and curtail our expenses by concentrating our efforts
on providing and marketing our services in Florida, with gradual managed growth
to other areas.
18
<PAGE>
In July 1999, we entered into a two-year Internet Access Service Agreement with
Qwest to provide us with certain network transit capacity, which we believe to
be adequate for our capacity requirements. The Qwest agreement will provide us
with additional bandwidth connectivity to the Internet.
In June 1999-we signed an agreement with Wireless Inc. ("Wireless"), a leader in
wireless networking, for wireless access equipment and installation valued at
$2.5 million. We will use the equipment to initially expand our wireless network
from Homestead to Jupiter, Florida. Once installation is completed, this
equipment will provide our customers with high-speed wireless Internet
connections utilizing Wireless's WaveNet(R) IP 2458, point-to-multipoint,
wireless access routers. The WaveNet IPs will be deployed off a wireless
backbone that Wireless and Quest Net have partnered together to build. The
second stage will be to deploy the network on the entire East Coast of Florida
and eventually the entire state of Florida. Installation of the WaveNet IP 2458
central units has begun and we anticipate completion within one year. We believe
that the future of dedicated services is in wireless technology. Wireless
technology provides innovative, high-quality solutions for local connectivity
and allows us to provide leading-edge technology to our customer base.
In May 1999, we acquired certain assets of AVX, Inc ("AVX"), valued at $300,000
in exchange for an aggregate of 39,894 shares of our common stock. AVX is a
Virginia based manufacturer and developer of "axcess" Internet enabled kiosk
systems. The assets that were acquired consisted of kiosk systems, a video
studio, digital cameras, software licenses, magnetic insertion card readers,
electronic equipment, and computers.
In May 1999, the Board of Directors, with Mr. Pereira abstaining, approved the
purchase of 49% of the authorized but unissued common stock of Quest Net Corp.
SA (PTY) LTD., a South African Internet company, for $4,000,000 to be paid in
our restricted common stock. The shares will be valued at market as of the date
of the closing of the transaction. Mr. Pereira owns 40% of Quest Net Corp. SA
(PTY) LTD. Quest Net Corp. SA (PTY) LTD holds a 51% interest in Web Solutions, a
South African Web page designer and developer and a Value Added Networks license
issued by the South African Telecommunications Regulatory Agency. Because we are
purchasing our interest with common stock, we cannot enter into a letter of
intent until we receive approval of the South African government.
In April 1996, we entered into a three- year contract with e.spire
Communications, Inc. ("e.spire") to purchase PRI's in Florida. Presently we are
operating six lines. Customers call into our POP located in Aventura Florida,
via one of six PRI's provided by e.spire, they will then be routed to the
Internet via a DS3 dedicated Internet connection, which is provided by Bell
South.
In April 1999, we were chosen to host the new Volkswagen Press Room Website and
Intranet. The Press Room will be used facilitate communication between these
Volkswagen managers that are spread all over the world and will enable the users
to have instant access to "the tools of their trade. Web Solutions and Johan
Wagner, the South African PR manager for Audi, conceived this Website.
In March 1999, we completed our first completely hi-tech, wired, and wireless
Internet Voice and Data Smart Building at the Concord Center II of Aventura
Florida, which houses our corporate headquarters. The Concord Center II is the
first building that we have equipped with advanced communications technology
such as fiber optics, maximum bandwidth, and other leading edge
telecommunication services. The City of Aventura was the first client to take
advantage of our new Smart Building. We offer up to 16 Mbps of Internet access,
up to 20 miles from the Smart Building.
In March 1999, we were going to acquire a 40% interest in Web Solutions, a South
African Web page designer and developer. We were unable to consummate the
purchase due to our inability to obtain financing at that time and the Web
Solutions declined our offer of issuing stock for the purchase price. After we
declined the purchase, Mr. Pereira, our president purchased the interest through
his South African company Quest Net Corp. SA (PTY) LTD. See "Certain
Transactions".
In February and March 1999, we acquired three industry-specific, e-commerce
sites, namely, Wings Online, Inc., who's principle asset is an aircraft
e-commerce site, Boats Online, a boat marketplace and resource center, and Cars
Online an automobile market place. These were acquired for an aggregate of
30,826 shares of our common stock and an aggregate of $142,000 in cash payments.
In January 1999, we received notice from the Federal Communications Commission
of approval of our FCC Section 214 Application granting us the authority to
provide domestic and international long distance telecommunications services to
both residential and commercial customers in the United States.
In December 1998, we purchased certain types of Internet provider equipment and
certain domains and sites from Grupo Internet Latinoamericano, S.A. ("Grupo").
19
<PAGE>
At the time the purchase was made Grupo was an unaffiliated third party. The
aggregate purchase price for the assets was $2, 042,000. We paid the purchase
price by the issuance of 2,607,660 shares of common stock and 100,000 shares of
redeemable convertible preferred stock. The face value of the preferred stock
was $10 per share. In July we redeemed the preferred stock at a redemption price
of $10.00 per share. See "Certain Transactions" and "Principal Stockholders".
In July 1998, we purchased software for the encryption of on-line credit card
processing, on-line casino transactions, on-line stock brokerage transactions,
and encrypted financial transaction from Simplex Ltda., an unaffiliated third
party, for $600,000. The purchase price was paid by the issuance of 60,000
shares of our redeemable preferred stock with a face value of $10.00 per share.
The preferred stock was converted into 111,000 shares of our common stock at a
conversion price of $5.380 per share. The conversion price was equal to the
5-day average bid price of our common stock at the date of conversion.
We are not currently a reporting company under the Securities and Exchange Ace
of 1934, as amended and therefore we have not filed any reports with the
Securities and Exchange Commission. Upon effectiveness of the Registration
Statement of which this Prospectus is a part, we intend to register under the
Exchange Act, and to furnish to our security holders annual reports containing
audited financial statements reported on by independent auditors, and quarterly
reports containing unaudited financial information for the first three quarters
of each fiscal year by electronic delivery on our Website at www.ipquest.com.
OUR BUSINESS
We utilize our proprietary technology and equipment to provide a total solution
for Internet connections to primarily commercial entities, most of which provide
some form of Internet value-added service to others. We accomplish this through
a wholesale business model in which we do not offer consulting services or
systems integration, but only provide bulk dial-up Internet access and dedicated
Internet access.
We also provide dedicated high speed Internet access, metropolitan and wide area
network data transportation services, including virtual private networks, to
several commercial clients and other Internet service providers (ISPs). In
addition, we offer Wireless Internet Connection services at a speed of up to 16
Mbps to a distance of 20 miles on a license free spectrum. As an added service,
we set RNAPs (Regional Network Access Points) at our points of presence (POP)
location. ISPs), Internet Presence Providers (IPPs), and others can connect to a
port on our Fast Ethernet switch, (for free or for a nominal fee) and peer with
other local and regional providers there. Peering is an arrangement to exchange
data at no additional cost. In this scenario, local providers save money on
bandwidth while we benefit by increasing the number of managed interconnections.
Until July 1999, when we terminated our agreement, we serviced our dial-up
customers nationwide through more than 228 POPs that were provided through
contractual agreements with PSINet. In February 1999, we entered into a
four-year contract with MCI World Com to provide us with certain network transit
capacity at a cost of approximately $30,000 per month, to make the long distance
metropolitan area connection to Tier 1 Internet providers. WorldCom was unable
to timely provide a DS3 switch in order to commence the services.
After an intense review of our operations, revenues and costs, we decided that
our operations were to wide-spread and that were expending substantial
management, sales and marketing efforts and money to service, maintain and
market to customers in large a geographic area. In June 1999, we decided to
streamline our operations and curtail our expenses by concentrating our efforts
on providing and marketing our services in Florida, with gradual managed growth
to other areas.
Although we are currently focusing on expanding our wireless operations
throughout Florida, we intend to expand our connection abilities nationwide by
the year 2002. Our objective is to shape and lead the global market for in total
solution for Internet connections. We intend to achieve this goal through a
strategy focused on:
Expanding our premier Web site hosting capabilities;
Addressing industry-specific customer needs;
Developing next generation service offerings;
expanding our wireless operations throughout Florida and eventually
nationwide;
expanding our capabilities through selective strategic alliances and
acquisitions; and
entering the international optical fiber market using Cuba as our
entry point.
20
<PAGE>
OUR SERVICES
Our services fall into five main classifications: Connection or Access Services,
Content Services, Optical Fiber Services, Internet Wireless Services and
Advertising Services, each serving a different market and a different customer
base.
Internet Connection (Access) Services
- -------------------------------------
Connection services to the Internet are provided through our IPQuest and Quest
Wireless divisions. This is currently our core business. The Internet connection
or access market comprises Internet Service Providers (ISPs), Internet Presence
Providers (IPPs), Internet Content Providers (ICPs) and large corporations,
organizations and small office home office. ("SOHO"), up to a T-3 (45 Mbps)
connection level. The Internet connection services afforded to this customer
base include dial-up, hosting, and co-location services.
Pricing for dial-up services are described in the following table.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
Dial-Up Service Pricing Structure
Service Type Price Per Month Terms
------------ --------------- -----
<S> <C> <C>
U.S. Customers $19.95 Monthly
International 22.95 Monthly
Dial-up
Dial on Demand (ETRN) 49.95 Monthly
Dedicated V90 150.00 Monthly
Dedicated ISDN
64K 200.00 Local Loop & Installation
128K 325.00 Local Loop & Installation
T1 Frame (56K) 150.00 Local Loop & Installation
T1 Frame (1.5 Mb/s) 895.00 2 Year Contract, Local Loop & Install
995.00 1 Year Contract, Local Loop & Install
Wireless (3.0 Mbps) 995.00 Installation
-------------------------------------------------------------------------------
</TABLE>
Hosting Services
- ----------------
Quest Net provides technical support while giving the end user the fastest
possible connection to the Internet through T1 and T3 connections. We also
provide the latest in cutting edge marketing for customized Web sites, including
a complete Internet Commerce Solution (ICS). We will work with their customer's
in-house resources and will handle everything from setup to a search engine
registration to provide the customer a Web presence with a minimum of effort.
Quest Net offers its customers three pricing options to accommodate multiple
customer needs and budgets as described in the following table.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
Hosting Services
Pricing Structure
-----------------
Service Type Price Per Month Terms
------------ --------------- -----
<S> <C> <C>
Value Plan $24.99 Set-up @ $39.99
E-Commerce Plan 49.95 Set-up @ $99.00
Co-Location Plan 99.00 Port Fee Set-up @ $500.00
----------------------------------------------------------------------------------------------------
</TABLE>
Each plan is individually described below.
Value Plan This plan is designed to attract individuals and small
business entities and offers the following:
o Includes the first 2,500 Mb, plus 3 cents per Mb thereafter.
o 10 Mb of disk space.
o 2E-mail accounts (POP3).
o Account control panel via Web.
o Unlimited FTP updates.
o Choice of UNIX or Windows NT hosting.
o Microsoft Front Page support.
o Telenet access to the server (UNIX hosting).
o Personal CGI Directory for personalized scripts.
o Site counter as well as detailed statistics.
o E-mail forwarding, auto responders, and vacation reply.
o Domain name registration. InterNIC fees are additional.
21
<PAGE>
Commerce Plan This plan is designed to attract companies selling products and
services on the Internet and offers the following:
o Includes the first 5,000 Mb, plus 3 cents per Mb thereafter.
o Storage Limit: 100 MB (Extra storage at $0.40/Mb/Month).
o 10 E-mail accounts (POP3)
o Secure Socket Layer (SSL) for credit card transactions.
o Shopping Card application, fully configurable.
o SQL support for database applications.
o Database utilities such as search engine, guest books, feedback
forms, mailing lists, and mass E-mail conferencing.
o Domain name registration (www.customersname.com). InterNIC fees
are additional.
Co-Location Plan This plan is designed to attract companies or individual
business entities running their own servers and offers the following:
o Includes the first 1,000 Mb, plus 3 cents per Mb thereafter.
o Connect into a 100 Mbps network.
o 10 IPs per server (Extra IP available at $9.99/Month).
o Server available for lease for an extra $69.00 per month.
Dedicated Line Services Dedicated lines consist of anything over 64K of
dedicated connection that stay on continuously. These lines may be either
wireless or hard-wired with point-to-point connectivity.
Internet Wireless Services
- --------------------------
Quest Net offers Internet wireless services through its Quest Wireless Division.
These services are designed to meet the expanding needs of local area
network/wide area network (LAN/WAN) users that include:
o Need for mobility and anytime, anywhere computing.
o Configuration flexibility for moves, add-ons or changes.
o Quick implementation.
o Lower cost.
To meet these needs, our Internet wireless services are designed to replace or
complement wired networks, are ideal for providing network access in areas
difficult or impossible to wire, allow mobile applications to work with
traditional wired LAN applications, and are non-invasive and aesthetic. In
short, they are the only LAN solution for true mobile devices, simultaneously
providing both mobility and Internet connectivity. Quest Wireless markets its
wireless services primarily to owners of existing commercial and residential
properties as well as to new property developers. We will provide the equipment
needed for the wireless connections at a reduced cost to the developers, which
will give them a state-of-the art, value-added item to attract tenants and will
increase their bottom-line profits because they will receive compensation based
on a percent of their tenants Internet usage. We will also take advantage of the
need for this technology by marketing it to small businesses and larger
corporations that require a fast and reliable access to the Internet but would
rather not have the expense of hard wiring and maintenance or the connection
setup delays. The figure below is a simple schematic visualizing a wireless
system compared to a conventional wired backbone.
22
<PAGE>
Wireless Backbone
[GRAPHIC HERE]
Wired Backbone
Wireless LANs connect at a fraction of the cost of dedicated leased lines with
no need for extra telephone lines. This characteristic makes them suitable for a
variety of applications including:
o Hard to wire architectural structures including heritage/old buildings,
asbestos containing buildings, marble-walled buildings, and full
conduits.
o Temporary connectivity needs such as on-site training facilities, audit
teams and task forces, trade shows and demonstrations, temporary offices
and short-term rentals.
o Disaster recovery applications such as crisis management and LAN backup
capabilities in case of cable failure.
o Outdoor applications linking two or more buildings on a university campus
or buildings within a city.
The advantages that Quest Wireless provides to the above applications include:
o Cost effective and non-invasive connectivity through most types of
physical barriers.
o Undisturbed, ongoing business activities.
o Reusable set-ups that can be moved to the next project/location with
minimal effort.
o The ability to move people and offices around without rewiring
o Immediate network installation at the new location
o More Cost effective than a dedicated leased line.
o Faster than 64Kbps or T1 lines.
The effective distance of the LAN depends on the antenna, power (amp), and
environment. Quest Net's wireless products connect at a speed of up to 11Mbps to
a distance of 20 miles on a license-free spectrum.
In June 1999-we signed an agreement with Wireless Inc. ("Wireless"), a leader in
wireless networking, for wireless access equipment and installation valued at
$2.5 million. We will use the equipment to initially expand our wireless network
from Homestead to Jupiter, Florida. Once installation is completed, this
equipment will provide our customers with high-speed Internet connections
utilizing Wireless's WaveNet(R) IP 2458, point-to-multipoint, wireless access
routers. The WaveNet IPs will be deployed off a wireless backbone that Wireless
and Quest Net have partnered together to build. The second stage will be to
deploy the network on the entire East Coast of Florida and eventually the entire
state of Florida. Installation of the WaveNet IP 2458 central units has begun
and we expect it to be completed within one year. We believe that the future of
dedicated services is in wireless technology. Wireless technology provides
innovative, high-quality solutions for local connectivity and allows us provide
leading-edge technology to our customer base.
We are currently focused on the Florida market for our connection services.
According to a nationwide Internet usage survey commissioned by CommerceNet, the
industry consortium for electronic commerce, of the top 12 states in the United
States, Florida was the fastest growing Internet state in 1997 based on the
number of Internet users in each state. Although California was still the number
one leading state in terms of total Internet users, with 6.4 million individuals
over the age of 16, Florida's Internet population is estimated to have grown by
72%, from 1.7 million to nearly 3 million users, or six times the national
average of 12 percent.
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In order to develop and implement our expansion strategy, we entered into a
three- year contract with e.spire to purchase PRI's in Florida, a two-year
Internet Access Service Agreement with Qwest to provide us with certain network
transit capacity and an agreement with Bell South to provide us with dedicated
Internet access. We also-we signed an agreement with Wireless, for wireless
access equipment and installation for expansion of our wireless network from
Homestead to Jupiter, Florida. Once installation is completed, this equipment
will provide our customers with high-speed Internet connections. The second
stage will be to deploy the network on the entire East Coast of Florida and
eventually the entire state of Florida. Installation of the WaveNet IP 2458
central units has begun and is expected to be completed within one year.
We believe that the Qwest agreement will allow us to build on and establish a
presence in areas that build on Qwest's infrastructure. This will allow us to
integrate our wireless infrastructure with conventional fiber networks across
Florida. The agreement provide for scalable bandwidth that could meet our
clients' needs well into the next century. We are planning major expansion
efforts throughout Florida and plan to establish a presence in several major
metropolitan cities, including Jacksonville, Tampa, Orlando, and Sarasota. This
will allow us to build a wireless infrastructure throughout the area that will
provide the business community with dedicated high-speed wireless connections at
a fraction of the cost of conventional dedicated services.
We believe that this new expansion plan, combined with backbone development
already underway on the east coast, will provide us with the framework and
foundation to be a dominant force for dedicated services to the business
community Florida.
E-Commerce Services
- -------------------
We offer the following e-commerce services to its customers through our
Globalbot division:
o Search Engine Services
o List Engines for Specific Markets
We have recently launched our GlobalBot division, which will develop and operate
dedicated search engines and also offer Web site platforms for e-commerce
transactions. We believe that current search engines are clogged up and have
lost their focus and that dedicated search engines will bring order to the
present chaotic collection of multimedia and resources on the Internet. The
Internet was not designed to support and organize publications and the accurate
retrieval of information, as a library would. Our search engines are designed to
organize the Net's storehouse of information (books, newsprint, raw scientific
data, menus, meeting minutes, advertisements, video and audio recordings,
transcripts or interactive conversations) in a manner similar to a traditional
library.
A search engine, which combines a librarian's skill with the computer's ability
to automate and index information, is vital to the future of Internet use for
generating extraordinary advertising revenue. A dedicated search engine that can
facilitate automated indexing much like a human indexer will be able to retrieve
specific information based on author names, length of document, subject matter
and date of publication, allowing the user efficient access to the specific
information he is seeking. Once the user has found that specific information
site, the user becomes a captive audience for those vendors selling products
related to that specific topic. Herein lies a tremendous opportunity to generate
advertising revenues.
In February and March 1999, we acquired three industry-specific, e-commerce
sites, namely, Wings Online, an aircraft e-commerce sites, Boats Online, a boat
marketplace and resource center, and Cars Online an automobile market place.
Wings Online is used by users wishing to purchase airplanes, in need of aviation
services for financing or insurance, those searching for parts and accessories,
or those seeking employment in the aviation industry. Wings Online normally
charges $25 per month per listing for a two-month listing. The charge to dealers
is a flat rate of $25 until the item listed is sold.
The Boats Online and Cars Online sites are currently less developed than that of
Wings Online, but we believe they are equivalent in the potential to generate
listing and advertising revenues. We are converting both of these sites to the
same streamlined, user-friendly format as used by Wings Online and will apply a
similar pricing structure.
We have recently completed the acquisition of the e-commerce sites, Yachts
Online and Motor Bikes Online. These sites will follow the same format as our
other e-commerce sites.
Search Engine Advertising Services
- ----------------------------------
The participating community attracted by a search engine is a prime marketing
audience for vendors selling products and services into the market that the
search engine serves. We are beginning to develop a Web advertising sales
organization that will educate, advise, and guide advertisers on optimizing
their Web advertising purchases. It's specialized services and technology will
enable advertisers to target the mass audience of Web consumers or tailor an
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advertising strategy for specific affinity groups or for consumers possessing
certain demographic traits or requesting information relevant to certain
advertisers. Search engine advertisements are of two types, General Banner and
Targeted, which are described and priced as follows:
o General Banner The average rate for Banner advertising is $50
per month, which is currently in place on all of Globalbot's
e-commerce sites. However, we will soon implement a new
pricing structure starting at 2 1/2 cents per exposure. We
believe that more revenue can be generated with this policy
than a flat monthly rate.
o Targeted Targeted advertising is "key word" driven and can be
more expensive than banner advertising depending on the key
word selected. For example, an insurance company can have its
advertisement shown in specific area code or zip code
territories, the codes being the key words selected. Prices
here range from 3 cents to 8 cents per exposure, depending on
the key word or words selected, averaging about 5 cents per
exposure.
Both types of advertising will be subject-specific and will appear on the Web
window that summarizes the seekers' search results. The typical advertiser
targeted by the us for our Web site advertising will be large corporations or
organizations that currently advertise nationally in print, radio, television or
electronic media, as well as local advertisers looking for exposure in specific
geographic areas.
PROPOSED EXPANSION PLAN
The following is our proposed plan to expand our business operations over the
next several years. This plan is contingent on several including but not limited
to financing of the projects, governmental approval when necessary and retaining
additional competent personnel. There can be no assurances that we will be able
to implement this expansion or that once implemented it will be successful.
Internet Kiosk Services
- -----------------------
In May 1999, we acquired certain assets of AVX, Inc ("AVX"), valued at $300,000
in exchange for an aggregate of 39,894 shares of our common stock. AVX is a
Virginia based manufacturer and developer of "axcess" Internet enabled kiosk
systems. The assets that were acquired consisted of kiosk systems, a video
studio, digital cameras, software licenses, magnetic insertion card readers,
electronic equipment, and computers.
The Kiosk Internet Systems will offer Internet access to people without the need
for a large capital investment and will also supply Internet access to people
who are traveling. We plan to position Kiosk Internet Systems initially in
Florida, expanding to other parts of the United States and eventually South
Africa and Europe. Our initial placement target market will be airports, hotels,
train stations, universities, and other easily accessible public areas. The
Kiosk Internet Systems will operate in the same manner as public fax machines
located in airports and stores. The user will insert a credit card, which will
enable him or her to connect to the Internet. Initially we plan to offer free
e-mail access via our Kiosk Internet Systems to users. We will pay the
establishment that hosts the Kiosk Internet System 20% of the revenues generated
at the establishment. We plan to place 20 Kiosk Internet Systems in universities
throughout Florida in the next three months.
South African Market
- --------------------
We have identified South Africa as an untapped telecommunications and Internet
market with a great potential to generate revenues. We believe that with the
growing political maturity in South Africa, the demand for easily accessible in
formation is increasing. We intend to position ourselves to provide
telecommunications and Internet services to take advantage of this growing
demand.
March 1999, we were going to acquire a 40% interest in Web Solutions, a South
African Web page designer, and developer. We were unable to consummate the
purchase due to our inability to obtain financing at that time and the Web
Solutions declined our offer of issuing stock for the purchase price. After we
declined the purchase, Mr. Pereira, our president purchased the interest through
his South African company Quest Net Corp. SA (PTY) LTD.
In May 1999, the Board of Directors, with Mr. Pereira abstaining, approved the
purchase of 49% of the authorized but unissued common stock of Quest Net Corp.
SA (PTY) LTD., a South African Internet company, for $4,000,000 to be paid in
our restricted common stock. The shares will be valued at market as of the date
of the closing of the transaction. Quest Net Corp. SA (PTY) LTD is majority
owned by Mr. Pereira. Because we are purchasing our interest with common stock
we cannot enter into a letter of intent until we receive approval of the South
African government.
We will be seeking other acquisitions and strategic partners South Africa as the
opportunity arises.
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Optical Fiber Network Services
- ------------------------------
We plan to enter the international optical fiber market using Cuba area as a
starting point. Through our Quest Fiber Division, we will implement our optical
fiber strategy as defined in its "Project Unidad" proposal.
Project Unidad will be a high capacity (up to OC-192 or 10 Gbps), fiber optic
communication network connecting Cuba's major population center with the United
State and the world. It will use state-of-the-art optical amplification and be
plow-buried from shore station to 4,900 ft. to avoid external aggressions. A
collapsed Synchronous Optical Network (SONET) ring will provide equipment
redundancy. A SONET is a standard way to interconnect high-speed traffic from
multiple vendors This installation will have a minimum service life of 25 years.
There is currently no fiber optic cable connecting Cuba with the U.S. and the
rest of the world. When Project Unidad is constructed, fiber optic capacity will
immediately multiply by fifty times the amount of the current copper capacity by
adding shore-based electronic equipment. The total design capacity for this
project is 10 Gigabytes (Gbps) or enough to carry 129,024 simultaneous voice or
data calls.
It is estimated that the overall cost of the project will be approximately
$11,000,000 and will be completed within one year from the date of the approval
by the proper governmental agencies and securing financing for the project, of
which no assurance can be given. A feasibility study has been completed by
SETWAVE Communications, a New Jersey based firm that specializes in management
and design of Fiber Optics undersea cable. SETWAVE has also been awarded the
management contract for the construction and installation of the cable.
In June 1999, our President, Camilo Pereira, received a license from the United
States Department of the Treasury to travel to Cuba to discuss Project Unidad
with Cuban officials. The licensed travel is for discussion of the project only.
We will not be able to conclude any negotiations or begin construction until
such time as permission has been obtained from both the United States and Cuban
Government.
The Project Unidad system is being designed primarily for data and will only
carry Internet and data traffic. Therefore we will not be involved in settlement
of telephone tariffs, which is a point of contention between the United States
and Cuba. After preliminary contact with the Office of Foreign Asset Control,
the Federal Communications Commission and State and Commerce Department, we are
confident that there is no violation of the Cuban Democratic Act in our proposal
as Internet traffic is already widely available between the United States and
Cuba. We will not begin construction until such time as permission has been
secured and the proper licenses have been obtained from both governments.
Although no assurances can be given, we believe that we will be able to comply
with all requirements in order to complete this project.
Conceptually, Project Unidad will use submarine and terrestrial connections to
extend high capacity fiber optics to Havana and all other major cities in Cuba.
The main connection point in the U.S. will be Key West, Florida. Havana is
targeted as the first interconnection point in Cuba. This is the communications
equivalent of an Interstate Highway system that will enable the deployment of
new, bandwidth-hungry communication applications such as fast Ethernet, ISDN,
video conferencing, and telemedicine and distance education. The figure below is
a visual representation of Project Unidad's proposed network.
[GRAPHIC HERE]
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The Cuban Market
Cuba is the largest Caribbean Sea country, larger that nearly all of the islands
within the Caribbean Sea area combined, and, with 11 million citizens, has
nearly one-third of the combined populations. The Republic of Cuba is nearly as
large as the State of Pennsylvania, approximately as long as the State of
Florida, and has the same size population as the State of Illinois. If Cuba were
a state within the United States, it would rank seventh in population.
The average literacy rate in this country is 95.7% nearly equally balanced
between male and female genders. All citizens age 15 and over can read and
write. We believe that Cuba's segmented age structure and high literacy rate
indicates a need for high bandwidth-demanding enterprises such as the Internet.
The table on the following page illustrates this point.
Cuba's economy, estimated at a $16.2 billion GDP in 1996 and growing at an
estimated real growth rate of 7.8%, is in a state of recovery as Cuba begins to
open its doors to trade and communication with the rest of the world and as the
U.S. relaxes its embargo on Cuban trade. Export earnings in 1996 rose an
estimated 40% to $2.1 billion, largely on the strength of increased sugar
shipments to Russia and higher nickel production through a joint venture with a
Canadian firm. With the economic recovery, imports rose for the second straight
year, growing by an estimated 26% to $3.5 billion. Cuba's international trading
partners include Russia, Canada, and China.
Cuba's labor force comprised 4.7 million in 1990 (latest available), with 30% of
this population working in services and government, 22% in industry, 20% in
agriculture, 11% in commerce, 10% in construction, and 7% in transportation and
communications. This economically active population translates to a per capita
GDP or purchasing power parity of $1,480.
In the area of communications, Cuba's telephone system is among the world's
least developed networks. There are only 229,000 telephones for 11 million
people, connected internationally in the Atlantic Ocean region by one
Intersputnik satellite. Data describing the domestic network is currently not
available.
According to a 1993 estimate, Cuba has 2.14 million radios and three radio
broadcast and short-wave stations. There are also 58 domestic television
broadcast stations serving this population.
The above referenced data indicates a tremendous telecommunications need and
opportunity in Cuba.
As a comparison, Taiwan, once an agricultural-based, low labor cost economy with
a GDP of $4.2 billion and a per capita GDP of $196 in 1954, is now an
international hub of industry and services valued at $224 billion. Taiwan has
twice the population, a 10% lower literacy rate, and a per capita GDP four times
that of Cuba. Since Taiwan is an open market, exports (valued at $85 billion in
1993) account for nearly forty percent of its GDP. Education has been identified
as a key success factor in this country's economic turn around. Market research
reports that 10.3% of all computer-owning households in Taiwan access the
Internet.
The economic success seen in Taiwan and other Asian nations bodes well for the
future of other industrialized countries with highly educated and trained
populations such as Cuba that are yet to participate in the capitalist world.
Taken in total, Cuba's economic, social, and demographic characteristics
indicate a country capable of tremendous growth, once U.S. trade and other
embargo problems have been resolved. Resolution is now in process in the U.S.
Congress and will probably escalate as pressure is brought to bear from the
large Cuban business population now residing in South Florida. Despite its
current limited trading capabilities, Cuba has a per capita GDP of nearly $1,500
and a literacy rate of over 95%, all boding well for the country's future
potential.
Long-Distance Telecom Services
- ------------------------------
In the US, local calling revenue was $96.6 billion in 1997. Long distance
revenue came to $92.7 billion in the same year and is estimated at $102 billion
in 1998. Future growth rates are forecast at 10%. The defining feature of
today's telecom market is change, spurred by technological advances and
deregulation.
We plan to enter the long distance telecom service market before the end of June
30, 2000. The Federal Communications Commission has recently accepted our
application for a cable-landing license. This license authorizes us to:
o Transfer control of or assign the authorization of a carrier.
o Be a facilities-based carrier.
o Resell the switched services of other common carriers to provide
international switched telecommunications services between the
United States and international points.
o Resell the private line services of other common carriers to
provide:
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(1) Non-interconnected international private line services the United
States and international points, and/or (2) Switched services to a
country for which the Commission has authorized the provision of
switched services over private lines or (3) To exceed the 25 percent
foreign ownership benchmark under Section 310(b)(4) of the
Communications Act.
We plan to provide domestic and international long distance telecommunications
services to both residential and commercial customers in the United States.
Although we will not be a facilities-based provider in this market, we will
serve as a less expensive alternative to larger major providers. We believe that
we can offer customers long distance services having the same quality and
convenience as the major carriers. Our operations will consist of leasing
transmission lines from long distance carriers at a volume discount and
reselling the long distance services to customers.
SALES AND MARKETING
Overview
- --------
Because of our limited working capital in the past, we have not had the
resources to develop a marketing and sales force. In order to increase our
revenues, we will have to develop a marketing and sales force with technical
expertise and marketing capability
The market for our services is new and rapidly growing. In developing our sales
and marketing strategies we are focused on attracting users for our connection
services, placement of our Internet Kiosk Systems and advertisers for our search
engine advertising services. We believe that the principal competitive factors
for companies seeking to attract users for its Internet connection services are
line quality, speed of connection, quality customer service, and demographic
focus. In addition, we believe that advertisers will more likely advertise on
sites that have (i) a large amount of Web traffic, (ii) reached critical
mass,(iii) a multi-functional Web site, (iv) brand recognition, user affinity
and loyalty,(v) a broad demographic range, (vi) an ability to deliver targeted
audiences, (vii) open access for visitors and (viii) a proven effective
We have recently hired an outside marketing consultant who is developing our
customer base through an active sales and marketing campaign, primarily centered
on building relationships with small businesses for connection services,
especially wireless connectivity, and developing an Internet community of loyal
search engine users that will serve as a captive audience for both banner and
targeted advertising. At present, we are concentrating our efforts in Florida
region, but anticipate expanding geographically over the next few years.
Customer Base
- -------------
Our primary target markets comprise small businesses that resell connectivity
services in some value-added way, small corporate entities and marketers who
wish an effective banner or targeted Internet advertising medium.
We are planning major expansion efforts throughout Florida and plan to establish
a presence in several major metropolitan cities, including Jacksonville, Tampa,
Orlando, and Sarasota. In light of the reorganization of our operations in order
to concentrate on Florida operations we have reduced our customer base from
approximately 200 to 57 customers, 45 of which are dialup customers and 12 of
which are hosting accounts. We have also reduced our operating costs accordingly
by not having to service customers nationwide at this time. We believe that our
new operational plan will provide manageable growth in our client base in
relatively a short time. We can devote our resources and marketing efforts to a
limited area, Florida and expand to other areas at a slower regulated pace once
our organization and resources grow.
Sales Strategy
- --------------
We rely primarily on direct sales to generate new customers and to maintain
relationships with existing customers. At present, we have two in-house and one
outside sales representative. As our capacity and operations grow we will be
hiring a Vice President of Marketing and a Vice President of Sales to build a
quality in-house direct sales force. Our sales effort will focus mainly on the
commercial sector, selling voice, data and enhanced telecommunications services
to business customers.
Marketing Strategy
- ------------------
We plan to utilize a variety of marketing techniques to generate awareness and
inquiries.
Telemarketing. We plan to contract with a national telemarketing firm
to enlist twelve telemarketers at a charge of $30 per hour to sell its
products and services by phone. We estimate that one telemarketer can
contact three potential customers per hour, with one of every three
contacts resulting in a sale. Each telemarketer will work 2,000 hours
per year, making 6,000 contacts during that time, of which 2,000 are
anticipated to be sales.
Direct Mail. We plan to conduct a direct mail campaign targeting
potential customers in new geographic areas in a six to twelve week
cycle. We will employ appropriate and creative printing and mailing
services. The promotional materials will be produced in the most cost
effective manner without sacrificing quality. We also plan direct mail
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campaigns for existing territories to stimulate incremental usage by
new and existing customers and to build awareness, especially for our
"bundled" services program. We also plan to establish an in-bound
telesales customer service department designed to supplement our direct
mail marketing strategy. Once established, customer service
representatives will be available 24 hours a day, 7 days a week to
answer marketing inquiries generated by our marketing campaigns, as
well as supporting existing customers.
Magazine/Professional Journal/Newspaper Advertisement. We plan to
advertise in major telecommunications and Internet magazines throughout
the country using postcard inserts and other mail-in techniques to
foster inquiries and to solicit sales.
Trade Shows. Trade shows are a critical component for generating
awareness because of their popularity among Internet users. Thousands
of enthusiasts who surf the Net attend trade shows each year, as well
as vendors and product manufacturers. We plan to participate in several
annual local shows and events, as well one national show starting in
fiscal year 2000. We plan to have a booth that is staffed with our
business development, technical, and sales people. In addition, we will
host a hospitality suite. Attending trade shows also gives sales people
the opportunity to gather competitor information and keep current
regarding industry needs and trends. We estimate that the cost of
exhibiting at a national trade show ranges from $20,000 to $30,000 and
the cost of exhibiting at a local trade show is between $1,000 and
$2,000.
Sponsorships. We also plan to sponsor Internet programs at local
universities. In one program being developed, we will underwrite
Internet connection services for local universities so that its
students can access the Net in the university's computer room. We will
distribute promotional literature to the students describing our
products and services, and also detailing similar for-fee services that
the students can purchase for home or business use. These sponsorships
are at a minimal cost to us and provide an excellent means of good
public relations.
Other We have a website (www.ipquest.com) where information about our
services and us can be obtained. Users can also E-mail a request for
contact by one of our sales representative. Interested parties can also
call a toll-free number (800-952-6638) and request informational
literature to be sent to them
Public Relations
- ----------------
We have retained a public relations firm to assist us in gaining attention from
the media and establishing a brand identity for Quest Net. Most of the public
relations activities will be focused on trade press, primarily those catering to
the telecommunications industry. We estimate that the cost of public relations
will be $1,500 per month We also periodically distribute press releases,
regarding our new acquisitions and agreements and describing our services.
EXPANSION STRATEGY
Our expansion strategy primarily consists of the following steps:
>> Add wireless connectivity through the State of Florida by fiscal year
2000.
>> Increase usage of services through "bundling".
>> Develop a diverse Web community around its search engine site.
>> Establish a customer base of vendors to advertise on its search engine
sites.
>> Enter the long distance telephone backbone market nationwide.
>> Provide Optical Fiber capacity to the islands of the Caribbean Sea.
>> Introduce new products and services.
Wireless connectivity throughout Florida
In June 1999-we signed an agreement with Wireless for wireless access equipment
and installation valued at $2.5 million. We will use the equipment to initially
expand our wireless network from Homestead to Jupiter, Florida.
Once installation is completed, we will be able to provide our customers with
high-speed Internet connections utilizing Wireless's WaveNet(R) IP 2458,
point-to-multipoint, wireless access routers. The WaveNet IPs will be deployed
off a wireless backbone that Wireless and Quest Net have partnered together to
build. The second stage will be to deploy the network on the entire East Coast
of Florida and eventually the entire state of Florida. Installation of the
WaveNet IP 2458 central units has begun and we expect it to be completed within
one year.
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We believe that the future of dedicated services is in wireless technology.
Wireless technology provides innovative, high-quality solutions for local
connectivity and allows us provide leading-edge technology to our customer base.
Increase Usage of Services Through "Bundling
We intend to motivate our current and prospective customers to use our services
by bundling our basic Internet connection services with its other services such
as long distance telephone and wireless services. We believe that if we are
successful in our bundling efforts we can increase revenue per customer and
decrease customer attrition. We also believe that such bundling will be
attractive to small businesses seeking to obtain a variety of services from one
provider.
Develop a Diverse Web Community Around Its Search Engine Sites
Search engines are usually subject specific and, as such, tend to create an
affinity environment. We have already established and overall affinity group for
transportation, divided into categories such as airplanes, boats, cars, and
motorbikes. We plan to expand this strategy to other categories of specific high
value items of interest to large groups of individuals. For example, a
"collectors" site may comprise sports memorabilia, and rare coins, stamps,
books, and records.
Develop Strategic Marketing Relationships
We intend to continue to develop strategic marketing relationships with entities
such as software developers and equipment manufacturers and retail outlets to
expand distribution of its basic Internet connection services as well as long
distance services.
Expand Through Acquisition
We operate in a highly fragmented segment of the Internet. This environment
provides opportunities for a company of our size and capabilities to acquire
similar smaller firms providing complementary services. Acquisition is a popular
mechanism for building a diverse customer base through purchase, a grass-roots
approach, which entails a large increase in overhead.
Introduce New Products and Services
Our objective is to eventually become the leading provider of Internet system
and management solutions nationwide. We realizes that in order to do so, we must
be innovative in our product design and capabilities and must continually
develop new collaborative management services, and establish strategic
relationships with leading technology developers and distribution alliances with
content developers, system integrators, system vendors, consulting companies and
ISPs.
COMPETITION
As with all markets growing at double-digit rates, competitors for these
potential revenues are numerous and formidable. We compete in five markets, each
having its own growth potential, expectations, customer base, and competitors.
Some of these competitors may be affiliated with major international players
and, as a result, are well financed and may present a formidable challenge. See
"Risk Factors-Business Competition". "Our potential competitors in its
individual markets are as follows:
Internet Access Services
We are Tier 1 Internet backbone operator. Our competitors in this category
include AEGIS, Dearborn, MI; @Home Network, Redwood City, Ca; AT&T, Basking
Ridge, NJ; CAIS Internet, McLean, VA; Concentric Network Corp., Cupertino, CA;
and Fiber Network Solutions, Columbus, OH, among others.
Wireless Services
Our competitors in this category include Intelligent Information, Inc.
(Stamford, CT), DataLink Systems Corp. (Canada), Geoworks, Silverlake
Communications, Inc., Ikon Office Solutions, Unwired Planet, Inc. (Redwood
Shores, CA), RTS Wireless, Fuzion Wireless Communications (Boca Raton, FL), and
TekNow (Phoenix, AZ). We believe that we have several advantages over these
competitors, including:
o As one of the first license radio spectrum service providers, we
enjoy a time-to-market advantage and are therefore well positioned
to capture a large percentage of early adopters, which are
generally among the heaviest users. We believe we are the only
free radio spectrum service provider currently offering commercial
services.
o The broad scope of our footprint enables us to offer wireless
broad services targeting much of the United States addressable
business market.
o Our network management operational support system provides
24-hour, seven-days-a-week network monitoring and management.
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Internet Advertising Market
We have entered a new and rapidly evolving market comprised of members, users,
and Internet advertising customers. Competition in this market includes The
Globe.Com, Tripod and GeoCities, which recently agreed to be acquired by Yahoo!.
We believe that we can successfully compete in attracting advertising customers
by focusing on niche community groups surrounding its search engine sites. We
will continue to acquire search engines in upscale markets that can deliver a
select audience to potential advertisers in these markets.
Long Distance Services
In this market, we plan to sell long distance connection services, either by
providing a "dial-around" access number or by being the customer's primary
carrier. In some instances, we may resell excess capacity purchased from major
carriers in local markets. We will compete with all long distance connection
services, including but not limited to Sprint, AT&T and MCI. The leading United
States provider in the resale market is Telco Communications Group, a subsidiary
of Excel Communications, Chantilly, VA. Other noteworthy competitors include
VarTec; Group Long Distance, Inc. Ft. Lauderdale, FL.; STAR Telecommunications,
Inc., Santa Barbara, CA.; and Startec Global Communications, Inc., Bethesda, MD
Optical Fiber Market
As a provider of offshore Optical Fiber capacity to the areas of the Caribbean,
we will compete with one major international company, Global Crossing Holdings
Ltd., and specifically Global Crossing's Atlantic Crossing division. However, we
believe the cable route we have chosen is more direct and will be less costly
than that envisioned by Global Crossing. Also, Cuba does not appear to be one of
Global Crossing's connection sites. We will also compete with providers of
satellite connections for this geographic location's telecommunications
business.
We have taken into account all areas of competition when planning our business
strategy. We plan to compete by attracting and retaining a quality customer base
using financial incentives combined with high customer service standards. In
addition, we are focused on attracting and retaining new advertising customers,
responding to competitive developments, developing and extending its brand,
continuing to form and maintain relationships with strategic partners. We also
realize that in order to compete we will need to attract, motivate and retain
qualified personnel, continuously develop and upgrade our technologies and
rapidly commercialize our services incorporating these technologies.
Year 2000
The "Year 2000" issue concerns the potential exposures related to the automated
generation of business and financial misinformation resulting from the
application of computer programs which have been written using two digits,
rather than four, to define the applicable year of business transactions.
We established a program during 1998 to ensure that, to the extent reasonably
possible, all systems are or will be Year 2000 compliant prior to the end of
1999. The Year 2000 Program ("Y2K Program"), designed with the assistance of an
outside consultant, consists of five phases: (i) inventory of systems,
equipment, software and hardware including those of significant third-party
suppliers and customers (the "Systems"), (ii) analysis of the Systems to
determine compliance or non-compliance, (iii) remediation and contingency plan
development, (iv) remediation, and (v) testing of affected Systems.
A team consisting of our staff from Information Technology, Finance and
Operations has been established as the Y2K Readiness Team. With the assistance
of our outside consultant, the team has designed an aggressive schedule to
identify Systems requiring compliance upgrades and a timetable for performance
and testing of the affected Systems. In addition, the Y2K Program calls for
validation of compliance by significant Company suppliers and customers.
Once identified, detailed remediation steps will be scheduled to ensure that
internal Systems and significant external suppliers and customers meet Y2K
compatibility requirements, or that sufficient contingency plans are in place.
Our assessment is approaching final completion. An inventory of computing,
communication and facility Systems has been prepared and validated. Significant
suppliers, including Competitive Local Exchange Carriers (CLEC), have also been
identified for validation. We have completed the inventory our Systems and a
majority of the analysis phase for these Systems. We anticipate that we will
complete the analysis phases for these Systems during the early part of the
second quarter of 1999. The Y2K Program calls for the completion of all phases
for the Systems by the end of the second quarter of 1999.
We have performed a technical review of significant third party suppliers and
customers and, if available, have surveyed the public Year 2000 statements
issued by them. Additionally, we have sent inquiry letters to certain third
31
<PAGE>
party suppliers and customers requesting information regarding their
vulnerability to Year 2000 issues. We intend to pursue appropriate responses to
these inquiries and evaluate the responses it receives to determine if alternate
business actions will be necessary.
Should any systems, significant customers or suppliers be determined to have
questionable remediation potential, the Y2K Committee will establish a
contingency plan to address the at-risk area. This will be decided during the
analysis phase of the overall project now underway. We are unable at this time
to determine what contingency plans, if any, should be implemented. As we
progresses through the Y2K Program and identifies specific risk areas, we intend
to timely implement appropriate remedial actions and contingency plans. See
"Risk Factors- We Could Lose Revenues And Our Reputation May Be Damaged If Our
Systems Or Those Of Our Customers Or Our Suppliers Are Not Year 2000 Compliant.
PROPERTY
We currently lease our offices located at 2999 NE 191st Street, PH-8 , Aventura,
Florida 33180. In January 1999, we signed a five-year lease for 3,000 square
feet of corporate office space at a base rent of $2,980 per month plus common
area maintenance costs. In December 1998 and March 1999 we leased two additional
offices at a base rent of $1,028.50 and $2,887.17 per month plus common area
maintenance fees. The additional space houses our Internet operations and
provides additional office space for employees. These leases expire five years
from their date of commencement. Our telephone number is (305) 935-1080.
LEGAL PROCEEDINGS
In April 1999, we filed a lawsuit in the Circuit Court of the 17th Judicial
Circuit in and for Broward County, Florida against Secure Transaction
International Corp.("STIC"), its subsidiaries and principals, the accounting
firm of Margolis, Fink & Wichrowski, Barry A Fink, C.P.A., P.A., Mark V.
Wichrowski, C.P.A. and Barry A. Fink and Mark Wichrowski, individually, alleging
violation of the Florida securities laws, negligent misrepresentations, breach
of contract payment of accounts, and conversion. The lawsuit stems from several
contracts entered into with STIC and its subsidiaries for bandwidth, consulting
services and software. As payment for the services STIC and its subsidiaries
issued redeemable preferred stock that was convertible into STIC common stock.
We provided the services as required and the appropriate amount of convertible
stock was not redeemed or converted. The amount due us under these various
agreements is approximately $867,842. We have also alleged that the Financial
Statements provided, negligently misrepresented the financial condition of STIC
and its subsidiaries. We have asked the court for rescission, compensatory
damages, attorneys' fees, costs, and expenses. The defendants file a motion to
dismiss, which was denied. The defendants have filed or are in the process of
filing an answer to our complaint. The lawsuit is in the discovery stage. At
present, we are unable to predict the outcome this lawsuit.
On December 10, 1998, we filed a lawsuit in the United States District Court for
the Southern District of Florida against PSINet, alleging fraud,
misrepresentation, and breach of contract. This lawsuit stems from PSINET's
inability to provide us with the services we contracted for. We have asked the
court for damages including compensatory, consequential, incidental and special
damages in excess of $15,000, plus interest, costs, disbursements, and
attorney's fees. PSI filed a counterclaim in February 1999, for $80,0000
alleging that we are the alter ego of Pact and that Pact owes them $80,000 for
services rendered. PSI also filed a motion to dismiss the fraud count, which was
granted. The lawsuit is still in the discovery stages. We intend to vigorously
defend the counter claim. At present we are unable to predict the outcome of
this lawsuit.
In January 1999, Herman Henin, a shareholder of Pact, filed a lawsuit against us
in Circuit Court of the 17th Judicial Circuit in and for Broward County,
Florida. Mr. Henin has alleged that he did not receive a proper distribution of
Quest shares from Pact after our acquisition of certain of the assets of Pact,
which we paid for in common stock and which was subsequently distributed by Pact
to its shareholders and that, somehow, we are responsible. Mr. Henin has
demanded that we issue him the additional shares that Pact allegedly did not
issue plus the dividend for those shares. We filed a motion to dismiss/for more
definite statement. On July 29, 1999, the motion to dismiss was granted, Mr.
Henin was grated 20n days to amend his complaint. As of August 9, 1999, no
amended complaint has been filed.
32
<PAGE>
MANAGEMENT
The following table sets forth certain information concerning our directors and
executive officers:
<TABLE>
<CAPTION>
Name Age Term Position
- ---- --- ---- --------
<S> <C> <C> <C>
Camilo Pereira 39 1999-2000 Chairman of the Board, Chief Executive
and Financial Officer and President
Maxine Pereira 34 1999-2000 Executive Vice-President, and
Director.
David Block 32 1999-2000 Director
Lauri Fitz-Pegado 43 1999-2000 Director
Victor Coppola 56 1999-2000 Director
</TABLE>
Our Directors hold office until the next annual meeting of shareholders and the
election and qualification of their successors. Officers serve at the discretion
of the board.
Camilo Pereira, President, Chief Executive Officer (CEO) and Chairman of the
- ----------------------------------------------------------------------------
Board of Directors
- ------------------
Mr. Pereira has been our Chief Operating Officer Since July 1998 and has served
as our President since January 1999. Mr. Pereira was Chief Operating Officer of
PACT Communications Inc. since its inception in September 1996 and served as
President of that company from February 1998 until A.P. Sales, Inc.(n/k/a Quest
Net Corp.) purchased certain of Pact's assets in July 1998. Mr. Pereira `s
employment contract was part of the asset purchase. He has served as Quest Net's
CEO and Board Chairman ever since. From 1988 to 1989, Mr. Pereira developed and
owned a successful 12-unit chain of restaurants in Johannesburg, South Africa.
While there in 1989, he founded a small food equipment company out of need to
obtain certain kitchen equipment for the restaurant. This endeavor was so
successful that in its last year, it generated sales of over $600,000. Due to
the unstable political situation in South Africa at the time, Mr. Pereira sold
the restaurant chain and relocated the food equipment business to the United
States under the name CaterQuip. CaterQuip is still an active company located in
Hong Kong, which manufactures and markets food equipment in Italy, England, the
United States and several other countries.
From 1986 to 1987, Mr. Pereira attended Tadmor College in Jerusalem, Israel and
received a Bachelor of Arts Degree in Hotel Administration. In 1987 he became a
certified Rooms Division Executive by Michigan State University, a program
sponsored by The Education Institute of the American Hotel and Motel
Association. As part of his management activity in several hotel chains, Mr.
Pereira designed and implemented computer software for use in the hospitality
industry. Mr. Pereira also has several patents registered with the U.S. Patent
Office for a food processor, grill scraper, fryers and a livestock branding
iron. In November 1996, due to the heavy financial burden of sustaining PACT
Communications, Inc., Mr. Pereira filed a personal bankruptcy action under
Chapter 7 in the United States Bankruptcy Court for the Southern District of
Florida. An order of discharge was entered on February 18, 1997.
Mr. Pereira began his professional career in the service of the government of
his native state of Goias, Brazil. During his employment there, he built
friendships and relationships with several high level members of the Brazilian
and other national governments, some of which have remained strong to date. Mr.
Pereira believes that these relationships are facilitating contact with several
government agencies that are important to the growth of Quest Net.
From 1981 to 1984, Mr. Pereira served in the Israeli Defense Force (IDF) and was
a spokesperson for the Israeli Consulate in Philadelphia. Mr. Pereira was
decorated by the IDF for service during the Lebanon War of 1982.
Mr. Pereira is the husband of Maxine Pereira.
Maxine Pereira, Vice President and Director
- -------------------------------------------
Maxine Pereira has been our Vice President since July 1998. From 1997 to January
1998 she was President of Pact. In 1996, she assisted in the founding of PACT
Communications. From 1991 to 1996 Ms. Pereira was Vice President of Caterquip.
Mrs. Pereira is a graduate of Port Elizabeth College in South Africa where she
studied Public Relation, Marketing and Cosmetology. She developed her marketing
skills during her career in cosmetology, where, as a consultant, she coordinated
events to launch new products onto the market for several companies. Ms. Pereira
is the wife of Camilo Pereira.
David J. Block, Esq., Outside Director
- --------------------------------------
David Block has been a director of the Company since July 1998. From March 1997
to present, Mr. Block has been employed by H. Hertner Associates, a Miami Lakes,
Florida recruiting firm, as a legal recruiter. From May 1996 to March 1997, he
was an attorney with the law office of Singer & Block, which was located in
Miami, Florida. From October 1994 to January 1996 he was a Supervising Attorney
for the United States Small Business Administration, in their Florida and
California offices delivering agency relief to disaster victims of Hurricanes
Andrew, Erin, Opal and the Northridge earthquakes. Mr. Block is a 1992 graduate
of the University of Miami School of Law, where he served as Vice President of
Entertainment and Sports Law Society from 1999-1991. Mr. Block is a member of
the Florida Bar. Mr. Block's affiliations within the legal community provide him
with insight into the ever-changing legal market.
33
<PAGE>
The Honorable Lauri J. Fitz-Pegado, Outside Director
- ----------------------------------------------------
Lauri Fitz-Pegado has been a director of the Company since January 1999 Since
May 1997, she has served as Vice President of Global Gateway Management for
Iridium, LLC., a $5 billion wireless global mobile personal communications
system based on a technology that utilizes satellites to facilitate, coordinate
and manage activities between Iridium and its gateway investors. From 1993 to
May 1997, she was Assistant Secretary and Director General United States and
Foreign Commercial Service for the Department of Commerce and .served as a
special advisor to the Secretary of Commerce and the International Trade
Administration on issues and projects including national export strategy and
regional commercial initiatives involving Mexico, APEC/ASEAN, Middle East, South
Africa and Latin America.
Ms. Fitz-Pegado brings strong national and international experience in the areas
of telecommunications, radio and TV media, and trade and commerce Ms.
Fitz-Pegado also directed and managed the International Public Affairs Division
of Hill and Knowlton Public Affairs Worldwide where she supervised and managed
client interests, both foreign and domestic, provided strategic counsel, and
handled media and government relations. Her earlier professional experience
includes several Foreign Service and U. S. Embassy positions where she served as
U.S. medial liaison (radio and television) with Mexico, and the Dominican
Republic. She is a member of numerous prestigious professional organizations
including the Council on Foreign Relations, The Women's Forum in Washington,
Women in International Trade, Ronald H. Brown Foundation Advisory Board, the
Commercial Space Transportation Advisory Committee of the Federal Aviation
Administration.
Ms. Fitz-Pegado received a Masters Degree in International Affairs from Johns
Hopkins University, and a Bachelor of Arts cum Laude from Vassar College. She is
fluent in Spanish and Portuguese.
Victor V. Coppola, Outside Director
- -----------------------------------
Victor Coppola has been a director of the Company since January 1999. From 1998
to present Mr. Coppola has been Chief Executive Officer of P.I. Associates, a
management development firm located in Delray Beach, Florida. From 1996 to 1997,
Mr. Coppola was President of C & C Consulting, a compensation, merger and
acquisition search fir located in Bryn Mawr, Pennsylvania. From 1995 to 1996, he
was Executive Vice President for the Mid Atlantic Region, for Right Management,
a human resource-consulting firm located in Philadelphia, Pennsylvania. From
1968 to 1995, Mr. Coppola was employed by Coopers & Lybrand, now Price
Waterhouse Coopers ("C&L"), where he held several high level positions,
including. National Chairman of Middle Market Business Services, partner-in
- -charge of the Middle Market Group of its Philadelphia, Pennsylvania office. Mr.
Coppola's experience spans many industries including manufacturing,
merchandising, conglomerates, real estate and communications. He has also been
responsible for or a participant in auditing, tax and management consulting
engagements for national and international operations of multi-unit companies,
as well as special engagements in acquisitions, investment analysis, financial
projections and operational audits.
Mr. Coppola was chosen by C&L to be part of a select four-man team responsible
for developing a program to train C&L personnel as specialists in serving
entrepreneurial, growth-oriented businesses; i.e., companies needing more than
conventional auditing services. This effort resulted in the creation of C&L's
National Middle Market Business Services Group, which is now on of the focal
points of C&L's practice. He has also co-authored the Coopers and Lybrand Guide
to Growing Your Business, which offers both new entrepreneurs and experienced
business owners the financial and operating advice and techniques to flourish in
an increasingly competitive market.
He has served as a member of the Board of Directors of Leadership, Inc.,
University City Science Center, Ben Franklin Technology Center and the Greater
Philadelphia Economic Development Coalition. He is also a member of the
Securities and Exchange Commission's Executive Committee on Small Business
Capital formation and has served on several SEC panels. He has also written a
regular column about growing businesses for the Philadelphia Business Journal,
and has been an invited speaker at the Inc. 500 and Growth Company conferences,
participated in SEC panels and has given numerous presentations pertinent to
emerging growth companies. Mr. Coppola received a Bachelor of Science in Finance
from Long Island University.
Compensation of Directors
In March 1999, outside directors received options to purchase an aggregate of
5,000 shares of our common stock at $6.00 per share. The options vest in two
equal increments of 2,500 shares 6 months and 12 months from the date of grant
as long as the holders are members of the Board of Directors at the time the
options vest. Any options not vested will terminate upon resignation or
termination from the Board. The options will be exercisable at any time after
vesting and for a period of two years there after. In January 1999, before the
present board was appointed, we awarded directors an aggregate of 6,667 shares
of common stock.
34
<PAGE>
Limited Liability of Directors
Provisions included in our certificate of incorporation, as amended, protect our
directors against personal liability for monetary damages from breaches of their
duty of care. As a result, our directors will not be liable for monetary damages
from negligence and gross negligence in the performance of their duties. They
remain liable for monetary damages for any breach of their duty of loyalty to
us, and our stockholders, as well as acts or omissions not made in good faith or
which involve intentional misconduct or a knowing violation of law and for
transactions from which a director derives improper personal benefit. The
liability of our directors under federal or applicable state securities laws is
also unaffected. We carry officers and directors' liability insurance in the
amount of $1,000,000.
While our directors have protection from awards of monetary damages for breaches
of the duty of care, that does not eliminate their duty of care. Equitable
remedies, such as an injunction or rescission based upon a director's breach of
the duty of care, are still available.
Management Compensation
- -----------------------
<TABLE>
<CAPTION>
SUMMARY OF COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------- ----------------------
Name & Principal
Position Year Salary Other Annual Restricted Securities/Underlying
Compensation(3) Stock Awards Option/SARs (1)(2)
- ------------------------- ------- ---------------------------- --------------- --------------------------
<S> <C> <C> <C> <C> <C>
Camilo Pereira, CEO and 1999 $125,000 N/A $440,625 1,310,698
Director 1 2
- ------------------------- ------- ---------------------------- --------------- --------------------------
- ------------------------- ------- ---------------------------- --------------- --------------------------
Maxine Pereira 1 3 1999 $48,000 N/A $154,675 N/A
- ------------------------- ------- ---------------------------- --------------- --------------------------
</TABLE>
1. Camilo Pereira and Maxine Pereira became officers of the Company in July
1998.
2. Does not include 150,000 shares granted to Mr. Pereira as of July 1,
1999. The value of these shares is $975,00. The number of shares
actually issued was 135,022. The remaining shares were cancelled as
payment of $97,360 is advances to Mr. Pereira.
3. Does not include 1,250 shares granted to Ms. Pereira for her services
as a Director. Also does not include 25, 000 shares to be granted to Ms.
Pereira as of July 1, 1999. The value of these shares is $168,750.
Employment Agreements
- ---------------------
We entered into five-year employment agreements with Camilo Pereira and Maxine
Pereira that expire March 20, 2003 and July 1, 2003, respectively. Pursuant to
the terms of the employment agreements, base annual salaries, after giving
effect to cost of living adjustments, are as follows: Camilo Pereira $125,000;
Maxine Pereira $48,000. Each employment agreement provides for health insurance,
vacations, and related benefits, and a cost of living adjustment.
Ms. Pereira's agreement provides for the issuance of 50,000 shares of common
stock on each anniversary date of her employment, to be paid pro rata every six
months. Mr. Pereira's agreement provides for the issuance of 300,000 shares of
our common stock on each anniversary date of his employment, to be paid pro rata
every six months, and a performance bonus. The bonus will be in the form of an
option to purchase one share of common stock for every $100 of earning assts
generated by us prior to and after September 9, 1998. The options are
exercisable at $.012 per share, calculated after every quarterly audit and
exercisable for up to five years from the date of issuance. As of June 30,1999,
Mr. Pereira earned and exercised options to purchase 1,310,693 shares of common
stock. See "Certain Transactions".
The following table sets forth certain information with regard to the
Options/SAR granted to Management for the fiscal year ended June 31, 1999.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
No. of Securities %of Total Options Exercise or Market Price
Underlying Options Granted to Employees Base Price On Date of Expiration
Name Granted In Fiscal Year ($/Share) Grant Date
- -------------- ---------------- -------------------- ----------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Camilo 1,310,693 97.4% $.12 $2.75 Exercised
Pereira (1)
- -------------- ---------------- -------------------- ----------------- ----------- --------------
</TABLE>
35
<PAGE>
Stock Option Plans
- ------------------
We intend to establish a new stock and option plan and present it for
shareholder approval at its next annual meeting.
CERTAIN TRANSACTIONS
Camilo Pereira and. Maxine Pereira are husband and wife. Further, Camilo Pereira
and Maxine Pereira are each "Control Persons" as a result of their control of a
majority voting power of our outstanding stock. Both parties disclaim, however,
any beneficial interest or ownership in the shares owned by the other party.
Camilo Pereira receives a performance bonus. The bonus is in the form of an
option to purchase one share of common stock for every $100 of earning assets
generated by us prior to and after September 9, 1998. The options are
exercisable at $.012 per share, calculated after every quarterly audit and
exercisable for up to five years from the date of issuance. As of June 30, 1999,
Mr. Pereira earned and exercised options to purchase 1,310,698 shares of common
stock. See "Management- Compensation".
In March 1999, we were going to acquire a 40% interest in Web Solutions, a South
African Web page designer, and developer. We were unable to consummate the
purchase due to our inability to obtain financing at that time and the Web
Solutions declined our offer of issuing stock for the purchase price. After we
declined the purchase, Mr. Pereira, our president purchased the interest through
his South African company Quest Net Corp. SA (PTY) LTD. In May 1999, the Board
of Directors, with Mr. Pereira abstaining, approved the purchase of 49% of the
authorized but unissued common stock of Quest Net Corp. SA (PTY) LTD., a South
African Internet company, for $4,000,000 to be paid in our restricted common
stock. The shares will be valued at market as of the date of the closing of the
transaction. Quest Net Corp. SA (PTY) LTD is majority owned by Mr. Pereira.
Because we are purchasing our interest with common stock, we cannot enter into a
letter of intent until we receive approval of the South African government.
In March 1999, we issued 100,000 shares to Maxine Pereira, an officer of the
Company, pursuant to her employment agreement. The agreement called for the
issuance of 25,000 shares on January 1, 1999. The Company neglected to timely
issue the shares and therefore the shares were not issued at the time of the
stock dividend. The Board of Director authorized the issuance of the additional
75,000 shares that would have been issued to Ms. Pereira pursuant to the
dividend if the Company had performed its obligations under the employment
agreement in a timely manner.
In January 1999, we issued a total of 101,333 shares of our common stock for to
David Plant, the father of Maxine Pereira and father-in-law of Camilo Pereira,
officers and directors of the Company, for consulting services rendered. The
consulting services were valued at $7,600. In addition, in March 1999 Mr. Plant
was paid a consulting fee of $35,000 in connection with Project Unidad.
In December 1998, we acquired certain assets of Grupo Internet Latinoamericano
valued at $2,042,000 in exchange for an aggregate of 100,000 shares of our
redeemable preferred stock and 2,607,660 shares of our common stock. At the time
of the transaction, Grupo Internet Latinoamericano was an unaffiliated third
party. The Company redeemed the redeemable convertible preferred shares in July
1999, at a redemption price of $10.00 per share. At the time of the redemption,
Grupo Internet Latinoamericano owned 49.2% of the outstanding common stock.
During the year ended June 30, 1999, Camilo Pereira, an officer and director of
the Company and another entity owned by Mr. Pereira, paid on behalf of the
Company certain expenses totaling $103,976. Mr. Pereira also advances $35,000 to
the Company for working capital. We repaid $29,725 to the President and issued a
seven and half percent note payable to Mr. Pereira for the remaining $109,899.
We repaid the note and accrued interest of $3,241 for a total of $113,140.
Mr. Pereira also advanced the Company an additional $105,000 in exchange for a
promissory note. We repaid the note within sixty days of issuance and did not
accrue any interest.
From time to time during the year ended June 30, 1999, the Company paid certain
expenses related to ventures Mr. Pereira is associated with, but have no
relative business purpose to the Company. The amounts totaled $97,360 and have
been deducted from amounts accrued and payable to Mr. Pereira pursuant to his
employment agreement by decreasing the shares to be issued to Mr. Pereira in
connection with his employment agreement by 14,978 shares valued at $97,360.
36
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of our common stock as
August 9, 1999 as to (a) each person known to us who beneficially owns more than
5% of the outstanding shares of our common stock; (b) each current director
executive officer; and (c) all of our executive officers and directors as a
group.
The actual number of shares of Common stock held by Camilo Pereira and Maxine
Pereira are 6,666,810 and 136,000 shares respectively. Both Camilo Pereira and
Maxine Pereira specifically disclaim any beneficial interest in each other's
shares
<TABLE>
<CAPTION>
Name and Address Number of Shares Owned % of Outstanding
of Beneficial Owner Beneficially (1)(2) Shares of Common Stock
- ------------------- ------------------- ----------------------
<S> <C> <C>
Camilo Pereira 17,732,088 (3) 79.9%
2999 NE 191st Street, PH-8
Aventura, Florida 33180
Maxine Pereira 6,817,788 30.7%
2999 NE 191st Street,. PH-8
Aventura, Florida 33180
Grupo Internet Latinoamericano, S.A 10,929,278 49.2%
P.O. Box 3174
Road Town, Tortola
British Virgin Islands
Simplex LTDA 1,200,000 5.4%
Rua P-25 No. 774
Setor dos Funcionarios
Goiania Gois 74.000 Brazil
All officers and directors 17,743,191 (5) 79.9%
as a group (5) persons)
</TABLE>
(1) Except as indicated in the footnotes to this table, based on
information provided by such persons, the persons named in the table
above have sole voting power and investment power with respect to all
shares of common stock shown beneficially owned by them.
(2) Percentage of ownership is based on 22,205,522 shares of common stock
outstanding as of August 9, 1999, plus each person's options that are
exercisable within 60 days. Shares of common stock subject to stock
options that are exercisable within 60 days of August 9 1999 are deemed
outstanding for computing the percentage of that person and the group.
(3) Includes 136,000 shares owned by the wife of Camilo Pereira, Maxine
Pereira, of which he disclaims beneficial ownership. Also include the
10,929,278 shares owned by Grupo Internet Latinoamericano, S.A. which
are subject to a proxy held by Mr. Pereira
(4) Includes 6,681,788 shares owned by the husband of Maxine Pereira,
Camilo Pereira, of which she disclaims beneficial ownership.
(5) Includes include the 10,929,278 shares owned by Grupo Internet
Latinoamericano, S.A. which are subject to a proxy held by Mr. Pereira.
MARKET PRICE OF SECURITIES
Our common stock is traded on the NASDAQ over-the-counter bulletin board market
under the symbol QNET. There has been trading in our common stock since July 10,
1998. The following table sets forth, for each of the fiscal periods indicated,
the high/ask and low/bid trade prices for the common stock, as reported on the
OTC Bulletin Board. These per share quotations reflect inter-dealer prices in
the over-the-counter market without real mark-up, markdown, or commissions and
may not necessarily represent actual transactions.
QUARTER ENDING HIGH/ASK LOW/BID
FISCAL YEAR 1998
September 1998 $ 5.25 $ .6875
December 1998 $19.00 $ .43
March 1999 $30.71 $ 4.75
June 1999 $13.75 $ 3.50
On August 9, 1999, the closing trade price of the common stock as reported on
the OTC Bulletin Board was $3.50. As of such date, there were approximately 281
holders of record of our common stock.
37
<PAGE>
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 16, 1998, the shareholders approved a 10 to 1 reverse split. For
every 10 shares held by a shareholder the shareholder received one share.
DESCRIPTION OF SECURITIES
Our Articles of Incorporation, as amended authorizes us to issue up to
50,000,000 shares of common stock, no par value per share and 5,000,000 shares
of Preferred Stock, no par value. As of the date of this Prospectus we have
issued and outstanding 22,205,522 shares of common stock and no shares of
Preferred stock. In October 1998, the shareholder approved a 10 to 1 reverse
split. For every 10 shares held by a shareholder the shareholder received one
share.
In January 1999, the Board of Directors approved a three for one stock dividend.
For every one share of common stock held by a shareholder they received three
shares.
COMMON STOCK
Holders of the common stock are entitled to one vote for each share in the
election of directors and in all other matters to be voted on by the
shareholders. There is no cumulative voting in the election of directors.
Holders of common stock are entitled to receive such dividends as may be
declared from time to time by our Board of Directors out of funds legally
available thereof and, in the event of liquidation, dissolution or winding up of
the Company, to share ratably in all assets remaining after payment of
liabilities. The holders of common stock have no preemptive or conversion
rights, and are not subject to further calls or assessments. There are no
redemption or sinking fund provisions applicable to the common stock. The rights
of the holders of the common stock are subject to any rights that may be fixed
for holders of Preferred Stock. All of the outstanding shares of common stock
are fully paid and non-assessable.
PREFERRED STOCK
Our Articles of Incorporation authorize the issuance of "blank check" preferred
stock with such designations, rights, and preferences as the board of directors
may determine, from time to time. This means that the board of directors can,
without stockholder approval, designate and issue additional series of preferred
stock with dividend, liquidation, conversion, voting, or other rights, including
the right to issue convertible securities with no limitations on conversion.
This power could adversely affect the voting power or other rights of the
holders of our common stock, substantially dilute the common shareholders'
interest, and depress the price of our common stock.
DIVIDEND POLICY
It is the current policy of the Board of Directors to retain any earnings to
provide for the growth of the Company. Consequently, no cash dividends are
expected to be paid on the Company's common stock in the foreseeable future.
SELLING SECURITY HOLDERS
In accordance with our obligations to the Selling Security Holder contained in
the Registration Rights Agreement, we have registered for sale by the Selling
Security Holder, pursuant to this Prospectus, 1,700,000 shares of common stock
owned by or to be issued to the Selling Security Holder. The Selling Security is
James LLC., a Cayman Island corporation whose address is c/o Citco Trustees
(Cayman) LTD., Corporate Centre, West, Bay Road, Po Box 31106 SMB, Grand Cayman,
Cayman Islands, BWI. CTC Corporation LTD is the sole director of and has voting
control over James LLC. Michael Francombe is a director of CTC Corporation LTD.
Under the terms of a registration statement between the Company and James LLC.,
if the average of the closing bid prices of the Common Stock as reported by
Bloomberg, LP for the sixty (60) consecutive trading days following but not
including the date the Registration Statement is deemed effective is less than
125% of the Purchase Price, then the Company is required to issue to the Selling
Security Holder, at no cost to the Selling Security Holder, within 5 business
days of receipt of written notice from the Selling Security Holder, additional
shares of Common Stock equal to the difference between (i) the Aggregate
Purchase Price divided by 80% of the Current Market Price and (ii) the Total
Number of Shares.
38
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Example: Aggregate Purchase Price = $5,000,000
Purchase Price (80% of $7.00) = $5.60
125% of Purchase Price = $7.00
Current Market Price = $6.00
80% of Current Market Price = $4.80
Total Number of Shares = 892,857 (5,000,000 $5.60)
Additional Shares = ($5,000,000 $4.80) - 892,857
148,810 = 1,041,667 - 892,857
</TABLE>
Due to the fluctuation in the price of the Company's Common Stock during the
past 60 days, the Company's good faith estimate of the number of shares that
will be required to be issued in connection with the Subscription Agreement is
1,700,000 shares. In the event that additional shares will be required to be
issued, the Company will file a new or amended registration statement to cover
the additional shares. Any shares that are not issued will be deregistered. As
of August 9, 1999 we would be required to issue a total of 1,785,715 shares in
accordance with the terms of the Subscription Agreement. Presently, James LLC.
holds a total of 910,747 shares. CTC Corporation LTD does not hold any of our
securities.
If the Registration Statement is not declared effective within 120 day from June
3, 1999, the Company is required to pay, as liquidated damages, 1.0% of the
principal amount of the Shares, and 2.0% of the principal amount of the Shares
for each 30-day period, or portion thereof that registration is not declared
effective after 150 calendar days.
No officer, director or affiliate of James LLC. or CTC Corporation LTD is or has
been an officer, director, or employee of ours during the past three years, or
had any other relationship with us during such period, other than as an
investor. The 1,700,000 shares of common stock being sold pursuant to this
Prospectus represent the total beneficial holdings of the Selling Security
Holder.
All of the common stock held by the Selling Security Holders is being offered
for sale pursuant to this Prospectus for its accounts. Accordingly, it is
anticipated that the Selling Security Holder, after completion of the Offering,
will not hold any shares of our common stock.
PLAN OF DISTRIBUTION
The Registration Statement of which this Prospectus is a part has been filed in
connection with the registration rights included in Subscription Agreement
between the Selling Security Holder and us.
The Shares may be offered and sold from time to time by the Selling Security
Holder. The Selling Security Holder will act independently of the Company in
making decisions with respect to the timing, manner, and size of each sale. Such
sale may be made on the OTC Bulletin Board or otherwise, at prices and on terms
then prevailing or at prices related to the then market price, or in negotiated
transactions. The Shares may be sold by one or more of the following methods:
(a) a block trade in which the broker-dealer engaged by the Selling Security
Holder will attempt to sell Shares as agent but may position and resell a
portion of the block as principal to facilitate the transaction; (b) purchases
by the broker-dealer as principal and resale by such broker or dealer for its
account pursuant to this Prospectus; and (c) ordinary brokerage transactions and
transactions in which the broker solicits purchasers. To the best of our
knowledge, the Selling Security Holder has not, as of the date hereof, entered
into any arrangement with a broker or dealer for the sale of shares through a
block trade, special offering, or secondary distribution of a purchase by a
broker-dealer. In effecting sales, broker-dealers engaged by the Selling
Security Holder may arrange for other broker-dealers to participate.
Broker-dealers may receive commissions or discounts from the Selling Security
Holder in amounts to be negotiated.
In offering the Shares, the Selling Security Holder and any broker-dealers who
execute sales for the Selling Security Holder may be deemed to be "underwriters"
within the meaning of the Securities Act in connection with such sales, and any
profits realized by the Selling Security Holder and the compensation of such
broker-dealer may be deemed to be underwriting discounts and commissions.
We have advised the Selling Security Holder that during the time they are
engaged in distribution of the securities covered by this Prospectus, they must
comply with Rule 10b-5 and Regulation M under the Exchange Act and Pursuant
thereto: (i) each must not engage in any stabilization activity in connection
with the Company's securities; (ii) each must furnish each broker through which
securities covered by this Prospectus may be offered the number of copies of
this Prospectus which are required by each broker; and (iii) each must not bid
for or purchase any securities of the Company or attempt to induce any person to
purchase any of the Company's securities other than as permitted under the
Exchange Act Release 34-38067 (December 20, 1996) have been advised that they
39
<PAGE>
must coordinate their sales under this Prospectus with each other and the
Company for purposes of Regulation M.
The Shares are being offered on a continuous basis pursuant to Rule 415 under
the Securities Act of 1933, as amended This offering will terminate on the
earlier of (a) the date on which such Selling Security Holders' shares may be
resold pursuant to Rule 144 under the Securities Act; or (b) the date on which
all Shares offered hereby have been sold by the Selling Security Holder. There
can be no assurance that the Selling Security Holder will sell any or all of the
shares of common stock offered hereby.
The Selling Security Holder and any broker-dealers participating in the
distribution of the Shares may be deemed to be "underwriters" within the meaning
of the 1933 Act, and any commissions or discounts paid or given to any such
broker-dealer may be regarded as underwriting commissions or discounts under the
1933 Act.
INTERESTS OF NAMED EXPERTS AND COUNSEL
Certain legal matters in connection with the securities being offered hereby
will be passed upon for the Company by Rebecca J. Del Medico, Esq., Counsel for
the Company. Ms. Del Medico currently owns approximately 96,000 shares of common
stock of the Company.
EXPERTS
The consolidated audited Financial Statements of Quest Net Corp. incorporated by
referenced herein have been examined by Cordovano and Harvey, P.C., independent
certified public accountants, for the periods and to the extent set forth in
their report and are incorporated herein in reliance upon such report of said
firm given under their authority as experts in accounting and auditing.
The report of Cordovano and Harvey P.C. covering the June 30, 1999, Financial
Statements contains an explanatory paragraph that states that Quest Net Corp.
has incurred significant operating losses since inception, has a limited
operating history, and has a negative cash flow from operations, which raises
substantial doubt about its ability to continue as a going concern. The
Financial Statements do not include any adjustments that might result from the
outcome of this uncertainty.
LEGAL MATTERS
Rebecca J. Del Medico, Esq. Counsel for the Company, will pass upon the validity
of the issuance of the Shares for the Company.
40
<PAGE>
<TABLE>
<CAPTION>
QUEST NET CORP
--------------
(A Development Stage Company)
Page
----
<S> <C>
Independent auditors' report...............................................................................F-2
Balance sheet as of June 30, 1999..........................................................................F-3
Consolidated statements of operations, for the years ended June 30, 1999 and 1998,
and for the period November 28, 1995 (inception) through June 30, 1999 (unaudited).......................F-4
Consolidated statements of shareholders' equity
for the period November 28, 1995 (inception) through June 30, 1999 (unaudited)...........................F-5
Consolidated statements of cash flows, for the years ended June 30, 1999 and 1998,
and for the period November 28, 1995 (inception) through June 30, 1999 (unaudited).......................F-7
Notes to consolidated financial statements.................................................................F-8
</TABLE>
F-1
<PAGE>
To the Board of Directors and Shareholders
Quest Net Corp. and Subsidiaries
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Quest Net Corp.
and subsidiaries (a Florida corporation in the development stage) as of June 30,
1999 and 1998 and the related consolidated statements of operations,
shareholders' equity and cash flows for the years ended June 30, 1999 and 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 Quest Net Corp. and
subsidiaries, as of June 30, 1999 and 1998 and the results of their operations
and cash flows for the years ended June 30, 1999 and 1998, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As shown in the accompanying
consolidated financial statements, the Company incurred a net loss of $8,019,883
during the period from November 28, 1995 (inception) through June 30, 1999,
negative cash flows from operations and has a limited operating history. These
and other factors discussed in Note A to the consolidated financial statements
raise a substantial doubt about the ability of the Company to continue as a
going concern. Management's plans in regard to those matters are also described
in Note A. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Pro forma financial information provided in Note G giving effect to the
Company's acquisition of Wings Online, Inc. is on an unaudited basis.
Cordovano and Harvey, P.C.
Denver, Colorado
July 10, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
QUEST NET CORP.
---------------
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
<S> <C>
ASSETS
CURRENT ASSETS
Cash......................................................................................$.3,298,289
Accounts receivable, net of $867,842 allowance ................................................11,084
Accounts receivable, other......................................................................2,276
Prepaid expenses...............................................................................29,155
---------------
TOTAL CURRENT ASSETS 3,340,804
PROPERTY AND EQUIPMENT, net of
accumulated depreciation of $266,159 (Note C)..............................................1,329,364
PROPERTY NOT IN SERVICE (Note C)....................................................................434,144
INTANGIBLE ASSETS, net of
accumulated amortization of $41,453 (Note A).................................................501,031
DEPOSITS.............................................................................................69,800
---------------
$ 5,675,143
===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, trade......................................................................$.44,114
Accrued compensation (Note E)...............................................................1,118,265
Accrued expenses...............................................................................25,506
Accrued payroll taxes..........................................................................64,814
---------------
TOTAL CURRENT LIABILITIES 1,252,699
---------------
COMMITMENTS (Note H)......................................................................................-
SHAREHOLDERS' EQUITY
Preferred stock, no par value; 5,000,000 shares authorized;
-0- shares issued and outstanding, respectively..................................................-
Common stock, no par value; 50,000,000 shares authorized;
22,045,500 shares issued and outstanding ................................................12,435,136
47,000 outstanding common stock warrants......................................................7,191
Deficit accumulated during development stage...............................................(8,019,883)
---------------
TOTAL SHAREHOLDERS' EQUITY 4,422,444
---------------
$ 5,675,143
===============
See accompanying notes to the consolidated financial statements
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
QUEST NET CORP.
---------------
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
November 28,
1995
(inception)
For the Years Ended June 30, Through June 30,
1999 1998 1999
------------- ----------- ----------------
(Unaudited)
<S> <C> <C> <C>
REVENUES
Internet related services...................................... $ 136,361 $ - $ 136,361
OTHER:
Software sales and development (Note H)...................... 933,837 - 933,837
------------ ----------- ------------
TOTAL REVENUES 1,070,198 - 1,070,198
------------ ----------- ------------
COSTS AND EXPENSES
Cost of internet related services............................. 95,088 - 95,088
Cost of revenues - software sales and development............. 600,000 - 600,000
Stock based compensation...................................... 6,109,110 - 6,109,110
Bad debt expense.............................................. 893,095 - 893,095
Salaries and bonuses.......................................... 383,160 - 383,160
General and administrative.................................... 634,861 4,761 642,325
Depreciation and amortization................................. 313,367 - 313,367
Loss on disposal of assets.................................... 56,559 - 56,559
------------ ----------- ------------
TOTAL OPERATING EXPENSES 9,085,240 4,761 9,092,704
------------ ----------- ------------
OPERATING LOSS (8,015,042) (4,761) (8,022,506)
NON-OPERATING INCOME (EXPENSE)
Interest expense.............................................. (5,943) - (5,943)
Interest income............................................... 8,566 - 8,566
------------ ----------- ------------
NET LOSS BEFORE INCOME TAXES $ (8,012,419) $ (4,761) $ (8,019,883)
INCOME TAXES (NOTE F)
Current tax benefit........................................... 1,348,598 678 1,349,662
Deferred tax expense.......................................... (1,348,598) (678) (1,349,662)
------------ ----------- ------------
NET LOSS $ (8,012,419) $ (4,761) $ (8,019,883)
============ =========== ============
NET LOSS PER SHARE:
Basic......................................................... $ (0.71) $ (0.02)
============ ===========
Diluted....................................................... $ (0.71) $ (0.02)
============ ===========
SHARES USED FOR COMPUTING NET LOSS PER SHARE:
Basic......................................................... 11,351,263 240,000
============ ===========
Diluted....................................................... 11,351,263 240,000
============ ===========
</TABLE>
See accompanying notes to the consolidated financial statements
F-4
<PAGE>
<TABLE>
<CAPTION>
QUEST NET CORP.
---------------
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
From November 28, 1998 (inception) through June 30, 1999 (Unaudited)
Preferred Stock Common Stock
Shares Amount Shares Amount Warrants
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Balance, November 28, 1995 (inception)........................ - $ - - $ - $ -
Net loss for the period ended June 30, 1996................... - - - - -
---------- ---------- ---------- ------------ --------
BALANCE, June 30, 1996 - - - - -
July 3, 1996, shares issued for cash (Note B)................. 300,000 3,000 - - -
September 4, 1996, shares issued for cash..................... - - 240,007 * 1,200 -
Net loss for the year ended June 30, 1997..................... - - - - -
---------- ---------- ---------- ------------ --------
BALANCE, June 30, 1997 300,000 3,000 240,007 * 1,200 -
June 15, 1998, cancellation of preferred stock................ (300,000) (3,000) - 3,000 -
June 16, 1998, capital contributed by officer................. - - - 70 -
June 30, 1998, shares issued in asset acquisition (Note D).... - - 200,000 * 125,274 -
Net loss for the year ended June 30, 1998..................... - - - - -
---------- ---------- ---------- ------------ --------
BALANCE, June 30, 1998 - - 440,007 * 129,544 -
July 27, 1998 shares issued for software purchase (Note D).... 60,000 600,000 - - -
November 2, 1998, shares issued for services, valued at cost
of services................................................. - - 200,000 25,000 -
November 16, 1998, conversion of preferred shares............. (60,000) (600,000) 300,000 600,000 -
November 23, 1998, shares issued for cash, net of $2,950
offering costs.............................................. - - 50,000 97,050 -
December 1, 1998, shares issued for officers' compensation
(Note E).................................................... - - 1,310,693 4,013,997 -
December 11, 1998, shares issued pursuant to employment
agreements.................................................. - - 175,000 514,063 -
December 22, 1998, shares issued in exchange for equipment
(Note D).................................................... 100,000 1,000,000 2,607,660 724,520 -
December, 1998, shares issued for cash........................ - - 50,000 50,000 -
(RESTUBBED TABLE)
Deficit
Accumulated
During Total
Development Shareholders'
Stage Equity
----- ------
Balance, November 28, 1995 (inception)........................ $ - $ -
Net loss for the period ended June 30, 1996................... - -
---------- ------------
BALANCE, June 30, 1996 - -
July 3, 1996, shares issued for cash (Note B)................. - 3,000
September 4, 1996, shares issued for cash..................... - 1,200
Net loss for the year ended June 30, 1997..................... (2,703) (2,703)
---------- ------------
BALANCE, June 30, 1997 (2,703) 1,497
June 15, 1998, cancellation of preferred stock................ - -
June 16, 1998, capital contributed by officer................. - 70
June 30, 1998, shares issued in asset acquisition (Note D).... - 125,274
Net loss for the year ended June 30, 1998..................... (4,761) (4,761)
---------- ------------
BALANCE, June 30, 1998 (7,464) 122,080
July 27, 1998 shares issued for software purchase (Note D).... - 600,000
November 2, 1998, shares issued for services, valued at cost
of services................................................. - 25,000
November 16, 1998, conversion of preferred shares............. - -
November 23, 1998, shares issued for cash, net of $2,950
offering costs.............................................. - 97,050
December 1, 1998, shares issued for officers' compensation
(Note E).................................................... - 4,013,997
December 11, 1998, shares issued pursuant to employment
agreements.................................................. - 514,063
December 22, 1998, shares issued in exchange for equipment
(Note D).................................................... - 724,520
December, 1998, shares issued for cash........................ - 50,000
</TABLE>
* Restated (See Note D)
See accompanying notes to the consolidated financial statements
F-5
<PAGE>
<TABLE>
<CAPTION>
QUEST NET CORP.
---------------
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
From November 28, 1998 (inception) through June 30, 1999 (Unaudited)
Preferred Stock Common Stock
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C>
January 5, 1999, shares issued for compensation at market value
of stock.............................................................. - - 17,667 178,878
January 5, 1999, shares issued for payment of offering costs of
$15,000............................................................... - - 24,000 -
Shares issued in three for one common stock dividend (Note D)........... - - 15,525,081 -
January 7, 1999, shares issued for cash................................. - - 25,000 75,000
January 21, 1998, shares issued for services at cost of services........ - - 101,333 7,600
January 1999, shares issued for purchase of domain names................ - - 1,500 7,000
January 25, 1999, shares issued for cash................................ - - 132,915 692,809
January 25, 1999, 47,000 warrants issued for cash....................... - - - -
February 15, 1999, shares issued in acquistion of Wings Online, Inc.
(Note G).............................................................. - - 29,326 200,000
February 12, 1999, shares issued pursuant to employment agreement....... - - 100,000 154,675
March 2, 1999, shares issued for services, valued at cost of
services.............................................................. - - 4,000 5,000
March 10, 1999, shares issued for services at market value of stock..... - - 677 10,000
May 3, 1999, shares issued in exchange for property..................... - - 39,894 300,000
May 27, 1999, shares issued for cash, net of $350,000 offering costs.... - - 910,747 4,650,000
July, 1999 cash redemption of preferred stock (Note X)..................(100,000) (1,000,000) - -
Net loss for the year ended June 30, 1999............................... - - - -
-------- ---------- ---------- -----------
BALANCE, JUNE 30, 1999.......... - $ - 22,045,500 $12,435,136
======== ========== ========== ===========
(RESTUBBED TABLE)
Deficit
Accumulated
During Total
Development Shareholders'
Warrants Stage Equity
-------- ----- ------
January 5, 1999, shares issued for compensation at market value <C>
of stock.............................................................. - - 178,878
January 5, 1999, shares issued for payment of offering costs of
$15,000............................................................... - - -
Shares issued in three for one common stock dividend (Note D)........... - - -
January 7, 1999, shares issued for cash................................. - - 75,000
January 21, 1998, shares issued for services at cost of services........ - - 7,600
January 1999, shares issued for purchase of domain names................ - - 7,000
January 25, 1999, shares issued for cash................................ - - 692,809
January 25, 1999, 47,000 warrants issued for cash....................... 7,191 - 7,191
February 15, 1999, shares issued in acquistion of Wings Online, Inc.
(Note G).............................................................. - - 200,000
February 12, 1999, shares issued pursuant to employment agreement....... - - 154,675
March 2, 1999, shares issued for services, valued at cost of
services.............................................................. - - 5,000
March 10, 1999, shares issued for services at market value of stock..... - - 10,000
May 3, 1999, shares issued in exchange for property..................... - - 300,000
May 27, 1999, shares issued for cash, net of $350,000 offering costs.... - - 4,650,000
July, 1999 cash redemption of preferred stock (Note X).................. - - -
Net loss for the year ended June 30, 1999............................... - (8,012,419) (8,012,419)
------- ----------- -----------
BALANCE, JUNE 30, 1999.......... $ 7,191 $(8,019,883) $ 4,422,444
======= =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements
F-6
<PAGE>
<TABLE>
<CAPTION>
QUEST NET CORP.
---------------
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
November 28,
1995
(inception)
For the Years Ended June 30, Through June 30,
1999 1998 1999
------------- ------------ ---------------
(Unaudited)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss....................................................$ (8,012,419) $ (4,761) $ (8,019,883)
Transactions not requiring cash:
Depreciation and amortization............................ 313,367 - 313,367
Loss on disposal of assets............................... 56,559 - 56,559
Increase to allowance for doubtful accounts.............. 867,842 - 867,842
Non-cash software cost of revenues....................... 600,000 - 600,000
Stock based compensation expense......................... 6,109,110 - 6,109,110
Changes in current assets and current liabilities:
Increase in receivables and prepaid expenses............ (910,357) - (910,357)
Increase in accounts payable and accrued liabilities
net of effects from purchase of Wings Online, Inc...... 23,000 3,237 26,237
------------ ------------- --------------
NET CASH USED IN
OPERATING ACTIVITIES (952,898) (1,524) (957,125)
------------ ------------- --------------
INVESTING ACTIVITIES
Equipment and leasehold purchases........................... (118,756) - (118,756)
Proceeds from sale of equipment............................. 2,100 - 2,100
Cash paid for deposits...................................... (69,250) - (69,250)
Purchase of Wings Online, Inc, net of $-0- cash received.... (135,000) - (135,000)
------------ ------------- --------------
NET CASH (USED IN)
INVESTING ACTIVITIES (320,906) - (320,906)
------------ ------------- --------------
FINANCING ACTIVITIES
Capital contribution........................................ - 70 70
Sale of preferred stock..................................... - - 3,000
Sale of common stock and warrants........................... 5,925,000 - 5,926,200
Cash paid for offering costs................................ (352,950) - (352,950)
Redemption of preferred stock............................... (1,000,000) - (1,000,000)
Proceeds from issuance of notes to related party............ 214,900 - 214,900
Principal payments of related party notes................... (214,900) - (214,900)
------------ ------------- --------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 4,572,050 70 4,576,320
------------ ------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS...................... 3,298,246 (1,454) 3,298,289
Cash and cash equivalents, beginning............................ 43 1,497 -
------------ ------------- --------------
Cash and cash equivalents, ending............................... $ 3,298,289 $ 43 $ 3,298,289
============ ============= ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.......................................... $ 5,943 $ - $ 5,943
============ ============= ==============
Cash paid for income taxes...................................... $ - $ - $ -
============ ============= ==============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
2,000,000 common shares issued for property..................... $ - $ 125,274 $ 125,274
2,649,054 common shares issued for property..................... $ 1,031,520 $ - $ 1,031,520
160,000 preferred shares issued for property and software....... $ 1,600,000 $ - $ 1,600,000
24,000 common shares issued for payment of offering costs....... $ 15,000 $ - $ 15,000
29,326 common shares issued in acquisiton of Wings Online, Inc.. $ 200,000 $ - $ 200,000
</TABLE>
See accompanying notes to the consolidated financial statements
F-7
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A: Organization, business, liquidity and summary of significant accounting
- --------------------------------------------------------------------------------
policies
- --------
Organization and business
Quest Net Corp. (the "Company") was incorporated in the state of Colorado on
November 28, 1995 under the name of A. P. Sales, Inc. The Company was formed for
the purpose of entering the office furniture repair and reconditioning market.
In June of 1998, the Company acquired certain assets related to the internet
services industry and became a provider of Internet system and network
management solutions for enterprises with mission-critical Internet operations,
including server hosting, Internet connectivity, and Internet technology
services. At that time, the Company changed its name to Quest Net Corp. The
Company reincorporated in Florida in December 1998.
As shown in the accompanying financial statements, the Company incurred a net
loss of $8,019,883 during the period from November 28, 1995 (inception) through
June 30, 1999, and has a limited operating history. Those factors, as well as
the uncertain condition that the Company faces as a new business with an
unproven business model entering the new and rapidly evolving market of online
commerce and the Internet, create an uncertainty about the Company's ability to
continue as a going concern.
Management plans to commence significant operations during the next fiscal year,
reduce expenses resulting from stock based compensation and raise an additional
$5,000,000 in equity financing. The ability of the Company to continue as a
going concern is dependent on the success of these plans, and ultimately upon
achieving profitability. The financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.
Summary of significant accounting policies:
Basis of presentation
- ---------------------
The Company's primary operations since July 1998 have been devoted to developing
its Internet services business and raising capital. As a result, the
consolidated financial statements are presented in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by
Development Stage Enterprises." In order to generate significant revenues and
become an operating business, the Company will need to continue to market its
internet access services to customers in its current markets and in markets to
be acquired.
F-8
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of significant accounting policies continued:
Principles of Consolidation
- ---------------------------
The Company's consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries; Wings Online, Inc., IPQuest Corp.,
Quest Wireless Corp., Globalbot Corp., QuesTel Corp. and Quest Fiber Corp. All
material intercompany accounts and transactions have been eliminated in
consolidation.
Use of estimates
- ----------------
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassifications
- -----------------
Certain prior-year amounts have been reclassified for comparative purposes to
conform to the current-year presentation.
Cash and cash equivalents
- -------------------------
The Company considers all short-term, highly liquid investments with an original
maturity date of three months or less to be cash equivalents. Cash and cash
equivalents are stated at cost, which approximates fair value. The Company has
concentrated its credit risk for cash by maintaining its cash in one money
market account. The maximum loss that would have resulted from that risk totaled
$4,351,891 at June 30, 1999. The Company has not experienced any losses in the
account and believes it is not exposed to any significant credit risk to cash.
Property and equipment
- ----------------------
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets, which is estimated to be three to five years.
Expenditures for repairs and maintenance are charged to expense when incurred.
Expenditures for major renewals and betterments, which extend the useful lives
of existing equipment, are capitalized and depreciated. Upon retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the consolidated statements of operations.
Leasehold improvements are amortized over the life of the existing lease of
sixty months.
F-9
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of significant accounting policies continued:
Intangible assets
- -----------------
Intangible assets are stated net of accumulated amortization and include a
non-compete agreement acquired as a result of the Company's acquisition of Wings
Online, Inc. and goodwill resulting from the Company's purchase of equipment and
certain other assets from AVX Communications. Amortization is provided using the
straight-line method over three years. The Company evaluates on a regular basis
whether events and circumstances have occurred that indicate that the carrying
amount of intangible assets may warrant revision. Management believes that there
has been no impairment to the intangible assets as reflected in the Company's
consolidated financial statements as of June 30, 1999.
Long-lived assets
- -----------------
The Company periodically reviews the values assigned to long-lived assets, such
as property and equipment, to determine whether any impairments are other than
temporary. Management believes that the long-lived assets in the accompanying
balance sheets are appropriately valued.
Sources of supplies
- -------------------
The Company relies on third-party networks, local telephone companies and other
companies to provide data communications capacity. Although management feels
alternative telecommunications facilities could be found in a timely manner, any
disruption of these services could have an adverse effect on operating results.
Income taxes
- ------------
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the recorded book basis and tax basis
of assets and liabilities for financial and income tax reporting. The deferred
tax assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred taxes are also recognized for
operating losses that are available to offset future taxable income and tax
credits that are available to offset future federal income taxes.
Revenue recognition
- -------------------
The Company recognizes revenue when services are provided.
F-10
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of significant accounting policies continued:
Stock-based compensation
- ------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation" permits the use of
either a fair value based method or the method defined in Accounting Principles
Board Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25") to
account for stock-based compensation arrangements. Companies that elect to use
the method provided in APB 25 are required to disclose pro forma net income and
earnings per share that would have resulted from the use of the fair value based
method. The Company has elected to continue to determine the value of
stock-based compensation arrangements under the provisions of APB 25 and,
accordingly, has included pro forma disclosures under SFAS No. 123 in Note E.
Fair value of financial instruments
- -----------------------------------
SFAS 107, "Disclosure About Fair Value of Financial Instruments," requires
certain disclosures regarding the fair value of financial instruments. The
Company has determined, based on available market information and appropriate
valuation methodologies, the fair value of its financial instruments
approximates carrying value. The carrying amounts of cash, accounts receivable,
prepaid expenses, accounts payable, accrued compensation, and other accrued
liabilities approximate fair value due to the short-term maturity of the
instruments.
Loss per share
- --------------
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share" (SFAS 128). The Company adopted SFAS 128 for the
two year period ended June 30, 1999. Under SFAS 128, net loss per share-basic
excludes dilution and is determined by dividing loss available to common
shareholders by the weighted average number of common shares outstanding during
the period. Net loss per share-diluted reflects the potential dilution that
could occur if securities and other contracts to issue common stock were
exercised or converted into common stock. As of June 30, 1999, there were 87,999
stock options and 47,000 common stock purchase warrants outstanding which were
not included in the calculation net loss per share-diluted because they were
antidilutive.
Recently issued accounting pronouncements
- -----------------------------------------
The Company has adopted the following new accounting pronouncements for the year
ended June 30, 1999. There was no material effect on the financial statements
presented from the adoption of the new pronouncements.
SFAS No. 130, "Reporting Comprehensive Income," requires the reporting and
display of total comprehensive income and its components in a full set of
general-purpose financial statements.
F-11
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of significant accounting policies continued:
Recently issued accounting pronouncements continued
- ---------------------------------------------------
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is based on the "management" approach for reporting segments. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. SFAS No. 131 also requires
disclosure about the Company's products, the geographic areas in which it earns
revenue and holds long-lived assets, and its major customers.
SFAS No. 132, "Employers' Disclosures about Pensions and Other Post-retirement
Benefits," which requires additional disclosures about pension and other
post-retirement benefit plans, but does not change the measurement or
recognition of those plans.
Statement of Position ("SOP") 98-1, "Accounting for the costs of Computer
Software Developed or Obtained for Internal Use." This SOP requires that
entities capitalize certain internal-use software costs once certain criteria
are met.
SOP 98-5, "Reporting on the costs of Start-Up Activities." SOP 98-5 provides,
among other things, guidance on the reporting of start-up costs and organization
costs. It requires costs of start-up activities and organization costs to be
expensed as incurred.
The Company will continue to review these new accounting pronouncements over
time, in particular SFAS 131 and SOP 98-1, to determine if any additional
disclosures are necessary based on evolving circumstances.
Note B: Related party transactions
- ----------------------------------
For the year ended June 30, 1999
- --------------------------------
During the year ended June 30, 1999 the President of the Company and another
entity owned by the President of the Company, paid on behalf of the Company
certain expenses totaling $103,976. The President also advanced $35,648 to the
Company for working capital purposes. The Company repaid $29,725 to the
President and issued a seven and half percent note payable to the President for
the remaining $109,899. As of June 30, 1999, the Company repaid the note and
accrued interest of $3,241 for a total of $113,140.
The President advanced the Company an additional $105,000 in exchange for a note
payable to the President. The Company repaid the $105,000 within sixty days of
issuance of the note, and did not accrue any interest.
F-12
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note B: Related party transactions continued
- --------------------------------------------
The Company paid $35,000 to an affiliate for consulting fees related to the
Company's proposed plan to expand into international markets.
From time to time during the year ended June 30, 1999, the Company paid certain
expenses related to ventures the President is associated with, but have no
relative business purpose to the Company. The amounts totaled $97,360 and have
been deducted from amounts accrued and payable to the President pursuant to his
employment agreement. See Note H Commitments and contingencies.
For the year ended June 30, 1998 and the period November 28, 1995 (inception)
- -----------------------------------------------------------------------------
through June 30, 1998 -
- ---------------------
On July 3, 1996, the Company issued 300,000 shares of its no par value preferred
stock to an officer and an affiliate company for $3,000. In June 1998, the
preferred shares were cancelled and the related $3,000 was reclassified as a
capital contribution.
Note C: Property and equipment
- -------------------------------
Furniture and equipment consisted of the following at June 30:
1999 1998
----------- -----------
Office equipment ............................... $ 44,588 $ 8,196
Computer equipment.............................. 1,468,317 66,966
Software........................................ 56,588 49,562
Artwork......................................... 9,545 --
Leasehold improvements.......................... 16,485 --
----------- -----------
1,595,523 124,724
Less accumulated depreciation................... (266,159) --
----------- -----------
$ 1,329,364 $ 124,724
=========== ===========
Depreciation expense for the years ended June 30, 1999, 1998 and inception
(November 28, 1995) through June 30, 1999 totaled $271,877, $-0-, and $271,877,
respectively.
As discussed in Note A to the financial statements, the Company has not yet
fully commenced planned operations. Certain computer equipment that was acquired
during the year ended June 30, 1999 has not yet been placed in service. The cost
of the equipment not being used at June 30, 1999 is $434,144 and accordingly the
Company has not recorded any depreciation expense related to the unused
equipment. Management expects the equipment to be placed in service during the
Company's next fiscal year.
F-13
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note D: Shareholders' equity
- ----------------------------
Preferred Stock
- ---------------
The Company is authorized to issue five million shares of no par value preferred
stock which may be issued in series with such designations, preferences, stated
values, rights, qualifications or limitations as determined by the Board of
Directors.
During the year ended June 30, 1999, the Company issued 60,000 shares of its
convertible preferred stock with a stated value of $10 per share in exchange for
certain software used in transacting credit card business over the internet. The
preferred stock was convertible into the Company's common stock based on a
discount of the average bid price for the Company's common stock on the date of
conversion. The preferred stock was converted into 300,000 shares in November
1998.
During the year ended June 30, 1999, the Company issued 100,000 shares of its
convertible redeemable preferred stock with a stated value of $10 per share,
along with 2,607,660 shares of its common stock in exchange for computer
equipment at a cost of $2,000,000. 480,000 of those shares were issued pursuant
to an exemption from registration as discussed below. Based on a third party
independent appraisal of the equipment, the Company recorded the transaction at
the fair value of the equipment of $1,724,520.
Common Stock
- ------------
On June 30, 1998, the Company issued 200,000 (restated from 2,000,000 for
reverse stock split) shares of its no par value common stock pursuant to an
Asset Purchase and Sale Agreement, whereby the Company would receive certain
assets from PACT Communication Group, Inc. - See Note G.
On October 16, 1998 the Company reversed its 4,400,000 outstanding common shares
to 440,000 to give effect to a one for ten reverse split approved by the
shareholders.
On December 31, 1998, the board of directors approved a three for one common
stock dividend to shareholders of record as of January 6, 1999. The number of
shares issued in the dividend of 15,525,081 was greater than twenty five percent
of the outstanding shares prior to the dividend, therefore the Company has
accounted for the transaction as if it were a forward three-for-one stock split.
F-14
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note D: Shareholders' equity continued
- --------------------------------------
Common stock continued
- ----------------------
During the year ended June 30, 1999 the Company sold 1,039,248 of its no par
value common stock in exchange for $925,000 in cash, $42,400 of equipment (see
discussion of equipment acquired for $2,000,000 above) and services valued at
the cost of the services of $32,600. The offerings were conducted on behalf of
the Company through its executive officers and directors. The shares offered
were not registered and were offered pursuant to an exemption from registration
claimed under Section 3(b) of the Securities Act of 1933, as amended, and Rule
504 of Regulation D promulgated thereunder. The Company incurred $17,950 in
legal costs related to the offerings. The offering costs were paid in $2,950
cash and in the issuance of 24,000 shares of the Company's restricted stock
valued at the cost of the services of $15,000. The costs have been deducted from
the offering proceeds and are recorded as such in the accompanying consolidated
financial statements.
Shares sold to one shareholder in conjunction with the above-mentioned offering
also included 47,000 warrants to purchase additional shares of the Company's no
par value common stock for $9.40 per share. The warrants may be exercised
anytime beginning January 25, 2000 and prior to January 25, 2001. The Company
valued the warrants at $7,191 using pricing methods similar to those used in
valuing options under SFAS 123.
In January 1999 the Company acquired from two different individuals the rights
to the domain names Boats Online and Cars Online for $10,000 and $4,000,
respectively. The purchase price was paid in 1,000 and 500 shares of the
Company's restricted stock, respectively valued at $5,000 and $2,000 along with
$5,000 and $2,000 in cash, respectively.
On February 12, 1999 the Company issued 29,326 shares of its restricted common
stock valued at the market price of the Company's free-trading common shares or
$200,000 and $135,000 in cash, in exchange for all of the outstanding shares of
Wings Online, Inc. - See Note G.
On May 3, 1999 the Company entered into an agreement with AVX Communications
whereby the Company would receive certain assets valued at $300,000 in exchange
for the issuance of 39,894 shares of the Company's restricted common stock. -
See Note G.
On May 27, 1999, pursuant to an exemption from registration claimed under
Section 3(b) of the Securities Act of 1933, as amended, and Rule 506 of
Regulation D promulgated thereunder, the Company sold 910,747 shares of its
common stock for $5,000,000 to one shareholder. The costs of the offering were
legal and finders' fees of $350,000, which have been deducted from the proceeds
of the offering in the accompanying consolidated financial statements.
F-15
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note E: Stock based compensation
- --------------------------------
On December 11, 1998, pursuant to employment contracts with key management and
officers, the Company issued 175,000 shares of the Company's common stock as
compensation to three employees. The Company has recorded stock compensation
expense of $514,063 based on the market price of the Company's free-trading
common stock as of the date of the grant which was December 1, 1998.
On January 5, 1999 the Company issued 10,000 shares of its restricted common
stock to a former officer of the Company as payment for services. The stock was
valued at the market price of the Company's free-trading common stock as of
January 5, 1999 and accordingly the Company has recorded $101,250 in stock
compensation expense.
On January 5, 1999 the Company issued 7,667 shares of its restricted common
stock, valued at the market price of the Company's free-trading common stock as
of January 5, 1999, to its board of directors and accordingly recorded a $77,628
charge to operations as directors' fees.
On February 12, 1999, the Company issued to an officer of the Company 100,000
shares of the Company's restricted common stock as payment pursuant to the
officer's employment agreement. The employment agreement dated July 1, 1998
states that the officer is to receive 50,000 shares per year, 25,000 of which is
to be issued each six months beginning January 1. The Company failed to issue
the officer the 25,000 shares prior to the three for one dividend effective
January 6, 1999. Therefore to make the officer whole, the Company issued 100,000
shares, valuing them at the total value of 25,000 shares at the market price of
the Company's free-trading stock which was $6.187 on January 1, 1999, resulting
in stock compensation expense of $154,675.
On March 2, 1999 as payment for $5,000 in consulting services, the Company
issued 4,000 shares of its restricted common stock, valued at the cost of the
services.
On March 10, 1999 as payment for $10,000 in consulting services, the Company
issued 677 shares of its restricted common stock, valued at the cost of the
services.
F-16
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note E: Stock based compensation continued
- -------------------------------------------
Common stock options
- --------------------
On September 9, 1998 the board of directors approved a performance bonus plan in
the form of common stock options with an exercise price of $.012 to the
President and CEO of the Company. The President would receive one share of
restricted common stock for every $100.00 of earning assets (increase in total
assets) generated prior to and after September 9, 1998. The number of shares to
be received as options are to be calculated at the end of each quarter and
expire five years from the date of grant which is considered to be the date both
the strike price and number of shares are determined. On December 1, 1998, based
on unaudited quarterly financial information, the board of directors granted to
the President options to purchase 1,310,693 shares of the Company's restricted
common stock for $.012 per share. The Company recorded stock compensation
expense in accordance with APB 25 of $3,998,269 which was the difference between
the exercise price of $.012 and the market value of the Company's common stock
on December 1, 1998 of $3.05. The President exercised the options in December of
1998. No other options have been granted pursuant to the performance bonus plan.
On March 26, 1999, the Company granted options to its three outside directors to
purchase 5,000 shares of the Company's common stock for $6.00 per share, which
was the market value of the Company's common stock on that date. The options
vest in two equal increments of 2,500 shares six months and twelve months from
the date of grant, as long as the option holders are members of the board at
time of vesting. The options expire two years from date of vesting. As of June
30, 1999 none of the options were vested.
On March 30, 1999 the Company granted options for 9,999 shares of its common
stock, exercisable for $6.00 per share. The options vest on March 30, 2000 and
expire on March 30, 2002. The options were granted at the market value of the
Company's common stock as of March 30, 1999. In accordance with APB 25, no
compensation expense was recorded.
On April 5, 1999 the Company granted options for 25,000 shares of its common
stock, exercisable for $4.00 per share, to a former officer. The options were
vested on the date of grant and expire April 5, 2000. The options were granted
at the market value of the Company's common stock as of April 5, 1999. In
accordance with APB 25, no compensation expense was recorded.
On May 17, 1999 the Company granted options for 10,000 shares of its common
stock, exercisable for $7.25 per share to certain consultants. The options were
granted at the market value of the Company's common stock as of May 17, 1999.
They are fully vested and expire on May 17, 2001. In accordance with APB 25, no
compensation expense was recorded.
F-17
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note E: Stock based compensation continued
- -------------------------------------------
Common stock options continued
- ------------------------------
On May 17, 1999 the Company granted options for 28,000 shares of its common
stock, exercisable for $7.25 per share to certain employees. The options were
granted at the market value of the Company's common stock as of May 17, 1999.
The options vest in six months from the date of grant. As of June 30, 1999 none
of the options were vested. In accordance with APB 25, no compensation expense
was recorded.
Summary
- -------
A summary of the status of the Company's stock option awards as of June 30,
1999, and the changes during the period ended June 30, 1999 is presented below:
Fixed Options Number
- ----------------------------------------------------
Outstanding at June 30, 1998........... --
Granted................................ 1,398,692
Exercised.............................. (1,310,693)
Canceled............................... --
----------
Outstanding at June 30, 1999........... 87,999
==========
The weighted average exercise price per share for the 87,999 outstanding options
at June 30, 1999 was $5.97.
SFAS 123
- --------
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting form Stock-Based
Compensation". SFAS 123 encourages the use of a fair value based method of
accounting for compensation expense associated with stock option awards and
similar plans. SFAS 123 permits the continued use of the intrinsic value based
method prescribed by APB 25, but requires additional disclosures, including pro
forma calculations of net earnings and earnings per share, as if the fair value
method of accounting prescribed by SFAS 123 had been applied for the applicable
periods.
The fair value of each option granted has been estimated as of the grant date
using the Black-Scholes option-pricing model with the following weighted-average
assumptions: risk-free interest rate of 5.63 percent, expected volatility of 80
percent, expected life of two years, and no expected dividends. During the year
ended June 30, 1999, the weighted-average fair values of options granted were
$2.03 for options granted with an exercise price equal to the market price of
the stock.
F-18
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note E: Stock based compensation continued
- -------------------------------------------
SFAS 123 continued
- ------------------
Had compensation expense been determined based on the fair value at the grant
date, and charged to expense over vesting periods, consistent with the
provisions of SFAS 123, the Company's net loss and net loss per share would have
increased to the pro forma amounts indicated below:
Amount
------------------
As reported:
Net loss...................................... $(8,012,419)
Net loss per share - basic and diluted........ $ (0.71)
Pro Forma:
Net loss...................................... $(8,140,406)
Net loss per share - basic and diluted........ $ (0.72)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. Option valuation models also require the input of highly
subjective assumptions such as expected option life and expected stock price
volatility. Because the Company's stock-based awards have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, the
Company believes that the existing option valuation models do not necessarily
provide a reliable single measure of the fair value of its stock-based awards.
F-19
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note F: Income taxes
- ---------------------
A reconciliation of the U.S. statutory federal income tax rate to the effective
tax rate follows for the years ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
November 28,
1995
(Inception)
June 30, Through
--------------------------------- June 30,
1999 1998 1999
-------------- -------------- -------------------
<S> <C> <C> <C>
U.S. statutory federal rate.................. 34.00% 15.00% 34.00%
State income tax rate,
net of federal benefit.................... - 4.25% -
Permanent differences:
Deferred offering costs...................... 1.42% 1.42%
Excess officers compensation................. (15.42%) (15.42%)
Other........................................ (.02%) (.02%)
Temporary differences:
Depreciation expense......................... .20% .20%
Allowance for bad debt....................... (3.35%) (3.35%)
Net operating loss for which no tax
benefit is currently available............. (16.83) (19.25%) (16.83)
-------------- -------------- -------------------
- % -% - %
============== ============== ===================
</TABLE>
At June 30, 1999 and 1998, deferred taxes consisted of the following:
<TABLE>
<CAPTION>
June 30,
-----------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
Deferred tax assets,
Net operating loss....................................... $ 1,349,662 $ 1,064
Valuation allowance......................................... (1,349,662) (1,064)
------------------ ------------------
Net deferred taxes.................................... $ - $ -
================== ==================
</TABLE>
The valuation allowance offsets the net deferred tax asset for which there is no
assurance of recovery. The change in the valuation allowance for the years ended
June 30, 1999 and 1998 totaled $1,348,598 and $678, respectively. The net
operating loss carryforward expires through the year 2018.
F-20
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note F: Income taxes, continued
- --------------------------------
The valuation allowance will be evaluated at the end of each year, considering
positive and negative evidence about whether the deferred tax asset will be
realized. At that time, the allowance will either be increased or reduced;
reduction could result in the complete elimination of the allowance if positive
evidence indicates that the value of the deferred tax assets is no longer
impaired and the allowance is no longer required.
Should the Company undergo an ownership change as defined in Section 382 of the
Internal Revenue Code, the Company's tax net operating loss carryforwards
generated prior to the ownership change will be subject to an annual limitation
which could reduce or defer the utilization of these losses.
Note G: Acquisitions
- ---------------------
Wings Online, Inc.
- -----------------
On February 15, 1999 the Company purchased all of the outstanding common stock
of Wings Online, Inc. ("Wings") in exchange for $135,000 cash and 29,326 of the
Company's common stock valued at $200,000. Net assets of Wings as of the date of
the acquisition totaled $3,372, which approximated fair value. As part of the
acquisition, the previous shareholders of Wings entered into an agreement to not
compete with the Company for thirty-six months. The excess of the purchase price
over the fair value of the assets, in the amount of $331,628 has been allocated
to the non-compete agreement and is being amortized over the life of the
agreement. Amortization expense of $41,453 has been recorded in the accompanying
consolidated financial statements for the year ended June 30, 1999.
The Company has recorded the transaction as a purchase in accordance with
Accounting Principles Board Opinion No. 16. The accompanying consolidated
financial statements include the results of operations of Wings from the date of
the acquisition, February 15, 1999 through June 30, 1999.
The following unaudited pro forma condensed consolidated statement of operations
gives effect to the acquisition of Wings as if it had occurred at the beginning
of the period presented. The unaudited pro forma financial information should be
read in conjunction with the separate audited financial statements and notes
thereto of each of the companies included in the pro forma.
The unaudited pro forma condensed consolidated statement of operations are not
necessarily indicative of results of operations had the acquisition occurred at
the beginning of the periods presented nor of results to be expected in the
future.
F-21
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note G: Acquisitions continued
- -------------------------------
Wings Online, Inc. continued
- ----------------------------
<TABLE>
<CAPTION>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended June 30, 1999
Pro forma
Quest Net Wings Adjustments Consolidated
--------- ----- ----------- ------------
<S> <C> <C> <C> <C>
Revenues........................................ $ 1,070,198 $ 105,169 (58,705) $ 1,116,662
Operating expenses.............................. (9,085,240) (97,668) (7,798) (9,190,706)
(Loss) income from operations................... (8,015,042) 7,501 (66,503) (8,074,044)
Interest expense................................ (5,943) - - (5,943)
Interest income................................. 8,566 - - 8,566
Net (loss) income............................... (8,012,419) 7,501 (66,503) (8,071,421)
Net (loss) income per share - basic and diluted. $ (0.71) $ 37.50 $ (0.71)
Basic and diluted shares outstanding............ 11,351,263 200 11,351,263
</TABLE>
Pro forma adjustments
- ---------------------
The consolidated financial statements of Quest Net include the results of
operations of Wings for the period February 15, 1999 through June 30, 1999. The
financial information of Wings presented in the pro forma statement are the
results of operations for Wings for the year ended June 30, 1999. Therefore the
adjustments reduce the pro forma consolidated information for the duplication of
the period February 15, 1999 through June 30, 1999 by the following: Revenues:
$58,705, Operating expenses: $61,292, Loss from operations and Net loss: $2,587.
The adjustments also include the increased amortization expense resulting from
the non-compete agreement as if the agreement was amortized for the full year of
$69,090.
The unaudited pro forma condensed consolidated financial information do not show
any adjustments for a change in the income tax benefit as the total pro forma
consolidated benefit for income taxes would be offset by any valuation allowance
due to any deferred tax asset derived from net operating losses. The valuation
allowance offsets the net deferred tax asset for which there is no assurance of
recovery.
Asset acquisitions
On May 3, 1999, the Company purchased certain assets, including computers,
software licenses, video editing and studio equipment, office equipment,
inventory, contracts for software development and interactive kiosk systems and
related software for $300,000 from AVX Communications. The purchase price was
paid in 39,894 shares of the Company's restricted common stock, valued at the
average bid and asked price for the three trading days prior to closing. The
fair value of the assets received is $89,144.
F-22
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note G: Acquisitions continued
- -------------------------------
Asset acquisitions continued
- ----------------------------
The excess of the purchase price over the fair value of the assets received is
$210,856 and has been recorded as goodwill in the accompanying consolidated
financial statements. As of June 30, 1999, the assets were still in transit and
had not been placed in service. The $89,144 attributed to the equipment and
software is recorded in the Company's consolidated balance sheet as "Property
not in service." As of June 30, 1999 the Company had not amortized any of the
goodwill, however management intends to assess the estimated useful life of the
goodwill once the assets are place in service and amortize the goodwill on a
straight-line basis over the estimated useful life.
On June 24, 1998, the Company entered into an agreement with PACT Communication
Group, Inc. ("Pactcom") to acquire certain assets of Pactcom in exchange for
2,000,000 shares of the Company's restricted common stock. The Company's
President was also a significant shareholder and officer of Pactcom, therefore
the transaction was recorded as a transfer of assets between entities under
common control and has been recorded at the historical cost basis of Pactcom as
determined under generally accepted accounting principles.
The assets acquired include equipment, software, furniture and an office lease
deposit, which have been recorded on the Company's books at $125,274. The
Company also acquired Pactcom's contracts with BellSouth Telecommunications,
Inc. ("Bellsouth") and WorldPass Communications Corporation ("WorldPass"),
office leases and certain employment agreements. There was no value assigned to
any of the above contracts in conjunction with the acquisition. Based on the
total value assigned to the assets received, the Company has valued the 200,000
(restated from 2,000,000) shares issued, as consideration for the assets, at
$125,274.
During the year ended June 30, 1999, the Company discovered that the BellSouth
contract could not be assigned by Pactcom to the Company and Pactcom has
subsequently terminated the contract. Amounts due under the contract for any
services or termination costs have not been accrued on the Company's records as
management believes that the costs should accrue to Pactcom.
The WorldPass contract was terminated during the year ended June 30, 1999.
F-23
<PAGE>
QUEST NET CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note H: Commitments and contingencies
- --------------------------------------
Litigation
- ----------
The Company is involved in various legal proceedings that have arisen in the
ordinary course of business. While it is not possible to predict the outcome of
such proceedings with certainty, in the opinion of the Company's management, all
such proceedings should not materially result in any liability, which would have
a material adverse effect on the financial position, liquidity or results of
operations of the Company.
As noted in the accompanying consolidated financial statements, the Company has
recorded a reserve for the doubtful collection of accounts receivable totaling
$867,842 of which substantially all of which is due from one customer. The
receivables resulted from the Company's sale of certain software and revenue
generated from the installation and modifications to the software. The Company
has filed lawsuit against the customer. The lawsuit is in the discovery stage
and management is unable to determine at June 30, 1999 the outcome of the
lawsuit.
Employment contracts
- --------------------
The Company has employment agreements and arrangements with its executive
officers. The agreements are dated March 20, 1998 and July 1, 1998. The
contracts provide for an annual issuance of 300,000 and 50,000 shares of the
Company's common stock, respectively, with fifty percent of the annual awards
payable every six months. During the year ended June 30, 1999 the Company
incurred compensation expense related to the contracts of $1,729,675, resulting
from the issuance of 175,000 common shares valued at the market price of the
Company's common stock on the anniversary date of the awards. 160,022 shares not
issued, but due at June 30, 1999 total $1,037,015, net of 14,978 shares valued
at $97,360 for the repayment of certain advances made to the President of the
Company. The accrual is recorded in the accompanying consolidated financial
statements as accrued stock compensation expense. - See Note B - Related party
transactions
The Company had employment agreements with certain key management during the
year June 30, 1999. The agreements were terminated during the year. Amounts paid
as stock compensation pursuant to the agreements were 25,000 shares valued at
$73,438, which is recorded in the accompanying consolidated financial statements
as stock compensation expense. Amounts due at June 30, 1999 for unissued common
stock awards of 12,500 shares have been accrued as stock compensation expense of
$81,250 and is recorded in the accompanying consolidated financial statements as
accrued stock compensation expense.
F-24
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note H: Commitments and contingencies continued
- ------------------------------------------------
Non-cancelable leases
- ---------------------
The Company leases office space under three separate non-cancelable operating
leases that expire in January 2004. Total office rent expense incurred under
these leases for the years ended June 30, 1999 and 1998 and for the period
November 28, 1995 (inception) through June 30, 1999 was $25,565, $-0- and
$25,565, respectively. Future minimum lease payments for the leases with initial
terms in excess of one year as of June 30, 1999 are as follows:
June 30, 2000.............. $ 117,494
June 30, 2001.............. $ 117,494
June 30, 2002.............. $ 117,494
June 30, 2003.............. $ 117,494
June 30, 2004.............. $ 65,698
Note I - Year 2000 Compliance
- -----------------------------
The Year 2000 issue ("Y2K") is the result of computer programs written using two
digits rather than four to define the applicable year. Any of the Company's
computer and telecommunications programs that have date sensitive software may
recognize a date using "00" as the year 1900 instead of 2000. This could result
in system failure or miscalculations causing disruptions in operations,
including the ability to process transactions, send invoices, or engage in
similar normal business activities. The Company is currently assessing its
current computer systems and has yet to determine the extent, if any, of
non-compliance. There is no certainty that the Company will not experience Y2K
issues.
The Company cannot determine the extent to which the Company is vulnerable to
third parties' failure to remediate their own Y2K problems. As a result, there
can be no guarantee that the systems of other companies on which the Company's
business relies will be timely converted, or that failure to convert by another
company, or a conversion that is incompatible with the Company's systems, would
have a material adverse affect on the Company. In view of the foregoing, there
can be no assurance that the Y2K issue will not have a material adverse effect
on the Company's business.
Note J - Subsequent event
- -------------------------
In July 1999, the Company redeemed its outstanding preferred stock for
$1,000,000. Due to the significance of the transaction, the accompanying
consolidated financial statements reflect the redemption as though it occurred
on June 30, 1999.
F-25
<PAGE>
WINGS ONLINE, INC.
------------------
FINANCIAL STATEMENTS
With
INDEPENDENT AUDITORS' REPORT
June 30, 1999
Prepared By:
Cordovano and Harvey, P.C.
--------------------------
Certified Public Accountants
Denver, Colorado
<PAGE>
<TABLE>
<CAPTION>
WINGS ONLINE, INC.
------------------
Index to Financial Statements
Page
----
<S> <C>
Independent auditors' report................................................................................. F-27
Balance sheet, June 30, 1999................................................................................. F-28
Statements of operations, for the years ended June 30, 1999 and 1998......................................... F-29
Statement of shareholder's equity, July 1, 1997 through
June 30, 1999........................................................................................... F-30
Statements of cash flows, for the years ended June 30, 1999 and 1998......................................... F-31
Summary of significant accounting policies................................................................... F-32
Notes to financial statements................................................................................ F-34
</TABLE>
F-26
<PAGE>
To the Board of Directors and Shareholders
Wings Online, Inc.
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheet of Wings Online, Inc. (an "S"
Corporation) as of June 30, 1999, and the related statements of operations,
shareholders' equity and cash flows for the years ended June 30, 1999 and 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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 financial statements referred to above present fairly, in
all material respects, the financial position of Wings Online, Inc., as of June
30, 1999, and the results of its operations and its cash flows for the years
ended June 30, 1999 and 1998 in conformity with generally accepted accounting
principles.
Cordovano and Harvey, P.C.
Denver, Colorado
July 10, 1999
F-27
<PAGE>
<TABLE>
<CAPTION>
WINGS ONLINE, INC.
------------------
Balance Sheet
June 30, 1999
<S> <C>
ASSETS
CURRENT ASSETS
Cash.................................................................................................... $ 15,557
Accounts receivable, less allowance for doubtful accounts
totaling $5,175...................................................................................... 5,175
----------
TOTAL CURRENT ASSETS 20,732
PROPERTY AND EQUIPMENT, less accumulated depreciation
of $7,891 (Note C)...................................................................................... 10,186
OTHER ASSETS................................................................................................. 716
----------
$ 31,634
==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable........................................................................................ $ 10,684
Accrued liabilities..................................................................................... 6,106
Notes payable, related party (Note B)................................................................... 14,059
----------
TOTAL CURRENT LIABILITIES 30,849
==========
SHAREHOLDERS' EQUITY
Preferred stock, $.0001 par value; 5,000,000 shares authorized;
-0- shares issued and outstanding.................................................................... -
Common stock, $.0001 par value; 50,000,000 shares authorized;
200 shares issued and outstanding.................................................................... -
Additional paid-in capital.............................................................................. 200
Retained earnings....................................................................................... 585
----------
TOTAL SHAREHOLDER'S EQUITY 785
----------
$ 31,634
==========
</TABLE>
See accompanying summary of significant accounting policies
and notes to the financial statements.
F-28
<PAGE>
<TABLE>
<CAPTION>
WINGS ONLINE, INC.
------------------
Statements of Operations
For The Years Ended
June 30,
--------
1999 1998
---- ----
<S> <C> <C>
SALES............................................................................... $ 105,169 $ 46,161
COST OF SALES....................................................................... 19,316 7,458
---------- -----------
GROSS PROFIT 85,853 38,703
EXPENSES
Selling, general and administrative............................................ 52,924 17,998
Provision for uncollectible accounts........................................... 25,428 -
---------- -----------
NET INCOME $ 7,501 $ 20,705
========== ===========
Basic earnings per common share..................................................... $ 37.50 $ 103.52
========== ===========
Basic weighted average common shares outstanding.................................... 200 200
========== ===========
</TABLE>
See accompanying summary of significant accounting policies
and notes to the financial statements.
F-29
<PAGE>
<TABLE>
<CAPTION>
WINGS ONLINE, INC.
Statement of Shareholder's Equity
July 1, 1997 through June 30, 1999
Additional Total
Preferred Stock Common Stock Paid-In Retained Shareholders'
Shares Par Value Shares Par Value Capital Earnings Equity
------ --------- ------ --------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1997........................... - $ - 200 $ - $ 200 $ (935) $ (735)
Net income for the year ended
June 30, 1998................................ - - - - - 20,705 20,705
---- ----- ------- ------- -------- --------- ----------
BALANCE, JUNE 30, 1998 - - 200 - 200 19,770 19,970
Distributions paid to shareholders.............. - - - - - (26,686) (26,686)
Net income for the year ended
June 30, 1999................................ - - - - - 7,501 7,501
---- ----- ------- ------- -------- --------- ----------
BALANCE, JUNE 30, 1999 - $ - 200 $ - $ 200 $ 585 $ 785
==== ===== ======= ======= ======== ========= ==========
</TABLE>
See accompanying summary of significant accounting policies
and notes to the financial statements.
F-30
<PAGE>
<TABLE>
<CAPTION>
WINGS ONLINE, INC.
------------------
Statements of Cash Flows
For The Years Ended
June 30,
--------
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................................................ $ 7,501 $ 20,705
Transactions not requiring cash:
Depreciation and amortization...................................................... 5,367 3,528
Loss on write-off of organization costs............................................ 125 -
Allowance for uncollectible accounts............................................... 5,175 -
Changes in current assets and current liabilities:
Decrease in receivables and other current assets................................... 3,561 -
Increase in accounts payable and other
current liabilities............................................................. 16,412 377
-------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 38,141 24,610
-------- ---------
INVESTING ACTIVITIES
Purchases of furniture and equipment.................................................. (11,492) (2,507)
-------- ---------
NET CASH (USED IN) INVESTING ACTIVITIES (11,492) (2,507)
-------- ---------
FINANCING ACTIVITIES
Distributions paid to officers........................................................ (26,686) -
Advances paid to officers............................................................. - (26,825)
Repayment advances from officers (Note B)............................................. - 4,702
Proceeds from notes payable (Note B).................................................. 14,059 -
-------- ---------
NET CASH (USED IN) FINANCING ACTVITIES (12,627) (22,123)
-------- ---------
NET CHANGE IN CASH 14,022 (20)
Cash, beginning of period.................................................................. 1,535 1,555
-------- ---------
CASH, END OF PERIOD $ 15,557 $ 1,535
======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.............................................................................. $ 1,220 $ 11
======== =========
Income taxes.......................................................................... $ - $ -
======== =========
</TABLE>
See accompanying summary of significant accounting policies
and notes to the financial statements.
F-31
<PAGE>
WINGS ONLINE, INC.
------------------
Summary of Significant Accounting Policies
June 30, 1999
Use of estimates
- ----------------
The preparation of the financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect certain reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Accordingly, actual results could differ from those estimates.
Cash equivalents
- ----------------
For the purpose 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.
Property, equipment and depreciation
- ------------------------------------
Property and equipment is stated at cost and depreciated using the straight-line
method over the estimated useful lives of the assets. Maintenance and repair
costs are charged to expense as incurred. Gains or losses on disposition of
property and equipment are reflected in income.
Sales
- -----
Sales consist of monthly fees charged to customers for Internet advertisements.
Internet advertisement sales are recognized in the period ads are run.
Income Taxes
- ------------
The Company, with the consent of its shareholders, has elected under the
Internal Revenue Code to be an S corporation. In lieu of corporation income
taxes, the shareholders of an S corporation are taxed on their proportionate
share of the Company's taxable income. Therefore, no provision or liability for
federal income taxes has been included in the accompanying financial statements.
Fair value of financial instruments
- -----------------------------------
The Company has determined, based on available market information and
appropriate valuation methodologies, that the fair value of its financial
instruments approximates carrying value. The carrying amounts of cash,
receivables, payables and other current liabilities approximate fair value due
to the short-term maturity of the instruments.
Earnings per common share
- -------------------------
Effective December 31, 1997, SFAS 128 "Earnings per Share" requires a dual
presentation of earnings per share-basic and diluted. Basic earnings per common
share has been computed based on the weighted average number of common shares
outstanding. Diluted earnings per share reflects the increase in weighted
average common shares outstanding that would result from the assumed exercise of
outstanding stock options. However, the Company has a simple capital structure
for the periods presented and, therefore, there is no variance between the basic
and diluted earnings per share.
F-32
<PAGE>
WINGS ONLINE, INC.
------------------
Summary of Significant Accounting Policies
June 30, 1999
Recently issued accounting pronouncements
- -----------------------------------------
The Company has adopted the following new accounting pronouncements for the year
ended December 31, 1998. There was no effect on the financial statements
presented from the adoption of the new pronouncements. SFAS No. 130, "Reporting
Comprehensive Income," requires the reporting and display of total comprehensive
income and its components in a full set of general-purpose financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is based on the "management" approach for reporting segments. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. SFAS No. 131 also requires
disclosure about the Company's products, the geographic areas in which it earns
revenue and holds long-lived assets, and its major customers. SFAS No. 132,
"Employers' Disclosures about Pensions and Other Post-retirement Benefits,"
which requires additional disclosures about pension and other post-retirement
benefit plans, but does not change the measurement or recognition of those
plans.
F-33
<PAGE>
WINGS ONLINE, INC.
------------------
Notes to Financial Statements
June 30, 1999
Note A: Nature of Organization
- --------------------------------
Wings Online, Inc. (the "Company") was incorporated in Florida on
November 29, 1995. The Company sells advertising space on its web
site to dealers and individuals that are looking to sell their
aircraft.
On February 15, 1999, the shareholders of the Company entered into
a Stock Purchase Agreement with Quest Net Corp. ("Quest"), whereby
the shareholders received $135,000 and 29,326 shares of Quest's no
par value common stock in exchange for 100 percent of the
outstanding common shares of the Company. As a result, the Company
became a wholly owned subsidiary of Quest.
The Company has a tax year-end of December 31; however, the Company
adopted an accounting year-end of June 30 to correspond to the
year-end of its parent corporation, Quest.
Note B: Related party transactions
- ------------------------------------
At July 1, 1998, the officers owed the Company $14,627 for advances
received in prior years. During the year ended June 30, 1999, the
Company advanced the officers and additional $13,350, and the
officers repaid $1,292. As a result, the officers owed the Company
$26,686 at June 30, 1999, which was reclassified as a distribution
to shareholders and is included in the accompanying financial
statements in retained earnings. The officers resigned on February
15, 1999. As a result, an allowance was established against 100
percent of the receivable as of June 30, 1999.
On June 3, 1999 and June 30, 1999, the Company received $6,000 and
$8,059, respectively, for working capital in exchange for
promissory notes from Quest. The notes are unsecured, non-interest
bearing and are due on demand. The $14,059 is included in the
accompanying balance sheet as notes payable, related party.
Note C: Property and equipment
- --------------------------------
Property and equipment consisted of the following at June 30, 1999:
Furniture and fixtures........................ $ 4,868
Equipment..................................... 13,209
-------------------
18,077
Less: accumulated depreciation................ (7,891)
-------------------
$ 10,186
===================
Depreciation expense totaled $5,292 and $3,459 for the years ended
June 30, 1999 and 1998, respectively.
F-34
<PAGE>
WINGS ONLINE, INC.
------------------
Notes to Financial Statements
June 30, 1999
Note D: Year 2000 compliance
- ------------------------------
The Year 2000 issue (Y2K) is the result of computer programs
written using two digits rather than four to define the applicable
year. Any of the Company's computer and telecommunications programs
that have date sensitive software may recognize a date using "00"
as the year 1900 instead of 2000. This could result in system
failure or miscalculations causing disruptions in operations,
including the ability to process transactions, send invoices, or
engage in similar normal business activities.
The Company cannot determine the extent to which the Company is
vulnerable to third parties' failure to remediate their own Y2K
problems. As a result, there can be no guarantee that the systems
of other companies on which the Company's business relies will be
timely converted, or that failure to convert by another company, or
a conversion that is incompatible with the Company's systems, would
have a material adverse affect on the Company. In view of the
foregoing, there can be no assurance that the Y2K issue will not
have a material adverse effect on the Company's business.
F-35
<PAGE>
APPENDIX A
GLOSSARY OF SELECTED TERMS
Set forth below are certain technical terms defined as they are used in this
Prospectus.
ACCESS Access refers to the means by which a call is
connected from the end user's telephone to a long
distance carrier (i.e., regular local lines or
dedicated private lines). See Dedicated Access and
Switched Access.
ACCESS CHARGES Expenses incurred by an IXC and paid to LECs
and CAPs for accessing the local networks of the LECs
in order to originate and terminate long distance
calls and provide the customer connection for private
line services.
BACKBONE A centralized high-speed network that interconnects
smaller, independent networks.
BANDWIDTH The number of bits of information which can move
through a communications medium in a given amount of
time.
BASE STATION Transmitter, receiver, signaling and related
equipment located within an area served by our
proposed wireless local network.
BUNDLING Combining several services for one charge.
COMMON CARRIERS Companies that own or operate transmission facilities
and offer telecommunication services to the general
public on a non-discriminatory basis.
CAP A company that provides its customers with an
(COMPETITIVE alternative for local transport of private
ACCESS PROVIDER) line and special access telecommunications services.
DS-3 A data communications circuit capable of transmitting
data at 45 megabits per second sometimes called a
T-3).
DEDICATED Telecommunications lines dedicated or reserved for
use by particular customers.
DEDICATED ACCESS Access to a long-distance network over private lines-
analog or digital-reserved for the specific use of a
single entity.
DIGITAL A method of storing, processing and transmitting
information through the use of distinct electronic or
optical pulses that represent the binary digits 0 and
1. Digital transmission and switching technologies
employ a sequence of these pulses to represent
information as opposed to the continuously variable
analog signal. The precise digital numbers minimize
distortion (such as graininess or snow in the case of
video transmission, or static or other background
distortion in the case of audio transmission).
FACILITIES-BASED A facilities-based provider of telecommunications
services possesses it own call switching equipment
and transmission lines, regionally or nationally.
FIBER-OPTIC: A technology using light as a transmission mechanism.
IXC A long distance carrier providing services between
(INTEREXCHANGE local exchanges.
CARRIER)
INTERNET A global collection of interconnected computer
networks which use TCP/IP, a common communications
protocol.
A-1
<PAGE>
IP (INTERNET The most important of the protocols on which the
PROTOCOL) Internet is based. It allows a packet to traverse
multiple networks on the way to it final destination
nodes, routes outgoing messages, and recognizes in
coming messages
K Kilobit. A kilobit means a thousand bits per second
LANS The interconnection of computers for the purpose of
(LOCAL AREA sharing files, programs and various devices such as
NETWORKS) printers and high-speed modems. LANs may include
dedicated computers or file servers that provide a
centralized source of shared files and programs.
LATA A geographic area within which a LEC can provide
(LOCAL ACCESS telephone services, and between which a long
TRANSPORT AREA) distance carrier provides services.
LEC A LEC is a local exchange carrier-that is, a carrier
which provides local exchange services in a LATA or
LATAs, but not between LATAs.
LOCAL LOOP: That portion of the public telecommunications
network which extends from the service provider's
switch to the individual home or business end-user.
LOCAL LOOP Local telephone services.
SERVICES
MBPS Mega bits per second. Million bits per second. Bit is
a contraction of the term Binary digit. It is the
smallest unit of information (data a computer can
process, representing either high or low, yes or no,
or 1 or 0. It is the basic unit in data
communications. A bit can have a value of zero (a
mark) or one (a space.)
NETWORK A location where installed switching equipment routes
SWITCHING long distance calls and information with respect to
CENTER calls such as the length of the call and the
telephone numbers of the calling and called parties
--
OC-12 (OPTICAL A transmission rate for SONET, a high speed data
SIGNAL LEVEL transport service used on fiber optic cabling, at
12 CARRIER ) 622 megabits per second.
OC-48 (OPTICAL A transmission rate for SONET, a high speed data
SIGNAL LEVEL transport service used on fiber optic cabling, at
48 CARRIER ) 2,488 megabits per second.
POP Point of Presence. A local number where customers
can access the Company's network. distance
PRI Primary rate Interface. The equivalent of a T-1
circuit for the Integrated Services Digital Network
(ISDN). The ISDN can provide videoconferencing and
ultra faster data communications.
PROTOCOL An all-inclusive term used to describe the various
control functions, tuning and methodology standards
by which a communications system operates, as well as
any other equipment system characteristics necessary
to ensure compatibility.
SWITCH A switch is equipment that routes local and long
distance telephone calls over communications paths
between geographic points, opens or closes circuits
or selects the paths or circuits to be used for
transmission of voice or data. Switching is the
process of interconnecting circuits to form a
transmission path between users.
A-2
<PAGE>
SONET A standard way to interconnect high speed traffic
(SYNCHRONOUS from multiple vendors
OPTICAL NETWORK)
TCP/IP A suite of network protocols that allows computers
(TRANSMISSION with different architectures and operating system
CONTROL software to communicate with other computers on the
PROTOCOL/ Internet
INTERNET PROTOCOL)
T-1 A data communications circuit capable of transmitting
data at 1.5 megabits per second.
T-3 A data communications circuit capable of transmitting
data at 45 megabits per second (sometimes called
DS-3).
WAN Uses common carrier-provided lines that cover an
WIDE AREA extended geographical area. This network uses links
NETWORK provided by local telephone companies and
usually connects disperse sites
WIRELESS LOCAL Wireless Local Loop is a system that eliminates the
LOOP need for a wire (loop) connecting users to the public
switched telephone network, which is used in
conventional wired telephone systems, by transmitting
voice messages over radio waves for the "last mile"
connection between the location of the customer's
telephone and a base station connected to the network
equipment.
WORLD WIDE WEB A collection of computer systems supporting a
communications protocol that permits multi-media
presentation of information over the Internet.
A-3
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
No dealer, salesperson or other person has been
authorized to give any information or to make any
representations other than those contained in this
Prospectus, and, if given or made, such information 1,700,000 SHARES or
representations must not be relied upon as having been
authorized by the Company. This Prospectus does QUEST NET CORP.
not constitute an offer to sell or a solicitation of
an offer to buy any security other than the Common Stock
securities offered by this Prospectus, or an offer to
sell or a solicitation of an offer to buy any ________________
securities by any person in any jurisdiction in which
such offer or solicitation would be unlawful. PROSPECTUS
Neither the delivery of this Prospectus nor any sale ________________
made hereunder shall, under any circumstances, imply
that the information in this Prospectus is correct as
of any time subsequent to the date of this Prospectus.
----------------
TABLE OF CONTENTS
----------------
Page
----
Prospectus Summary.......................... 2
Risk Factors................................ 3
Capitalization.............................. 9
Selected Financial Information..............10
Management Discussion and Analysis of
Financial Condition and Results of
Operation............................... 11 QUEST NET CORP.
Business....................................13 2999 NE 191ST STREET, PH-8
Legal Proceedings...........................32 AVENTURA, FLORIDA 33180
Management..................................33 (305) 935-1080
Certain Transactions........................36
Principal Stockholders......................37
Market Price of Securities..................37
Description of Securities...................38
Dividend Policy.............................38
Selling Security Holders....................38
Plan of Distribution........................39
Interests Of Named Experts and Counsel......40
Experts.....................................40 ___, 1999
Legal Matters...............................40
Financial Information.......................F-1
Glossary of Selected Terms..................A-1
Until ____________, 1999 (25 days after the date hereof) all dealers effecting
transactions in the registered securities, whether or not participating in the
distribution, may be required to deliver a Prospectus.
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles of Incorporation and Florida law authorizes the Company to
indemnify directors and officers as follows:
1. So long as permitted by law, no director of the corporation shall be
personally liable to the corporation or its shareholders for damages
for breach of any duty owed by such person to the corporation or its
shareholders; provided, however, that, to the extent required by
applicable law, this Article shall not relieve any person from
liability for any breach of duty based upon an act or omission (i) in
breach of such person's duty of loyalty to the corporation or its
shareholders, (ii) not in good faith or involving a knowing violation
of law or (iii) resulting in receipt by such person of an improper
personal benefit. No amendment to or repeal of this Article and no
amendment, repeal or termination of effectiveness of any law
authorizing this Article shall apply to or effect adversely any right
or protection of any director for or with respect to any acts or
omissions of such director occurring prior to such amendment, repeal or
termination of effectiveness.
2. So long as permitted by law, no officer of the corporation shall be
personally liable to the corporation or its shareholders for damages
for breach of any duty owed by such person to the corporation or its
shareholders; provided, however, that, to the extent required by
applicable law, this Article shall not relieve any person from
liability for any breach of duty based upon an act or omission (i) in
breach of such person's duty of loyalty to the corporation or its
shareholders, (ii) not in good faith or involving a knowing violation
of law or (iii) resulting in receipt by such person of an improper
personal benefit. No amendment to or repeal of this Article and no
amendment, repeal or termination of effectiveness of any law
authorizing this Article shall apply to or effect adversely any right
or protection of any director for or with respect to any acts or
omissions of such officer occurring prior to such amendment, repeal or
termination of effectiveness.
3. To the extent that a Director, Officer, or other corporate agent of
this corporation has been successful on the merits or otherwise in
defense of any civil or criminal action, suit, or proceeding referred
to in sections (a) and (b), above, or in defense of any claim, issue,
or matter therein, he shall be indemnified against any expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
4. Expenses incurred by a Director, Officer, or other corporate agent
in connection with a civil or criminal action, suit, or proceeding may
be paid by the corporation in advance of the final disposition of such
action suit, or proceeding as authorized by the Board of Directors upon
receipt of an undertaking by or on behalf of the corporate agent to
repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF
1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE COMPANY
PURSUANT TO THE PROVISIONS SET FORTH ABOVE, THE COMPANY HAS BEEN INFORMED THAT
IN THE OPINION OF THE SECURITIES AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION
IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS THEREFORE UNENFORCEABLE
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following expenses in connection with the issuance and distribution of the
securities being registered hereby will be borne by us and are estimated to be
as follows:
Registration Fee ......................... $ 1,803.00
Legal Fees ............................... $50,000
Accounting Fees........................... $22,000
Edgar Formatting Fees $ 5,000
Miscellaneous ............................ $ 2,000
Total ........................... $80,803.03
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<PAGE>
ITEM 26. Recent Sales of Unregistered Securities(1)
In July 1996, under our former name A.P. Sales, Inc., we sold 300,000 shares of
our preferred stock to an affiliate and an accredited investor for a total
purchase price of $3,000. The sale was conducted pursuant to Regulation D Rule
504. Each of the investors were provided with and had access to financial and
other information concerning the Company and had the opportunity to ask
questions concerning the Company and its operations. Accordingly, the issuance
of these securities was exempt from the registration requirements of the Act
pursuant to Section 3(b) of the Act.
In September 1996, we concluded a private offering of a total of 2,400,000
shares of our common stock to thirty-eight investors for aggregate offering
proceeds of $1,200. The offering was conducted pursuant to Regulation D Rule
504. Each of the investors were provided with and had access to financial and
other information concerning the Company and had the opportunity to ask
questions concerning the Company and its operations. Accordingly, the issuance
of these securities was exempt from the registration requirements of the Act
pursuant to Section 3(b) of the Act.
In July 1998, we acquired certain assets of Pact Communication Group, Inc.
valued at $125,274 in exchange for an aggregate of 2,000,000 shares of our
common stock. Pact Communication Group, Inc was provided with or had access to
financial and other information concerning the Company and had the opportunity
to ask questions concerning the Company and its operations. Accordingly, the
issuance of these securities was exempt from the registration requirements of
the Act pursuant to Section 4(2) of the Act.
In July 1998, we acquired software from Simplex Ltda. valued at $600,000 in
exchange for 60,000 shares of our redeemable convertible preferred stock.
Simplex Ltda. was provided with or had access to financial and other information
concerning the Company and had the opportunity to ask questions concerning the
Company and its operations. Accordingly, the issuance of these securities was
exempt from the registration requirements of the Act pursuant to Section 4(2) of
the Act. In November 1999, these shares were converted into 300,000 shares of
our common stock at a conversion price of $2.00 per share.
In November 1998, we issued 150,000 shares of our common stock to a consultant
for consulting services valued at $25,000. These shares were issued pursuant to
Rule 504 of Regulation D under the Act. The consultant was provided with and had
access to financial and other information concerning the Company and had the
opportunity to ask questions concerning the Company and its operations.
Accordingly, the issuance of these securities was exempt from the registration
requirements of the Act pursuant to Section 3(b) of the Act.
In November 1998, we concluded a private offering of 50,000 shares of our common
stock to an accredited investor for aggregate proceeds of $100,000. These shares
were issued pursuant to Rule 504 of Regulation D under the Act. The consultant
was provided with and had access to financial and other information concerning
the Company and had the opportunity to ask questions concerning the Company and
its operations. Accordingly, the issuance of these securities was exempt from
the registration requirements of the Act pursuant to Section 3(b) of the Act.
In December 1998, we issued to employees of the Company, including officers, an
aggregate of 1,485,693 shares of our common stock pursuant to the terms of their
employment agreements. The employees were provided with or had access to
financial and other information concerning the Company and had the opportunity
to ask questions concerning the Company and its operations. Accordingly, the
issuance of these securities was exempt from the registration requirements of
the Act pursuant to Section 4(2) of the Act.
In December 1998, we acquired certain assets of Grupo Internet Latinoamericano
valued at $2,042,000 in exchange for an aggregate of 100,000 shares of our
redeemable preferred stock and 2,607,660 shares of our common stock. Grupo
Internet Latinoamericano was an accredited investor and was provided with or had
access to financial and other information concerning the Company and had the
opportunity to ask questions concerning the Company and its operations.
Accordingly, the issuance of these securities was exempt from the registration
requirements of the Act pursuant to Section 4(2) of the Act. The Company
redeemed the redeemable convertible preferred shares in July 1999, at a
redemption price of $10.00 per share.
In December 1998 we issued 175,000 shares of common stock as compensation to
three employees pursuant to their employment agreements. The shares were valued
at $514,063. The employees were provided with or had access to financial and
II-2
<PAGE>
other information concerning the Company and had the opportunity to ask
questions concerning the Company and its operations. Accordingly, the issuance
of these securities was exempt from the registration requirements of the Act
pursuant to Section 4(2) of the Act.
In December 1998, we concluded a private offering of a total of 50,000 shares of
our common stock to an accredited investor for aggregate offering proceeds of
$50,000. The offering was conducted pursuant to Regulation D Rule 504. The
investors was provided with and had access to financial and other information
concerning the Company and had the opportunity to ask questions concerning the
Company and its operations. Accordingly, the issuance of these securities was
exempt from the registration requirements of the Act pursuant to Section 3(b) of
the Act.
In January 1999, we issued 24,000 shares of common stock for legal services
valued at $15,000, and 1,000 shares for consulting services valued at $4,500.
The consultants were provided with or had access to financial and other
information concerning the Company and had the opportunity to ask questions
concerning the Company and its operations. Accordingly, the issuance of these
securities was exempt from the registration requirements of the Act pursuant to
Section 4(2) of the Act.
In January 1999, we issued 10,000 shares of common stock pursuant to an
employment agreement. The employee was provided with or had access to financial
and other information concerning the Company and had the opportunity to ask
questions concerning the Company and its operations. Accordingly, the issuance
of these securities was exempt from the registration requirements of the Act
pursuant to Section 4(2) of the Act.
In January 1999, we issued an aggregate of 6,667 shares of common stock to
directors of the Company. The directors were provided with or had access to
financial and other information concerning the Company and had the opportunity
to ask questions concerning the Company and its operations. Accordingly, the
issuance of these securities was exempt from the registration requirements of
the Act pursuant to Section 4(2) of the Act.
In January 1999, we concluded a private offering of a total of 25,000 shares of
our common stock to an accredited investor for aggregate offering proceeds of
$75,000. The offering was conducted pursuant to Regulation D Rule 504. The
investor was provided with and had access to financial and other information
concerning the Company and had the opportunity to ask questions concerning the
Company and its operations. Accordingly, the issuance of these securities was
exempt from the registration requirements of the Act pursuant to Section 3(b) of
the Act.
In January 1999, we issued a total of 101,333 shares of our common stock for to
a consulting for services rendered valued at $7,600. The shares were issued
pursuant to Regulation D Rule 504. The consultant was provided with and had
access to financial and other information concerning the Company and had the
opportunity to ask questions concerning the Company and its operations.
Accordingly, the issuance of these securities was exempt from the registration
requirements of the Act pursuant to Section 3(b) of the Act.
In January 1999, we concluded a private offering of a total of 132,915 shares of
our common stock and warrants to purchase 45,000 shares of common stock at an
exercise price of $9.40 to an accredited investor for aggregate offering
proceeds of $700,000. In connection with the offer we issued warrants to
purchase 2,000 shares of common stock at an exercise price of $9.40 to certain
nonaffiliated principals in the transaction. The warrants are exercisable on
year from the date of issuance and expire two years thereafter. The offering was
conducted pursuant to Regulation D Rule 504. The investors were provided with
and had access to financial and other information concerning the Company and had
the opportunity to ask questions concerning the Company and its operations.
Accordingly, the issuance of these securities was exempt from the registration
requirements of the Act pursuant to Section 3(b) of the Act. In connection with
the offering the Company paid
In March 1999, we purchased Wings Online Inc, for 29,326 shares of our common
stock and $135,00 in cash. The Wings Online transaction was valued at $335,000.
The Wing Online shareholders were provided with or had access to financial and
other information concerning the Company and had the opportunity to ask
questions concerning the Company and its operations. Accordingly, the issuance
of these securities was exempt from the registration requirements of the Act
pursuant to Section 4(2) of the Act.
II-3
<PAGE>
In March 1999, we acquired two industry-specific, e-commerce sites, namely,
Boats Online, a boat marketplace and resource center, and Cars Online an
automobile market place valued at $10,000 and $4,000. These were acquired for an
aggregate of 1,500 shares of our common stock along with and aggregate of $7,000
in cash. The owners of the Boats Online and Cars Online sites were provided with
or had access to financial and other information concerning the Company and had
the opportunity to ask questions concerning the Company and its operations.
Accordingly, the issuance of these securities was exempt from the registration
requirements of the Act pursuant to Section 4(2) of the Act.
In March 1999, we issued 677 shares of common stock for consulting services
valued at $10,000. The consultant were provided with or had access to financial
and other information concerning the Company and had the opportunity to ask
questions concerning the Company and its operations. Accordingly, the issuance
of these securities was exempt from the registration requirements of the Act
pursuant to Section 4(2) of the Act.
In March 1999, we issued 100,000 shares to Maxine Pereira, an officer of the
Company, pursuant to her employment agreement. The agreement called for the
issuance of 25,000 shares on January 1, 1999. The Company neglected to timely
issue the shares and therefore the shares were not issued at the time of the
stock dividend. The Board of Director authorized the issuance of the additional
75,000 shares that would have been issued to Ms. Pereira pursuant to the
dividend if the Company had performed its obligations under the employment
agreement.
In March 1999, the Company issued 4,000 shares of its common stock for
consulting services valued at $5,000. The consultant were provided with or had
access to financial and other information concerning the Company and had the
opportunity to ask questions concerning the Company and its operations.
Accordingly, the issuance of these securities was exempt from the registration
requirements of the Act pursuant to Section 4(2) of the Act.
In May 1999, we acquired certain assets of AVX, Inc. valued at $300,000 in
exchange for an aggregate of 39,894 shares of our common stock. The Shareholder
of AVX was provided with or had access to financial and other information
concerning the Company and had the opportunity to ask questions concerning the
Company and its operations. Accordingly, the issuance of these securities was
exempt from the registration requirements of the Act pursuant to Section 4(2) of
the Act.
In May 1999, we completed a Regulation D Rule 506 private offering of 910,747
shares of common stock to an accredited investor and received gross proceeds of
$5,000,000. The investor was provided with or had access to financial and other
information concerning the Company and had the opportunity to ask questions
concerning the Company and its operations. Accordingly, the issuance of these
securities was exempt from the registration requirements of the Act pursuant to
Section 4(2) of the Act. In connection with this offering the Company paid
consulting fees of $350,000.
From March 1999 to date, we have issued options to purchase an aggregate of
1,398,692 shares of common stock to Mr. Pereira, an officer of the Company,
employees, and consultants. The exercise price of the options ranged from $.12
to $7.25 per share. Mr. Pereira exercised options to purchase 1,310,693 shares
of common stock. No other options have been exercised to date. The remaining
options are exercisable for a period of two to five years from the date of
grant.
In August 1999, we issued 25,000 shares of common to Maxine Pereira and 135,022
shares of common stock to Camilo Pereira. Mr. Pereira was due to be issued
150,000 shares, however the shares issued to Mr. Pereira were decreased to
offset money advanced to Mr. Pereira by the Company.
- ---------------------------
(1) Does not give effect to the 3 for 1 common stock dividend declared in
January 1999 or, except for the shares issued subsequent to October 16,
1998, the approximately 10-to-1 stock split on October 16, 1998.
ITEM 27 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
EXHIBIT DESCRIPTION
2. Asset Purchase Agreement (Pact)*
3.1(a) Articles of Incorporation (Colorado)*
3.1(b) Amended Articles of Incorporation(Colorado)*
3.1(c) Articles of Incorporation (Florida)*
3.2 Bylaws*
3.2(a) Amended and Restated Bylaws*
4. Warrant (Zubeir Kazi)*
4.1 Warrant (Scott Goldstein)*
4.2 Warrant (Sheldon Goldstein)*
4.3 Warrant (DSF Capital)*
II-4
<PAGE>
4.4 Warrant (Jeffery Stein)*
5. Opinion of Rebecca J. Del Medico, P.A.
10. Lease (709)*
10.1 Lease (1008)*
10.2 Lease (901)*
10.3 Employment Agreement (Camilo Pereira)*
104 Employment Agreement (Maxine Pereira)*
10.5 Qwest Agreement*
10.6 Bell South Agreement*
10.7 E.spire Agreement*
10.8 Subscription Agreement (James LLC.)*
10.9 Registration Rights Agreement (James LLC.)*
10.10 Wireless Agreement*
10.11 Software Purchase Agreement (Secure Transaction International*
Corp.)*
10.12 Asset Purchase Agreement (Grupo Internet Latinoamericano)*
10.13 Software Purchase Agreement (Simplex)*
10.14 Asset Purchase Agreement (AVX, Inc.)*
10.15 Stock Purchase Agreement (Wings Online)*
10.16 Network Sales and Service Agreement (Real Time Cash, Inc.)*
10.17 Network Sales and Service Agreement (Real Time Encryption,
Inc.)*
10.18 Network Sales and Service Agreement (Real Time Wireless,
Inc.)*
10.19 Professional Consulting Agreement (Real Time Wireless, Inc.*
10.20 Professional Consulting Agreement (Real Time Encryption, Inc.*
10.21 Professional Consulting Agreement (Real Time Phone Services,
Inc.*
20 Long Distance Public Notice*
20.1 License (Cuba Travel)*
21 Subsidiaries of the Company
24. Consent of Cordovano and Harvey, P.C.
24.2 Consent of Rebecca J. Del Medico, P.A.**
* To be filed by Amendment
** Contained in Opinion of Rebecca J. Del Medico, P.A.
Item 26. Undertakings
(a) The Company hereby undertakes to file, during any period in which
offers or sales are being made, a post-1 effective amendment to this
Registration Statement (i) to include any Prospectus required by
Section 10(a)(3) of the Securities Act of 1933; (ii) to reflect in the
Prospectus any facts or events arising after the effective date of the
Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration
Statement; notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) may be reflected in
the form of Prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
Registration Statement; and (iii) to include any material information
with respect to the plan of distribution not previously disclosed in
the Registration Statement or any material change to such information
in the Registration Statement.
(b) The Company hereby undertakes that, for the purpose of determining
any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) The Company hereby undertakes to remove from registration by means
of a post-effective amendment any of the securities being registered,
which remain unsold at the termination of the offering.
(d) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and
controlling persons of the Company, the Company has been advised that
in the opinion of the Securities and Exchange Commission such
II-5
<PAGE>
indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any
action suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
the Company will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
(e) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of Prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of Prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) Under the Securities Act shall be
deemed to be part of this Registration Statement as of the time it was
declared effective.
(f) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
Prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets the
requirement for filing on Form SB-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Aventura, State of Florida, on the 7th day of August
1999.
QUEST NET CORP.
By: /S/ CAMILO PEREIRA
------------------
Camilo Pereira, Chairman of the Board,
Director, and President.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Dated: August 7, 1999 By: /S/ CAMILO PEREIRA
------------------
Camilo Pereira, Chairman of the Board,
Director, President and Chief Financial
Officer (PRINCIPAL ACCOUNTING OFFICER)
Dated: August 7, 1999 By: /S/ MAXINE PEREIRA
------------------
Maxine Pereira, Executive Vice-President
and Director
Dated: August 7, 1999 By: /S/ DAVID BLOCK
---------------
David Block, Director
Dated: _______, 1999 By: _______________________________
Victor V. Coppola, Director
Dated: _______, 1999 By: _______________________________
Lauri J. Fitz-Pegado, Director
II-6
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
<S> <C>
2. Asset Purchase Agreement (Pact)*
3.1(a) Articles of Incorporation (Colorado)*
3.1(b) Amended Articles of Incorporation(Colorado)*
3.1(c) Articles of Incorporation (Florida)*
3.2 Bylaws*
3.2(a) Amended and Restated Bylaws*
4. Warrant (Zubeir Kazi)*
4.4 Warrant (Scott Goldstein)*
4.5 Warrant (Sheldon Goldstein)*
4.6 Warrant (DSF Capital)*
4.4 Warrant (Jeffery Stein)*
5. Opinion of Rebecca J. Del Medico, P.A.
10. Lease (709)*
10.1 Lease (1008)*
10.2 Lease (901)*
10.3 Employment Agreement (Camilo Pereira)*
104 Employment Agreement (Maxine Pereira)*
10.5 Qwest Agreement*
10.6 Bell South Agreement*
10.7 E.spire Agreement*
10.8 Subscription Agreement (James LLC.)*
10.9 Registration Rights Agreement (James LLC.)*
10.10 Wireless Agreement*
10.11 Software Purchase Agreement (Secure Transaction International Corp.)*
10.12 Asset Purchase Agreement (Grupo Internet Latinoamericano)*
10.13 Software Purchase Agreement (Simplex)*
10.22 Asset Purchase Agreement (AVX, Inc.)*
10.23 Stock Purchase Agreement (Wings Online)*
10.24 Network Sales and Service Agreement (Real Time Cash, Inc.)*
10.25 Network Sales and Service Agreement (Real Time Encryption, Inc.)*
10.26 Network Sales and Service Agreement (Real Time Wireless, Inc.)*
10.27 Professional Consulting Agreement (Real Time Wireless, Inc.*
10.28 Professional Consulting Agreement (Real Time Encryption, Inc.*
10.29 Professional Consulting Agreement (Real Time Phone Services, Inc.*
20 Long Distance Public Notice*
20.1 License (Cuba Travel)*
21 Subsidiaries of the Company
24. Consent of Cordovano and Harvey, P.C.
24.2 Consent of Rebecca J. Del Medico, P.A.**
</TABLE>
* To be filed by Amendment
** Contained in Opinion of Rebecca J. Del Medico, P.A.
[Letterhead of Attorney]
August 10, 1999
Quest Net Corp.
2999 NE 191st Street, PH-8 ,
Aventura, Florida 33180
Re: Registration Statement on Form SB-2
Gentleman:
This opinion is submitted pursuant to applicable rules of the Securities and
Exchange Commission with respect to the registration by Quest Net Corp. (the
"Company") of an aggregate of 1,700,000 shares of common stock, no par value
(the "Common Stock") pursuant to a Registration Statement on Form SB-2.
In my capacity as general counsel to the Company, I have examined the original,
certified, conformed, or other copies of the Company's Certificate of
Incorporation, Bylaws and corporate minutes provided to me by the Company. In
all such examinations, I have assumed the genuineness of all signatures on
original documents, and the conformity to originals or certified documents of
all copies submitted to me as conformed, Photostat or other copies. .In passing
upon certain corporate records and documents of the Company, I have necessarily
assumed the correctness and completeness of the statements made or included
therein by the Company, and I express no opinion thereon. Based upon and in
reliance of the foregoing, I am of the opinion that the Common Stock has been
and upon issuance for the re-pricing structure will be upon issuance, validly
issued, fully paid and non-assessable. I hereby consent to the use of this
opinion in the Registration Statement on Form SB-2 to be filed with the
Commission.
/s/Rebecca J. Del Medico
- ------------------------
Rebecca J. Del Medico
Subsidiaries of the Company
Name State of Incorporation
IPQuest Corp Florida
Quest Wireless Corp. Florida
Globalbot Corp Florida
Wings Online, Inc., Florida
QuesTel Corp Florida
Quest Fiber Corp. Florida
TO: The Securities and Exchange Commission
Washington, D.C.
RE: Quest Net Corp.
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Quest Net Corp. and the
financial statements of Quest Net Corp. and Wings Online, Inc. on Form SB-2 of
our report dated July 10, 1999, appearing in the Prospectus, which is part of
this Registration Statement, and of our report dated July 10, 1999 relating to
the financial statement schedules appearing elsewhere in this Registration
Statement.
We also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
/s/ Cordovano and Harvey, P.C.
- ----------------------------------
Cordovano and Harvey, P.C.
Denver Colorado
August 10, 1999
