<PAGE>
As filed with the Securities and Exchange Commission on September 7, 1999
Registration No. 333-82721
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 1
To
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
WORLDQUEST NETWORKS, INC.
(Name of Small Business Issuer in its Charter)
Delaware 4813 75-2673785
(State or (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification
Number)
incorporation or 16990 Dallas Parkway, Suite 220
organization) Dallas, Texas 75248
(972) 818-0460
(Address and telephone number
of principal executive offices and principal place of business)
B. Michael Adler
Chairman of the Board
16990 Dallas Parkway, Suite 220
Dallas, Texas 75248
(972) 818-0460
(Name, address and telephone number
of agent for service)
Copies to:
Michael D. Parsons, Esq. Thomas J. Poletti, Esq.
Michael A. Watson, Esq. Susan B. Kalman, Esq.
Glast Phillips & Murray, P.C. Ted Weitzman, Esq.
13355 Noel Road, Suite 2200 Freshman, Marantz, Orlanski, Cooper &
Dallas, Texas 75240 Klein
Telephone (972) 419-8300 9100 Wilshire Boulevard, 8th Floor
Facsimile (972) 419-8329 East
Beverly Hills, California 90212
Telephone (310) 273-1870
Facsimile (310) 274-8357
Approximate Date of Commencement of Proposed Sale to the Public: As soon as
practicable 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,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum
Aggregate Amount of
Title of Each Class of Securities to Be Offering Registration
Registered Price(1) Fee
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<S> <C> <C>
Common Stock, $.01 par value(2)................ $33,120,000 $ 9,208
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Representative's Warrant....................... $ 240 $ 1
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Common Stock, $.01 par value(3)................ $ 4,032,000 $ 1,121
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Total.......................................... $37,152,240 $10,330
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
(2) Includes shares which the underwriters have the option to purchase to cover
over-allotments, if any, equal to fifteen percent of the shares being
offered.
(3) Issuable upon exercise of the Representative's Warrant.
----------------
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary 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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated September 7, 1999
2,400,000 Shares
[Logo to come]
WorldQuest Networks, Inc.
Common Stock
We are an international Internet telephony company. We sell virtual prepaid
calling cards through our interactive and easy to use Web site and transmit
long distance calls at discounted rates through our Internet and traditional
networks. We advertise, sell and deliver our virtual calling cards worldwide
exclusively through the Internet.
We have applied to have our shares approved for listing on the Nasdaq
National Market under the symbol "WQNI."
This is our initial public offering. No public market currently exists for
our shares. The offering price may not reflect the market price of our shares
after the offering. We estimate that the public offering price for the common
stock will range between $10.00 and $12.00 per share.
Your investment in our common stock involves a high degree of risk. Before
making an investment decision, you should carefully consider the risks
described under "Risk Factors" beginning on page 6.
<TABLE>
<CAPTION>
Per
The Offering Share Total
-------------------------------------- ----- -----
<S> <C> <C>
Public offering price $ $
Underwriting discounts and commissions $ $
Proceeds to us $ $
</TABLE>
We are also offering the underwriters a 60-day option to purchase up to
360,000 shares solely to cover any over-allotments on these same terms.
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.
EBI Securities Corporation
Prospectus dated , 1999
<PAGE>
[picture]
[description to be filed by amendment]
2
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding us and the consolidated financial statements and notes
appearing elsewhere in this prospectus. Our fiscal year ends on December 31 of
each year.
WorldQuest Networks, Inc.
Our Business
We are an international Internet telephony company. We carry international
long distance calls over our own enhanced services platform through one of two
methods:
. We transmit calls over our own Internet network, which involves
transmission through our Internet gateways.
. We transmit calls over our network of leased traditional long distance
telephone lines.
All of our calls are made from phone-to-phone over our networks. The voice
quality of our Internet carried calls is virtually the same as an international
telephone call carried over a traditional telephone line. We believe consumers
are more familiar and comfortable using telephones to make calls, as opposed to
computers which have historically been used for Internet telephony.
We advertise, sell and deliver our prepaid long distance virtual calling
cards worldwide exclusively over the Internet through our interactive and easy
to use Web site. Our Web site can be found at www.wqn.com. We focus on the
international long distance market, with particular emphasis on the calling
patterns between the United States and various countries. Our virtual calling
cards may be used to call from the United States to other countries, to call
from other countries to the United States, or to call between countries outside
the United States.
We also buy, at a discount, virtual calling cards processed through other
companies' platforms and sell them to our customers.
Our Current Market Opportunity
The Internet is an increasingly significant interactive global medium for
communication, information and commerce. International Data Corporation, a
market research firm, estimates that the number of users who make purchases
over the Internet worldwide will grow from 31 million in 1998 to more than
183 million in 2003.
TeleGeography, a market research firm, estimates that revenues from
international long distance traffic will grow from $65.9 billion in 1997 to
$77.5 billion in 2001, with consumers and businesses making an estimated 128.7
billion minutes of international long distance calls in 2001. However,
traditional international long distance calls routed over domestic and foreign
public switched telephone networks are still relatively expensive for the
consumer.
Internet telephony has emerged as a cost effective alternative to
traditional long distance telephony. Internet telephone calls are less
expensive because the use of the Internet bypasses the more costly
international long distance networks.
According to The PELORUS Group, a market research firm, the market for
prepaid calling cards has grown from an estimated $300.0 million in 1993 to an
estimated $2.8 billion in 1998. PELORUS predicts that this market will rise to
$10.9 billion in 2003. According to PELORUS, there were 30 million prepaid
calling cards sold in the United States in 1993 and 400 million sold in 1998.
PELORUS predicts there will be 652 million cards sold in the United States in
2003.
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<PAGE>
Our Strategy
Our goal is to be a leading worldwide Internet telephony company. Our
strategy includes:
. focusing our marketing efforts on developing countries that have high
international long distance rates and significant calling traffic to
the U.S. or other countries;
. advertising on Web sites and portals frequently visited by our target
groups;
. increasing the number of countries in which we locate our Internet
gateways; and
. developing and offering enhanced products and services to complement
existing products and services.
Our Company
We were incorporated in October 1996 as a Texas corporation. We plan to
reincorporate in Delaware prior to the closing of this offering. Our executive
offices are located at 16990 Dallas Parkway, Suite 220, Dallas, Texas 75248.
Our telephone number is (972) 818-0460. The information on our Web site is not
part of this prospectus.
The Offering
Shares offered by WorldQuest 2,400,000 shares
Networks...................
Shares to be outstanding after
the offering.................... 5,596,699 shares
Use of proceeds................. To expand our sales and marketing efforts; to
fund equipment purchases including certain
additional back-up systems; to repay
indebtedness; to fund software development;
to increase deposits with credit card
processing companies; and for working capital
and other general corporate purposes.
Unless otherwise indicated, all information in this prospectus:
. gives effect to our reincorporation in Delaware prior to the closing of
this offering;
. gives effect to a 290-for-1 stock dividend in January 1997;
. assumes no exercise of the underwriters' over-allotment option or
exercise of the representative's warrant;
. assumes no exercise of outstanding warrants and stock options to
purchase 497,031 shares of common stock;
. assumes no exercise of stock options to purchase 45,000 shares of common
stock to be issued at the effective date of this offering at an exercise
price equal to the initial public offering price; and
. assumes no issuance of options for 205,336 shares of common stock
available at the effective date of this offering for future issuance
under our stock option plan.
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<PAGE>
Summary Financial Data
The summary financial data below has been derived from our audited and
unaudited consolidated financial statements included in this prospectus
beginning on page F-1. You should review this summary in conjunction with our
consolidated financial statements and their accompanying notes and the section
captioned "Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 17. You should not assume that the
summary financial data is indicative of our future performance.
<TABLE>
<CAPTION>
Six months ended June
Year ended December 31, 30,
------------------------ ----------------------
1997 1998 1998 1999
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Total revenue............... $ 51,963 $ 1,841,439 $ 259,897 $2,650,050
Gross margin (deficit)...... (175,048) (164,192) (158,613) 501,303
Operating expenses:
Selling, general and
administrative .......... 1,277,383 1,290,131 644,148 877,043
Research and development.. 438,860 186,638 94,923 103,776
Net loss.................... (1,764,556) (1,753,427) (904,388) (568,042)
Weighted-average common
shares outstanding - basic
and diluted (1)............ 3,000,000 3,000,000 3,000,000 3,064,607
Net loss per share - basic
and diluted (1)............ $ (0.59) $ (0.58) $ (.30) $ (.19)
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1999
At December 31, ---------------------------
1998 Actual As adjusted(2)
--------------- ----------- --------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents......... $ 18,833 $ 85,993 $23,290,008
Working capital (deficit)......... (2,266,669) (2,088,657) 21,115,358
Total assets...................... 1,246,774 1,294,854 24,498,869
Long-term debt and capital lease
obligations...................... 1,129,004 1,131,140 1,131,140
Stockholders' equity (deficit).... (2,514,790) (2,340,332) 20,863,683
</TABLE>
- --------
(1) See note 2 of notes to consolidated financial statements for a description
of the computation of net loss per share and the number of shares used in
the per share calculation.
(2) Reflects our sale of 2,400,000 shares of common stock at an assumed public
offering price of $11.00 per share and our application of the estimated net
proceeds.
5
<PAGE>
RISK FACTORS
You should carefully consider the risks and uncertainties described below
and the other information in this prospectus before deciding whether to invest
in shares of our common stock. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business,
financial condition and operating results.
If any of the following risks occur, our business, financial condition and
operating results could be materially adversely affected. In such case, the
trading price of our common stock could decline and you may lose part or all of
your investment.
We Have a Limited Operating History
We were incorporated in October 1996. We began selling prepaid virtual
calling cards on our Web site in May 1998. We began routing calls over our
enhanced services platform in August 1998. Accordingly, we have a limited
operating history. Before you decide to purchase our common stock, you should
consider the risks and difficulties frequently encountered by early stage
companies in new and rapidly evolving markets. We cannot assure you that our
business strategy will be successful or that we will successfully address these
risks. Our failure to do so could materially adversely affect our business,
financial condition and operating results.
We Have a History of Losses and We Anticipate Future Losses and Negative Cash
Flow
Since inception, we have incurred operating losses, and as of June 30, 1999,
we had an accumulated deficit of $(4.4) million. We incurred net losses of
$(1.8) million for the fiscal year ended December 31, 1998 and $(568,000) for
the six months ended June 30, 1999.
We expect operating losses and negative cash flow to continue through at
least the fourth quarter of 1999. However, there can be no assurance that we
will be profitable beginning in 2000, because we expect to incur additional
costs and expenses related to:
. marketing and advertising related to traffic generation and brand
development;
. purchases of equipment for our operations and network infrastructure;
. the expansion of our telecommunications network into other countries;
. the continued development of our Web site transaction processing and
network infrastructure;
. development and improvement of additional products and services; and
. the hiring of additional personnel.
Our future profitability depends on our ability to generate and sustain
substantially higher net sales while maintaining reasonable expense levels. If
we do achieve profitability, we cannot assure you that we will be able to
sustain it or improve upon it on a quarterly or annual basis for future
periods.
Our Quarterly Operating Results are Subject to Significant Fluctuations and Our
Future Operating Results are Unpredictable
Our operating results are unpredictable and have fluctuated significantly on
a quarterly basis. We expect to continue to experience significant fluctuations
in our quarterly results of operations due to a variety of factors, many of
which are outside of our control. As a result, period-to-period comparisons of
our results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance.
Because of our limited operating history, we cannot accurately forecast our
net sales. We rely upon limited historical financial data to predict our future
operating results. Sales and operating results are difficult to forecast
because they generally depend on the volume of traffic on our network and the
volume and timing of sales of our virtual calling cards. Because of these
factors, we may be unable to adjust our spending in a timely manner to adjust
for any unexpected revenue shortfall.
We Must Keep Pace With a Rapidly Evolving Market
Our profitability will depend, in part, on our ability to anticipate and
adapt to rapid technological and other changes occurring in the
telecommunications industry. It will also depend on our ability to offer, on a
timely basis, services
6
<PAGE>
meeting developing industry standards and customer preferences. We may be
unable to adapt to these changes or offer these services on a timely basis.
Even if we are able to do so, we may not be able to do so at reasonable cost or
on a profitable basis.
We Are Dependent upon Long Distance Carriers and Local Terminating Parties to
Carry and Terminate Our Traffic
Our success depends, in part, on our ability to continue to lease long
distance telephone capacity from third parties at economic rates to serve the
foreign countries we target. It also depends, in part, on our ability to
maintain our contractual relationships with local terminating parties in those
countries where we have Internet gateways. If we lose our leases or contracts
or if these parties are unable to provide these services, we believe we could
replace them. However, it would cause a disruption of our business until they
are replaced. Also, any replacement leases or contracts may not be at rates or
on terms as favorable to us.
When we lease long distance telephone capacity from third-party carriers, we
rely on them to comply with local laws and regulations. We have no control over
the manner in which these companies operate in these countries. Foreign
regulatory, judicial, legislative or political entities may raise issues
regarding the compliance of these companies with local laws or regulations, or
limit their ability to carry our calls.
It Would Cause a Disruption of Our Services if Internet Service Providers Fail
to Provide Internet Access
We depend on Internet service providers to provide Internet access to us and
our customers. We have two Internet service providers in Dallas. Our local
terminating parties in foreign countries also rely on local Internet service
providers for access to the Internet in their countries. If we lost our
connection with both of our Dallas Internet service providers, we could not
sell our virtual calling cards through our Web site, and Web initiated calls
could not be made by our customers, until the connection was reestablished. If
a local terminating party in a foreign country loses its Internet connection,
we could not route calls over the Internet to that destination until the
connection was reestablished. These failures could cause us to lose customers
and our ability to sell virtual calling cards and telephone services would be
affected.
Our customers also rely on Internet service providers for access to the
Internet. If our customers cannot access the Internet, they cannot access our
Web site to purchase virtual calling cards or make Web initiated calls.
Our Operations Will Be Negatively Affected if Our Enhanced Services Platform
Fails to Operate Properly
All our calls are routed through our enhanced services platform. Our success
is dependent on our platform working properly. If our platform fails for any
reason, we could not route calls until the failure is corrected. From time to
time, we have experienced short term failures or malfunctions in our platform.
We cannot assure you that future failures will not occur.
We Need to Increase the Number of Web Sites and Portals Upon Which We Advertise
We market our virtual calling cards and services on third-party Web sites
and portals using banner ads. The banner ads connect directly to our Web site
when "clicked" by the customer. If we cannot continue to cost effectively
market our virtual calling cards and services, our ability to expand our
customer base would be adversely affected.
The Telecommunications Market is Highly Competitive
With respect to prepaid calling cards, we compete with the largest
telecommunications providers in the United States, as well as smaller, emerging
carriers. We may also compete with large operators in other countries. Most of
these companies are substantially larger and have greater financial, technical,
engineering, personnel and marketing resources, longer operating histories,
greater name recognition and larger customer bases than we do. Competition from
existing or new competitors could reduce our revenues from the sale of our
virtual prepaid calling cards. A general decrease in telecommunication rates
charged by international long distance carriers could also have a negative
effect on our operations.
7
<PAGE>
The Internet Telephony Market is Also Highly Competitive
An increasing number of large, well-capitalized companies are entering the
market for Internet telephony products and services. These competitors include
a number of companies that have introduced services that make Internet
telephony solutions available to businesses and consumers, and that permit
voice communications over the Internet. Many of these companies are larger and
have greater financial and other resources than we do. We may not be able to
compete effectively with our competitors in this market, or to increase our
customer base.
We May Be Vulnerable to Technical Malfunctions
We are dependent upon management information systems to provide services to
our customers, manage our network, track virtual calling card balances and
perform other vital functions. These systems and equipment are subject to
hardware defects and software bugs which may be beyond our control. If we
experience substantial technical difficulties with our hardware or software, we
may not succeed in routing traffic effectively, or in tracking virtual calling
card balances accurately, which could adversely affect our operations.
Network Failures Could Prevent Us from Providing our Services and Could Cause
Us to Lose Customers
We depend upon our software systems, communications hardware and enhanced
services platform to conduct our virtual calling card sales and telephone
routing. Our systems, communications hardware and platform are vulnerable to
damage or interruption from:
. natural disasters;
. power loss;
. telecommunication failures;
. loss of Internet access;
. physical and electronic break-ins;
. computer viruses; and
. intentional acts of vandalism and similar events.
We have experienced periodic system interruptions, which we believe will
continue to occur from time-to-time. Since our operations depend on our ability
to successfully expand our network and to integrate new technologies and
equipment into our network, there is an increased risk of system failure as
well as a natural strain on the system.
Our Systems May Not Accommodate Significant Growth in the Number of Users
Our success depends on our ability to handle a large number of simultaneous
calls. We expect that the volume of simultaneous calls will increase
significantly as we expand our operations. If this occurs, additional stress
will be placed upon the network hardware and software that manages our traffic.
We cannot assure you of our ability to efficiently manage a large number of
simultaneous calls. If we are not able to maintain an appropriate level of
operating performance, or if our service is disrupted, then we may develop a
negative reputation and our business, results of operations and financial
condition would be materially adversely affected.
We Depend on the Acceptance of Internet Telephony and Prepaid Calling Cards by
Potential Customers
We cannot be certain that Internet telephone service will gain market
acceptance or prove to be a viable alternative to traditional telephone
service. If the Internet telephony market fails to develop or develops more
slowly than we expect, then our future revenues would be adversely affected.
The market for prepaid calling cards is an emerging business with a large
number of market entrants. Therefore, it is difficult to accurately determine
what the demand will be for our products and services in this area. Substantial
markets may not continue to develop for prepaid calling cards, and we may not
be able to sustain or increase our sales of these products and services.
Our Long-Term Success Depends on the Development of the e-commerce Market
We anticipate that e-commerce will continue to account for substantially all
of our future revenues. Our business will suffer if e-commerce does not
8
<PAGE>
grow or grows more slowly than expected. A number of factors could prevent
acceptance of e-commerce, including:
. e-commerce is at an early stage and buyers may be unwilling to shift
their purchasing from traditional vendors to online vendors;
. increased government regulation or taxation may limit the growth of
e-commerce; and
. adverse publicity and consumer concern about the security of e-commerce
transactions may discourage its acceptance and growth.
These factors could impair our ability to generate revenues from our online
sales of virtual calling cards, online transmission of telephone calls and
other e-commerce activities.
We Depend on the Internet and the Development of the Internet Infrastructure
For the Internet to be commercially viable in the long-term, the size of the
network infrastructure, enabling technologies, necessary performance
improvements and user security will need to be continually addressed. To the
extent that the Internet continues to experience an increased number of users,
frequency of use or increased bandwidth requirements, we cannot assure you that
the performance or reliability of the Internet will not be adversely affected.
Furthermore, the Internet has experienced a variety of outages and other delays
as a result of damage to portions of its infrastructure, and could face such
outages and delays in the future. These outages and delays could adversely
affect the level of Internet usage and affect the level of traffic, the
processing of orders and the transmission of calls on our Web site.
We cannot assure you that the infrastructure or complementary products or
services necessary to make the Internet a viable commercial marketplace for the
long term will be developed. Even if these products and services are developed,
we cannot assure you that the Internet will become a viable commercial
marketplace for our virtual calling cards and services. If not, our business,
financial condition and operating results will be materially adversely
affected. Also, we may be required to incur substantial expenditures in order
to adapt our products and services to changing Internet technologies, which
could have a material adverse effect on our business, financial condition and
operating results.
We Need to Manage Growth in Operations and Hire Additional Qualified Employees
The expected growth of our operations place a significant strain on our
current management resources. To manage this expected growth, we will need to
improve our:
. transaction processing methods;
. operations and financial systems;
. procedures and controls; and
. training and management of our employees.
A portion of the proceeds from this offering will be used to hire additional
key personnel. Competition for personnel is intense, and we cannot assure you
that we will be able to successfully attract, integrate or retain sufficiently
qualified personnel. Our failure to attract and retain the necessary personnel
or to effectively manage our employee and operations growth could have a
material adverse effect on our business, financial condition and operating
results.
We are Exposed to Risks Associated With Internet Commerce Security and Credit
Card Fraud
Consumer concerns over the security of transactions conducted on the
Internet or the privacy of users may inhibit the growth of the Internet and
online commerce. To securely transmit confidential information, such as
customer credit card numbers, we rely on encryption and authentication
technology that we license from third parties. We cannot predict whether events
or developments will compromise or breach the technology that protects our
customer transaction data. If our security measures do not prevent security
breaches, this could have a material adverse effect on our business, financial
condition and operating results.
To date, we have suffered minimal losses as a result of orders placed with
fraudulent credit card data even though the associated financial institution
approved payment of the orders. Under current
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<PAGE>
credit card practices, a merchant is liable for fraudulent credit card
transactions where the merchant does not obtain a cardholder's signature. We do
not obtain the signature of the cardholder when we process orders. Although we
have implemented mechanisms to try to detect credit card fraud, we cannot
assure you that our efforts will be successful. Our inability to adequately
detect credit card fraud could materially adversely affect our business,
financial condition and operating results.
To the extent that our activities involve the storage and transmission of
proprietary information, such as credit card numbers, security breaches could
expose us to a risk of loss or litigation and possible liability. We do not
presently carry insurance policies to reimburse us for losses caused by
security breaches. We cannot assure you that our security measures will prevent
security breaches. Our failure to prevent security breaches could have a
material adverse effect on our business, financial condition and operating
results.
The Market Price For Your Common Stock May Be Volatile
The trading price of our stock is likely to be highly volatile and could be
subject to wide fluctuations in response to factors unrelated to our operating
performance, such as:
. actual or anticipated variations in our quarterly operating results;
. announcements of technological innovations;
. the offering of new services or products by us or our competitors;
. changes in financial estimates by securities analysts;
. conditions or trends in the telecommunications or Internet telephony
industries;
. conditions or trends in the Internet and online commerce industries;
. changes in the economic condition or market valuations of other Internet
or online service companies or telecommunications companies;
. announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
. additions or departures of key personnel;
. sales of restricted securities in the open market; and
. threatened or pending litigation.
The market prices of the securities of Internet-related and online commerce
companies have been especially volatile. The trading prices of many Internet
companies' stocks are at or near historical highs and reflect valuations
substantially above historical levels. We cannot assure you that these trading
prices and valuations will be sustained. Broad market and industry factors may
materially and adversely affect the market price of your common stock,
regardless of our operating performance.
In the past, following periods of volatility in the market price of their
stock, many companies have been the subject of securities class litigation.
Such litigation, if instituted, could result in substantial costs and a
diversion of our management's attention and resources, which could have a
material adverse effect on our business, financial condition and operating
results.
We Need to Protect Our Intellectual Property and Other Proprietary Rights From
Infringement
Our success depends in part upon our ability to protect our proprietary
technology and other intellectual property rights. We rely on a combination of
copyright, trademark, service mark and trade secret laws and contractual
restrictions to establish and protect our proprietary rights. We expect to be
granted a registered trademark for "WorldQuest" by the U.S. Patent and
Trademark Office upon our filing of an affidavit of use, which we intend to
file in September 1999. We have a pending trademark application on file with
the Patent and Trademark Office for "WorldQuest Networks." This application was
challenged by Qwest Communications, who filed a notice of opposition currently
pending before the Patent and Trademark Office. If we do not prevail, we will
not be able to obtain a registered trademark for "WorldQuest Networks" and we
could be required to stop using the name or pay a fee to Qwest for permission
to use it. Any trademark may be challenged for a period of six years after its
registration date. Thus, we could also face a cancellation proceeding with the
Patent and Trademark Office relating to our
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trademark for "WorldQuest." Effective trademark, service mark, copyright and
trade secret protection may not be available in every country in which our
services are made available online. Therefore, the steps that we take may be
inadequate to protect our rights.
The Internet Industry May Become Subject to Increased Government Regulation
Regulation of the Internet. Various actions have been taken by the United
States Congress and the Federal courts that, in some cases impose some forms of
regulation on the Internet, and in other cases protect the Internet from
regulation. Domestic and international authorities regularly consider proposed
legislation that could result in new regulations on the Internet. It is
impossible to say at this time whether and to what extent the Internet may
ultimately be regulated domestically or internationally. Increased regulation
of the Internet may decrease its growth, which may negatively impact the cost
of doing business via the Internet or otherwise materially adversely affect our
business, results of operations and financial condition.
In addition, because our services are accessible worldwide, and we
facilitate the sale of goods to users worldwide, other jurisdictions may claim
that we are required to comply with their laws. We are qualified to do business
in Delaware and Texas only, and failure by us to qualify as a foreign
corporation in a jurisdiction where we are required to do so could subject us
to taxes and penalties for the failure to qualify.
Potential Regulation of Internet Telephony. To our knowledge, there are
currently no domestic and few international laws or regulations that prohibit
the transmission of voice communications over the Internet. If Congress, the
FCC, state regulatory agencies or governments of other countries impose
substantial regulations relating to Internet telephony, the growth of our
business could be adversely affected. On April 10, 1998, the FCC issued a
Report to Congress concerning its implementation of the universal service
provisions of the Telecommunications Act. The FCC tentatively concluded that
providers of phone-to-phone Internet telephony services should be treated like
other providers of telephone service. This means that they should be required
to make payments into Federal universal service subsidy programs. To date, the
FCC has taken no further action, and has not imposed this obligation on
Internet telephony providers. It may do so at some time in the future, however,
and such a decision could have a material adverse effect on our business,
increasing our costs, and the price at which we can offer our Internet
telephony services.
Sales Tax Collection by States May Adversely Affect Our Growth
We do not currently collect sales or other similar taxes for calling cards
or services sold through our Web site, other than for calling cards sold to
Texas residents. However, one or more states may seek to impose sales tax or
similar collection obligations on out-of-state companies, such as ours, which
engage in Internet commerce. A successful assertion by one or more states or
any other country that we should collect sales or other taxes on the sale of
cards or services on our system could have a material adverse effect on our
operations.
We Depend on Key Personnel
We believe that our success will depend on the continued services of our
senior management team, especially B. Michael Adler and Michael R. Lanham. We
do not have employment agreements with any of our key personnel. At the closing
of this offering, we will carry $2.0 million of key person life insurance on
the lives of each of B. Michael Adler and Michael R. Lanham. The loss of the
services of any of our senior management team or other key employees could
adversely affect our business, financial condition and operating results.
We Face Risks That Our Computer Systems and Those of Our Business Partners May
Not Be Year 2000 Compliant
Many existing computer programs use only two digits to identify a year.
These programs were designed without addressing the impact of the upcoming
change in the century. If not corrected, many computer software applications
could fail or create erroneous results.
We are currently conducting an assessment of the Y2K readiness of our
systems and those of our third-party vendors and suppliers. We expect to
complete our Y2K review during the third quarter of
11
<PAGE>
1999. Based upon our assessment to date, we believe that our internally
developed proprietary software is Y2K compliant. We have not yet determined the
compliance level of third parties. Therefore, we may have to develop a
remediation plan to partially insulate us from third-party non-compliance. At
this time, the expenses associated with this assessment and any potential
remediation plan cannot be determined. We cannot assure you that the Y2K
problems of third parties with which we do business will not have a material
adverse effect on our business, financial condition and operating results.
We also depend on the Y2K compliance of the computer systems and financial
services used by our customers. A significant disruption in the ability of
customers to reliably access the Internet or portions of it or to use their
credit cards would have an adverse effect on demand for our virtual calling
cards and services and would have a material adverse effect on our business,
results of operations and financial condition.
We May Not be Able to Raise Needed Additional Capital in the Future
We require substantial working capital to fund our business. Our working
capital requirements and cash flow provided by operating activities can vary
from quarter to quarter depending on revenues, operating expenses, capital
expenditures and other factors. We anticipate that the net proceeds of this
offering will be sufficient to meet our anticipated needs through at least the
next 18 months. Thereafter, we may need to raise additional funds. We may also
need to raise additional funds sooner than anticipated to:
. fund more rapid expansion;
. develop new or enhanced services or products; and
. respond to competitive pressures.
If additional funds are raised through the issuance of equity or convertible
debt securities your rights and ownership in our company may be reduced.
We cannot assure you that additional financing will be available on terms
favorable to us or at all. If adequate funds are not available, or are not
available on acceptable terms, we may not be able to fund planned expansion,
take advantage of available opportunities, develop or enhance services or
products or respond to competitive pressures. Such inabilities could have a
material adverse effect on our business, financial condition and operating
results.
12
<PAGE>
FORWARD LOOKING STATEMENTS
This prospectus contains certain forward-looking statements that involve
risks and uncertainties. These statements refer to our future plans,
objectives, expectations and intentions. These statements can be identified by
the use of words such as "expects," "anticipates," "intends," "plans" and
similar expressions. Our actual results could differ materially from those
anticipated in such forward-looking statements. Factors that could contribute
to these differences include, but are not limited to, those discussed above in
"Risk Factors" and elsewhere in this prospectus.
USE OF PROCEEDS
The net proceeds to us from the sale of 2,400,000 shares of common stock
offered by us at an assumed initial public offering price of $11.00 per share
(after deducting estimated underwriting discounts, the underwriters' non-
accountable expense allowance and other estimated offering expenses payable by
us), are estimated to be $23.2 million (and an additional $3.6 million from the
sale of shares if the underwriters' over-allotment option is exercised in
full).
The net proceeds of the offering will be used for the following purposes:
. expansion of our sales and marketing efforts, including increased
advertising on other Web sites and print media and direct advertising
campaigns (approximately $1.8 million);
. equipment purchases including certain additional back-up systems
(approximately $1.25 million);
. repayment of indebtedness (approximately $468,000);
. software development (approximately $450,000)
. increasing deposits with credit card processing companies (approximately
$150,000); and
. general corporate purposes, including working capital for payment of
outstanding payables, development of relationships with other long
distance carriers and local terminating parties, expansion of the
countries in which we have gateways, and research and development of new
products (approximately $19.1 million).
The indebtedness to be repaid is a portion of a $2.5 million credit facility
with Eagle Venture Capital, LLC, formerly known as WorldQuest Networks, LLC
("Eagle Venture"), our controlling stockholder. B. Michael Adler, our Chairman
of the Board, owns controlling interest of Eagle Venture. At June 30, 1999,
$1.6 million was outstanding under the credit facility. The facility consists
of a $1.1 million term loan and a revolving line of credit of up to $1.4
million. The facility bears interest at 8% per year and the $1.1 million term
loan and accrued interest thereon is payable May 5, 2002. Any balance
outstanding under the $1.4 million revolving line of credit is payable on May
5, 2002, unless demand is made by Eagle Venture for earlier payment, and
accrued interest on the line of credit portion is payable on December 18, 1999
and thereafter is payable monthly. Demand for payment of $468,000 of the
principal balance of the line of credit portion (with accrued interest thereon)
has been made effective upon closing of this offering. The proceeds of this
credit facility were used to provide us with working capital.
Prior to their eventual use, the net proceeds will be invested in high
quality, short-term investment instruments such as short-term corporate
investment grade or United States Government interest-bearing securities.
DIVIDEND POLICY
We have never paid any dividends on our common stock, and we currently
intend to retain any future earnings to fund the development and growth of our
business. Any future determination to pay dividends will depend on our results
of operations, future earnings, financial condition and capital requirements,
applicable restrictions under any credit facilities or other debt arrangements
and such other factors deemed relevant by our Board of Directors.
13
<PAGE>
CAPITALIZATION
The following table sets forth, as of June 30, 1999, our (A) actual short-
term debt and capitalization at June 30, 1999 and (B) as adjusted to reflect
the sale by us of 2,400,000 shares of common stock offered by us at an assumed
initial public offering price of $11.00 per share and the application of the
net proceeds therefrom (after deducting estimated underwriting discounts, the
underwriters' non-accountable expense allowance and other estimated offering
expenses payable by us). The information in the table should be read in
conjunction with the more detailed consolidated financial statements and notes
beginning on page F-1.
<TABLE>
<CAPTION>
As of June 30, 1999
------------------------
Actual As adjusted
----------- -----------
<S> <C> <C>
Short-term debt...................................... $ 1,082,931 $ --
=========== ===========
Long-term debt and capital lease obligations......... $ 1,131,140 $ 1,131,140
----------- -----------
Stockholders' equity (deficit):
Preferred stock, $.01 par value;
10,000,000 shares authorized; none issued and
outstanding actual and as adjusted............... -- --
Common stock, $.01 par value:
50,000,000 shares authorized; 3,196,699 issued
and outstanding actual; 5,596,699 shares issued
and outstanding as adjusted...................... 319,670 343,670
Additional capital................................. 1,718,083 24,898,098
Accumulated deficit................................ (4,378,085) (4,378,085)
----------- -----------
Total stockholders' equity (deficit)........... (2,340,332) 20,863,683
----------- -----------
Total capitalization........................... $(1,209,192) $21,994,823
=========== ===========
</TABLE>
14
<PAGE>
DILUTION
Our net tangible book value (deficiency) at June 30, 1999 was $(2.3) million
or $(0.73) per share. Net tangible book value (deficiency) per share represents
the amount of our total tangible assets less total liabilities, divided by the
number of shares of common stock outstanding. After giving effect to the
receipt by us of the net proceeds from the sale of shares of common stock
offered hereby at the assumed initial public offering price of $11.00 per share
and the application of the net proceeds therefrom (after deducting the
estimated underwriting discounts, the underwriters' non-accountable expense
allowance and other estimated offering expenses payable by us), our as adjusted
net tangible book value at June 30, 1999 would have been $20.9 million or $3.73
per share. This represents an immediate increase in net tangible book value of
$4.46 per share to the existing stockholders and an immediate substantial
dilution of $7.27 per share to new investors purchasing shares in this
offering. The following table illustrates this per share dilution:
<TABLE>
<CAPTION>
Assumed initial public offering price per share................... $11.00
<S> <C> <C>
Net tangible book value (deficiency) per share before this
offering....................................................... $(0.73)
Increase per share attributable to new investors ............... 4.46
------
Net tangible book value per share after this offering............. 3.73
-----
Dilution per share to new investors............................... $7.27
=====
</TABLE>
The following table summarizes as of June 30, 1999 the differences between
existing stockholders and new investors (before deducting the estimated
underwriting discounts, the underwriters' non-accountable expense allowance and
other estimated offering expenses payable by us) with respect to the number of
shares of common stock purchased from us, the total consideration paid and the
average price per share.
<TABLE>
<CAPTION>
Shares owned
after
the offering Total consideration
----------------- ------------------- Average price
Number Percent Amount Percent per share
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 3,196,699 57.1% $ 1,156,000 4.2% $ 0.36
New investors............... 2,400,000 42.9 26,400,000 95.8 $11.00
--------- ----- ----------- -----
Total..................... 5,596,699 100.0% 27,556,000 100.0%
========= ===== =========== =====
</TABLE>
Eagle Venture owns 2,666,478 shares of our common stock. Eagle Venture paid
an average of $0.24 per share for these shares. B. Michael Adler, our Chairman
of the Board, owns a controlling interest in Eagle Venture. Each of Mr. Adler
and one of our other directors, Hugh E. Humphrey, Jr., have options to acquire
5,000 shares of our common stock for an exercise price of $1.00 per share.
Michael R. Lanham, our President and a director, has an option to purchase
167,867 shares at an exercise price of $3.33 per share.
15
<PAGE>
SELECTED FINANCIAL DATA
You should read the selected financial and operating data set forth below in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
notes included elsewhere in this prospectus. The statement of operations data
set forth below for the fiscal years ended December 31, 1997 and 1998 and the
selected balance sheet data as of December 31, 1998 have been derived from our
audited consolidated financial statements appearing elsewhere in this
prospectus. The statement of operations data for the six months ended June 30,
1998 and 1999 and the selected balance sheet data as of June 30, 1999 have been
derived from our unaudited consolidated financial statements. Our unaudited
consolidated financial statements include all adjustments, consisting of normal
recurring accruals, which we consider necessary for a fair presentation of the
results of operations for these periods. The historical results are not
necessarily indicative of results to be expected for any future period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Year ended December 31, Six months ended June 30,
------------------------ -------------------------
1997 1998 1998 1999
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Retail prepaid calling
card revenue........... $ -- $ 1,466,322 $ 149,198 $ 2,343,736
Wholesale traffic and
other.................. 51,963 375,117 110,699 306,314
----------- ----------- ------------ ------------
Total revenue......... 51,963 1,841,439 259,897 2,650,050
Cost of sales........... 227,011 2,005,631 418,510 2,148,747
----------- ----------- ------------ ------------
Gross margin (deficit).. (175,048) (164,192) (158,613) 501,303
Selling, general and
administrative......... 1,277,383 1,290,131 644,148 877,043
Research and development
costs.................. 438,860 186,638 94,923 103,776
----------- ----------- ------------ ------------
Operating loss.......... (1,891,291) (1,640,961) (897,684) (479,516)
Interest expense........ (28,265) (162,466) (56,704) (75,868)
Other income............ 155,000 50,000 50,000 --
----------- ----------- ------------ ------------
Loss before minority
interest and
income taxes........... (1,764,556) (1,753,427) (904,388) (555,384)
Minority interest....... -- -- -- (12,658)
----------- ----------- ------------ ------------
Loss before income
taxes.................. (1,764,556) (1,753,427) (904,388) (568,042)
Income tax benefit...... -- -- -- --
----------- ----------- ------------ ------------
Net loss................ $(1,764,556) $(1,753,427) $ (904,388) $ (568,042)
=========== =========== ============ ============
Weighted-average common
shares
outstanding - basic and
diluted................ 3,000,000 3,000,000 3,000,000 3,064,607
=========== =========== ============ ============
Net loss per share -
basic and diluted...... $ (0.59) $ (0.58) $ (0.30) $ (0.19)
=========== =========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1998 At June 30, 1999
-------------------- ----------------
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............... $ 18,833 $ 85,993
Working capital (deficit)............... (2,266,669) (2,088,657)
Total assets............................ 1,246,774 1,294,854
Long-term debt and capital lease
obligations............................ 1,129,004 1,131,140
Stockholders' equity (deficit).......... (2,514,790) (2,340,332)
</TABLE>
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for historical information, the discussion in this prospectus
contains forward-looking statements that involve risks and uncertainties. These
statements refer to our future plans, objectives, expectations and intentions.
These statements may be identified by the use of words such as "expects,"
"anticipates," "intends," "plans" and similar expressions. Our actual results
could differ materially from those anticipated in such forward-looking
statements. Factors that could contribute to these differences include, but are
not limited to, the risks discussed in the section titled "risk factors" in
this prospectus.
Overview
General. We are an international Internet telephony company. We sell virtual
prepaid calling cards through our interactive and easy to use Web site and
transmit long distance calls at discounted rates through our Internet and
traditional networks. We advertise, sell and deliver our virtual calling cards
worldwide exclusively through the Internet.
We were incorporated in October 1996 and began offering services for sale in
December of that year. We were formed when the principal shareholder of Eagle
Venture decided to pursue Internet telephony opportunities. In conjunction with
our formation, Eagle Venture contributed cash and other assets valued at
approximately $185,000 (the estimated fair value) in exchange for 100% of our
then outstanding common stock. During 1997, Eagle Venture contributed an
additional $316,000 to further capitalize us, but received no additional shares
of common stock.
We started our company to develop an international fax business. In May
1998, we changed our business model to focus on providing Internet based
telephone services. We began selling prepaid virtual calling cards on our Web
site in May 1998. We began routing calls over our enhanced services platform in
August 1998.
Revenues. We receive revenue from two sources, the sale of virtual calling
cards and the sale of excess line capacity to other long distance carriers. Our
virtual calling cards are sold to our customers worldwide over the Internet
through our Web site primarily through credit card purchases. Our wholesale
traffic and other revenues are derived from the sale of excess line capacity to
other long distance carriers pursuant to short-term contracts and the
transmission of facsimile traffic. Excess line capacity is the remaining
capacity on our telephone lines not used by us to terminate our calls during
any given month. Revenues from the sale of prepaid virtual calling cards is
deferred and recognized as calling services are used. Wholesale traffic revenue
is recognized as calls are processed.
All sales of our virtual calling cards are made over the Internet primarily
through credit card purchases. We use credit card processing companies to
verify credit cards. Until May 1999, our former credit card processing company
restricted the amount of credit card purchases that could be made from us per
month. That company also would not allow purchases with non United States
issued credit cards. These restrictions prevented us from increasing our sales
as rapidly as desired. In May 1999, we began processing with another credit
card processing company which sets no limit on our monthly credit card sales
and agreed to accept purchases with non United States issued credit cards. We
believe these developments may have a positive effect on sales in the near
term.
Accounts receivable consists of amounts owed by credit card processing
companies relating to prepaid virtual calling card sales, and amounts owed by
telephone companies for processed call traffic. At June 30, 1999, a telephone
company accounted for 29% of total accounts receivable. This company had no
accounts receivable at December 31, 1998, but another telephone company
accounted for 22% of accounts receivable as of June 30, 1999 and, 59% of total
accounts receivable at December 31, 1998. At June 30, 1999, a credit card
processing company accounted for 30% of total accounts receivable. This company
had no accounts receivable at December 31, 1998, but another credit card
processing company accounted for 26% of total accounts
17
<PAGE>
receivable at December 31, 1998. No individual customer accounted for more than
10% of total sales either for the first six months of 1999 or for 1998.
Customers purchase our virtual prepaid calling cards primarily using major
credit cards which are reimbursed by credit card processing companies.
Accordingly, we do not routinely perform on-going credit evaluations of our
customers, but do perform evaluations of our credit card processors.
Additionally, we do not require collateral.
Expenses. Due to our changing business model from fax services to Internet
telephony services, we have substantially expanded our infrastructure and
increased our capital expenditures and capital lease obligations relating to
property and equipment. During the first six months of 1999, our capital
expenditures and payments on capital leases totaled $200,000. These capital
expenditures and payments were $202,000 during 1998. As we continue to grow, we
expect to expand our infrastructure by increasing our capital expenditures and
leases. We expect these expenditures will represent a smaller percentage of
sales as our sales volume grows.
Research and development costs are expensed as incurred and consist
primarily of salaries, supplies and contract services.
Since inception, we have incurred significant losses and, as of June 30,
1999, had an accumulated deficit of $(4.4) million. We expect operating losses
and negative cash flow to continue through at least the fourth quarter of 1999.
We expect to incur additional costs and expenses related to:
. marketing and advertising related to traffic generation and brand
development;
. purchases of equipment for our operations and network infrastructure;
. the expansion of our telecommunications network into other countries;
. the continued development of our Web site transaction processing and
network infrastructure;
. development and improvement of additional products and services; and
. the hiring of additional personnel.
We have a limited operating history on which to base an evaluation of our
business and prospects. In addition, due to the change in our model from fax
services to Internet telephony services in May 1998, 1998 operations only
include a period of eight months of revenues from Internet telephony services.
Therefore, it is not very meaningful to compare 1998 to 1997 because of the
different models pursued in each year. You must also consider our prospects in
light of the risks, expenses and difficulties frequently encountered by
companies in their early stage of development, particularly companies in new
and rapidly evolving markets such as e-commerce. Such risks for us include, but
are not limited to, an evolving and unpredictable business model and management
of growth. To address these risks, we must, among other things, maintain and
expand our customer base, implement and successfully execute our business and
marketing strategy, continue to develop and upgrade our technology and systems
that we use to process customers' orders and payments, improve our Web site,
provide superior customer service, respond to competitive developments and
attract, retain and motivate qualified personnel. We cannot assure you that we
will be successful in addressing such risks, and our failure to do so could
have a material adverse effect on our business, prospects, financial condition
and results of operations.
18
<PAGE>
Results of Operations
The following table sets forth statement of operations data as a percentage
of revenues for the periods indicated:
<TABLE>
<CAPTION>
Six months
Year ended ended June
December 31, 1998 30,
----------------- --------------
1998 1999
------ -----
<S> <C> <C> <C>
Retail prepaid calling card revenue.......... 79.6% 57.4% 88.4%
Wholesale traffic and other(1)............... 20.4 42.6 11.6
----- ------ -----
Total revenue.............................. 100.0 100.0 100.0
Cost of sales................................ 108.9 161.0 81.1
----- ------ -----
Gross margin (deficit)....................... (8.9) (61.0) 18.9
Selling, general and administrative.......... 60.6 247.9 33.1
Research and development..................... 10.1 36.5 3.9
----- ------ -----
Operating loss............................... (79.6) (345.4) (18.1)
Interest expense............................. 8.8 21.8 2.9
Other income................................. (2.7) (19.2) --
Minority interest............................ -- -- 0.4
----- ------ -----
Net loss..................................... (85.7)% (348.0)% (21.4)%
===== ====== =====
</TABLE>
- --------
(1) Wholesale traffic represents the sale of excess line capacity, and other
revenue represents facsimile transmission revenues in 1998.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenue
Revenue increased to $2.7 million for the six months ended June 30, 1999
from $260,000 for the comparable period in 1998 as a result of the change in
our business model, significant growth of our customer base and an increase in
repeat purchases from our existing customers. Of the $2.7 million received for
the six months ended June 30, 1999, $2.3 million represents prepaid virtual
calling card revenue and the remainder represents wholesale traffic of $271,000
and other revenue of $35,000, all of which other revenue was derived from a
subsidiary which ceased operations in June 1999.
Cost of Sales
Cost of sales consists primarily of the costs of termination of long
distance traffic over our networks. Cost of sales increased to $2.1 million for
the six months ended June 30, 1999 from $419,000 for the comparable period in
1998. This $1.7 million increase was primarily attributable to our increased
sales volume. We expect cost of sales to increase in future periods to the
extent that our sales volume increases.
Operating Expenses
Selling, General and Administrative. Selling, general and administrative
expenses consist of advertising and promotional expenditures, payroll and
related expenses for executive and administrative personnel, facilities
expenses, professional services expenses, travel and other general corporate
expenses. Selling, general and administrative expenses increased to $877,000
for the six months ended June 30, 1999 from $644,000 for the comparable period
in 1998, but decreased significantly as a percentage of revenue. Such expenses
are expected to continue to decrease as a percentage of revenue during 1999
because our sales of calling cards are based on e-commerce which allows
increases in calling card purchases without having to incrementally add
overhead. We expect selling, general and administrative expenses to increase in
absolute dollars as we continue
19
<PAGE>
to pursue advertising and marketing efforts, expand our network termination
locations worldwide, expand our staff and incur additional costs related to the
growth of our business and being a public company.
Research and Development Costs. Research and development costs consist
primarily of payroll and related expenses for evaluating and integrating new
hardware and software, Web site development and information technology
personnel, Internet access and hosting charges and Web content and design
expenses. Research and development costs increased to $104,000 for the six
months ended June 30, 1999 from $95,000 for the comparable period in 1998.
While we will continue to incur expenses for research and development to
increase our product line and enhance our services, we expect these
expenditures will continue to decrease as a percentage of revenue as our sales
volume increases.
Interest Expense
Interest expense consists of interest charges attributable to capital leases
for equipment and to borrowings under a credit facility with our principal
stockholder. The increase to $76,000 for the six months ended June 30, 1999
from $57,000 for the comparable period in 1998 is attributable to increased
borrowings under the credit facility and new equipment leases entered into
after the end of the 1998 quarter.
Other Income
Other income consists of license fees received from our previous fax
services business model. Other income was zero for the six months ended June
30, 1999 as compared to $50,000 for the comparable period in 1998.
Net Loss
We incurred a net loss of $(568,000) for the six months ended June 30, 1999
as compared to $(904,000) for the comparable period in 1998. Net loss for the
six months ended June 30, 1999 was affected by the write off of $140,000 of
goodwill during the first quarter of 1999 in connection with the termination of
our Costa Rican operations in June 1999.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenue
Revenue increased to $1.8 million for 1998 from $52,000 for 1997 as a result
of the change in our business model, significant growth of our customer base
and an increase in repeat purchases from our existing customers. Of the $1.8
million, $1.5 million represents prepaid virtual calling card revenue and the
remainder represents wholesale traffic of $153,000 and other revenue of
$222,000, all of which other revenue was derived from a subsidiary which ceased
operations in June 1999.
Cost of Sales
Cost of sales increased to $2.0 million for 1998 from $227,000 for 1997.
This $1.8 million increase was primarily attributable to increased sales
volume.
Operating Expenses
Selling, General and Administrative. Selling, general and administrative
expenses remained constant at $1.3 million between 1998 and 1997. Selling,
general and administrative expenses decreased significantly as a percentage of
revenue due to the low revenue level in 1997.
20
<PAGE>
Research and Development Costs. Research and development costs decreased to
$187,000 in 1998 from $439,000 in 1997. This $252,000 decrease was primarily
attributable to a change from a hardware and downloadable software based
Internet fax model to a Web page driven prepaid virtual calling card model.
Research and development is not as significant under our Internet telephony
model as under our facsimile transmission model.
Interest Expense
Interest expense increased to $162,000 in 1998 from $28,000 in 1997 as a
result of increased borrowings under a credit facility with our principal
stockholder and new equipment leases entered into during 1998.
Other Income
Other income was $50,000 for 1998 as compared to $155,000 for 1997.
Net Loss
We incurred a net loss of $(1.8) million in each of 1998 and 1997 as we
changed our business model from a fax services to Internet telephony services
company and developed an infrastructure for future growth.
Income Taxes
As of December 31, 1998, we had approximately $2.9 million of net operating
loss carryforwards for federal income tax purposes, which expire beginning in
2011. We have provided a full valuation allowance on the deferred tax asset,
consisting primarily of net operating loss carryforwards, because of
uncertainty regarding its future realizability. Limitations on the utilization
of these carryforwards may result if we experience a change of control, as
defined in the Internal Revenue Code of 1986, as amended, as a result of
changes in the ownership or our common stock. See note 9 of notes to
consolidated financial statements.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through a $2.5
million credit facility with our principal stockholder, private sales of equity
and cash generated from operations. As of June 30, 1999, we had approximately
$86,000 of cash and cash equivalents. As of that date, our principal
commitments consisted of obligations outstanding under capital leases for
equipment, obligations under leases and contracts for long distance
transmissions and our credit facility with our principal stockholder.
Outstanding amounts owed to our principal stockholder as of June 30, 1999
were $1.6 million and as of December 31, 1998 were $1.7 million. In May 1999,
we amended our credit facility with our principal stockholder to convert $1.1
million to a term loan bearing interest at 8% per annum with interest and
principal payable May 5, 2002. Our principal stockholder also agreed at such
time to convert $200,000 of the loan into 60,061 shares of our common stock, at
a conversion price of $3.33 per share. We also continue to have a line of
credit with our principal stockholder. The amount we are able to borrow under
this line of credit was increased to $1.4 million by an amendment to our credit
facility in August 1999, $468,000 of which was drawn and outstanding as of the
date of the amendment. Demand for payment of $468,000 of the outstanding
principal balance of the line of credit portion has been made effective upon
the closing of this offering, and we intend to repay such amount from the
proceeds of this offering.
Net cash used in operating activities was $246,000 for the six months ended
June 30, 1999, $661,000 in 1998 and $1.0 million in 1997. Net cash used in
operating activities for 1998 and 1997 primarily consisted of net operating
losses as well as increases in accounts receivable and other assets, partially
offset by increases in accounts payable and accrued expenses.
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Net cash used in investing activities consists of additions to property and
equipment, including computer equipment and Internet gateways for voice over
the Internet transmission. Net cash used in investing activities was $131,000
for the six months ended June 30, 1999, $148,000 in 1998 and $111,000 in 1997.
During 1999, we expect to spend approximately $330,000 in capital expenditures,
of which $160,000 will be for gateway servers, $20,000 for a data base server,
$100,000 for software and $50,000 in miscellaneous other equipment. Through
June 30, 1999, $131,000 of such amount had been spent.
Net cash provided by financing activities was $444,000 for the six months
ended June 30, 1999, $841,000 for 1998 and $1.1 million for 1997. Net cash
provided by financing activities for 1998 and 1997 was affected by higher
levels of borrowings under our credit facility with our principal stockholder
and for 1997 was affected by a capital contribution of $316,000 from our
principal stockholder. During 1999, we expect to spend approximately $150,000
under capital leases for a switching platform. Through June 30, 1999, payments
on capital leases totaled $58,000
We currently anticipate that the net proceeds of this offering, together
with our available funds, will be sufficient to meet our anticipated needs for
working capital and capital expenditures through at least the next 18 months.
We may need to raise additional funds prior to the expiration of such period
if, for example, we pursue business or technology acquisitions or experience
operating losses that exceed our current expectations. If we raise additional
funds through the issuance of equity, equity-related or debt securities, such
securities may have rights, preferences or privileges senior to those of the
rights of our common stock and our stockholders may experience additional
dilution. We cannot be certain that additional financing will be available to
us on favorable terms when required, or at all.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), which requires disclosure of total comprehensive income in interim and
annual financial statements. We adopted SFAS 130 during 1998. There were no
items of other comprehensive income for the six months ended June 30, 1999 or
for 1998 and 1997.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"), which requires disclosure by
public companies of information related to a company's operating segments, as
defined. We have adopted SFAS 131 for 1998.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. This pronouncement identifies the characteristics of internal
use software and provides guidance on new cost recognition principles. SOP 98-1
is effective for fiscal years beginning after December 15, 1998. SOP 98-1 is
not expected to have a material impact on our results of operations, financial
position or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Similar
Financial Instruments and for Hedging Activities" ("SFAS 133"), which provides
a comprehensive and consistent standard for the recognition and measurement of
derivative and hedging activities. We will be required to adopt SFAS 133 at the
beginning of fiscal 2001. We have not yet assessed the impact SFAS 133 will
have on our results of operation, financial position or cash flows. However, we
currently have no derivatives or financial instruments that would be impacted
by SFAS 133.
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Year 2000
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. We use software, computer technology and other services internally
developed and provided by third-party vendors that may fail due to the year
2000 phenomenon. For example, we are dependent on the financial institutions
involved in processing our customers' credit card payments for Internet
services and third parties that provide our Internet access. We are also
dependent on telecommunications and Internet vendors to maintain our network.
We are in the process of reviewing the year 2000 compliance of our
internally developed proprietary software. This review has included testing to
determine how our systems will function at and beyond the year 2000. We expect
to complete these tests during the third quarter of 1999. Since inception, we
have internally developed substantially all of the systems for the operation of
our Web site. These systems include the software used to provide our Web site's
search, customer interaction, and transaction-processing and delivery
functions, as well as monitoring and back-up capabilities. Based upon our
assessment to date, we believe that our internally developed proprietary
software is year 2000 compliant.
We are currently assessing the year 2000 readiness of our third-party
supplied software, computer technology and other services, which include
software used in accounting, database and security systems. The failure of such
software or systems to be year 2000 compliant could have a material negative
impact on our corporate accounting functions and the operation of our Web site.
As part of the assessment of the year 2000 compliance of these systems, we have
sought assurances from these vendors that their software, computer technology
and other services are year 2000 compliant. We have expensed amounts incurred
in connection with year 2000 assessment since our formation through June 30,
1999. Such amounts have not been material. We expect this assessment process to
be completed during the third quarter of 1999. Based upon the results of this
assessment, we will develop and implement, if necessary, a remediation plan
with respect to third-party software, third-party vendors and computer
technology and services that may fail to be year 2000 compliant. We expect to
complete any required remediation during the third quarter of 1999. At this
time, the expenses associated with this assessment and potential remediation
plan that may be incurred in the future cannot be determined; therefore, we
have not developed a budget for these expenses. The failure of our software and
computer systems and of our third-party suppliers to be year 2000 complaint
would have a material adverse effect on us.
We are also contacting all of our credit card processing companies, Internet
service providers, local terminating parties and long distance carriers to
determine their year 2000 compliance. We are requiring evidence from each of
these companies regarding the level of their year 2000 readiness and
compliance. Once received, we will conduct selected tests to confirm their year
2000 readiness.
The year 2000 readiness of the general infrastructure necessary to support
our operations is difficult to assess. For instance, we depend on the integrity
and stability of the Internet to provide our services. We also depend on the
year 2000 compliance of the computer systems and financial services used by
consumers. Thus, the infrastructure necessary to support our operations
consists of a network of computers and telecommunications systems located
throughout the world and operated by numerous unrelated entities and
individuals, none of which has the ability to control or manage the potential
year 2000 issues that may impact the entire infrastructure. Our ability to
assess the reliability of this infrastructure is limited and relies solely on
generally available news reports, surveys and comparable industry data. Based
on these sources, we believe most entities and individuals that rely
significantly on the Internet are carefully reviewing and attempting to
remediate issues relating to year 2000 compliance, but it is not possible to
predict whether these efforts will be successful in reducing or eliminating the
potential negative impact of year 2000 issues. A significant disruption in the
ability of consumers to reliably access the Internet or portions of it or to
use their credit cards would have an adverse effect on demand for our services
and would have a material adverse effect on us.
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At this time, we have not yet developed a contingency plan to address
situations that may result if our vendors or we are unable to achieve year 2000
compliance because we currently do not believe that such a plan is necessary.
The cost of developing and implementing such a plan, if necessary, could be
material. Any failure of our material systems, our vendors' material systems or
the Internet to be year 2000 compliant could have material adverse consequences
for us. Such consequences could include difficulties in operating our Web site
effectively, taking product orders, making product deliveries or conducting
other fundamental parts of our business.
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BUSINESS
We are an international Internet telephony company. We sell virtual prepaid
calling cards through our interactive and easy to use Web site and transmit
long distance calls at discounted rates through our Internet and traditional
networks. We advertise, sell and deliver our virtual calling cards worldwide
exclusively through the Internet.
We incorporated in Texas in October 1996. We plan to reincorporate in
Delaware prior to the closing of this offering.
Industry Overview
Emergence of Internet Telephony. Internet telephony has emerged as a low
cost alternative to traditional long distance telephony. Internet telephone
calls are less expensive than traditional international long distance calls
primarily because these calls are routed over the Internet. The use of the
Internet bypasses a significant portion of international long distance networks
and the relevant tariffs. Also, routing calls over the Internet is more cost-
effective than routing calls over traditional circuit-switched networks,
because the packet-switching technology that enables Internet telephony is more
efficient than traditional circuit-switched voice technology. Packet-based
networks, unlike circuit-based networks, do not require a fixed amount of
bandwidth to be reserved for each call. This allows voice and data calls to be
pooled, which means that packet networks can carry more calls with the same
amount of bandwidth. This greater efficiency creates network cost savings that
can be passed on to the consumer in the form of lower long distance rates.
Problems of Existing Internet Telephony. The growth of Internet telephony
has been limited to date due to poor sound quality attributable to
technological issues such as delays in packet transmission and bandwidth
limitations related to Internet network capacity and local access constraints.
However, recent improvements in packet-switching and compression technology,
new software algorithms and improved hardware have substantially reduced delays
in packet transmissions. In addition, the use of private networks to transmit
calls as an alternative to the public Internet is helping to alleviate capacity
constraints.
Several large long distance carriers, including AT&T and Sprint, have
announced Internet telephony service offerings. However, many of these service
offerings have not been deployed on a large scale. Many also require users to
purchase other telecommunications services or allow only domestic calling.
Smaller Internet telephony service providers also offer low-cost Internet
telephony services from personal computers to telephones and from telephones to
telephones. We also believe that existing Internet telephony service providers
rely upon technologies and systems that lack large-scale billing, network
management and monitoring systems, and customer service capabilities required
for the integration of voice communication into the Web.
In addition, many other companies currently provide Internet telephony
software and services that allow Internet telephone calls to be made between
personal computers. However, most of these companies require both the initiator
and the recipient of the call to have the same software installed on their
personal computers and to be online at the same time.
Prepaid Calling Card Industry. The prepaid calling card industry has
experienced significant growth since 1993. This growth is attributed to three
trends according to industry sources. First, the larger telecommunications
companies have come to understand the strategic and financial benefits of
prepaid calling cards. Second, consumers are becoming more aware of various
advantages of prepaid cards. Third, businesses are beginning to purchase
prepaids as a means of controlling telephony costs and simplifying record
keeping. We believe that the affordable pricing, convenience and enhanced
features of prepaid calling cards has attracted price sensitive customers,
business travelers, international callers and other users of long distance
service. Also, while prepaid calling cards are relatively new in the United
States, they have been a widely used and accepted method of making telephone
calls in Europe and Asia since the 1970's.
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Problems with Traditional Prepaid Calling Card Industry. Manufacturers of
traditional prepaid long distance calling cards face numerous issues and costs.
These include costs associated with physical production of the actual cards,
security issues and costs to prevent theft during storage and transport, and
inventory costs to maintain cards at potentially numerous physical locations.
Manufacturers must also establish and maintain a retail distribution network.
Traditional prepaid long distance calling cards are typically sold through
multiple retail outlets familiar to consumers. These outlets include grocery
stores, convenience stores, discount retail stores, gas stations and stores
targeting resident nationals from other countries. The typical arrangement to
induce a retailer to carry prepaid cards in stores or in dispensing machines
involves providing the retailer with an inventory on consignment and allowing
the retailer a substantial commission on the sale of each card, thus adding
additional costs for the manufacturer.
We also believe that manufacturers using traditional store-based retailers
face a number of challenges in providing a satisfying combination of products
to its customers, including:
. the number of prepaid cards and the variety available is constrained by
the limited shelf space available in the retail outlet, thereby limiting
selection for consumers;
. security issues for this type of inventory are a disincentive to many
traditional store-based retailers;
. due to the cost of carrying inventory in multiple store locations,
traditional store-based retailers focus their product selection on the
most popular products that produce the highest inventory turns, thereby
further limiting consumer selection; and
. the ability to make sales is limited to the hours the traditional store-
based retailers are open for business.
In addition, we believe that many consumers find the shopping experience to
be time-consuming, inconvenient and unpleasant due to factors such as location,
store layout, product selection, level of customer service and the
inconvenience of having to leave home to purchase something that can be sold
and delivered another way.
WorldQuest Networks Solution
Internet Telephony. We believe we provide a superior international telephony
service. All of our calls are made from phone-to-phone over our network of
leased dedicated international and local long distance lines or over our
Internet network using Internet gateways. There is virtually no difference
between the voice quality of our Internet carried calls and international
telephone calls carried over traditional telephone lines and our customers do
not experience transmission delays experienced with earlier Internet telephony.
We believe consumers are more familiar and comfortable with telephones to make
calls, as opposed to computers. Also, it is not necessary to have special
hardware or software on a personal computer to make calls using our network.
Once we have electronically issued a virtual calling card and a toll free
access number to a customer, it is not necessary to have a personal computer to
make a call from the United States to other countries. For calls from other
countries to the United States or another country, a standard personal computer
with access to the Internet is used to communicate with our Web site to
initiate a call and then the call is completed by our calling platform phone-
to-phone. We are focusing our marketing efforts on developing countries that
have high international long distance rates and significant calling traffic to
the United States or other countries.
Prepaid Virtual Calling Cards. We believe our e-commerce solution provides
consumers with a wide range of product choice and a superior shopping
experience. We market, sell and deliver our prepaid virtual calling cards
worldwide exclusively over the Internet within seconds of the customer's
decision to buy. We deliver virtual cards to our customers electronically
through our Web site once the electronic purchase has been completed. This
allows our customers to use them immediately to place long distance calls. It
allows us to avoid the cost of physically printing, storing, safeguarding and
delivering actual calling cards. We also avoid the necessity of negotiating
with and maintaining a retail distributor network to sell and distribute our
cards.
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Our virtual calling cards give us the flexibility of promptly changing the
rates and features to respond to changing consumer demand, rather than having
an inventory of physical cards with set features that cannot be changed until
all are recalled or used. This also allows us to offer and test several
different types of virtual calling cards with varying pricing features, thus
providing a greater selection to our customers.
Our Web site is accessible 24 hours per day, seven days a week, so we are
not constrained by the hours that a retail store would be open for business.
Our Web site may also be reached from the customer's home or office. The
customer is not required to physically travel to another location to make a
purchase and receive delivery. Our online purchasing and delivery also allows
us to deliver a broad selection of products to customers worldwide in rural or
other locations that do not have convenient access to physical stores.
Business Strategy
Our goal is to be a leading worldwide Internet telephony company. Our
objective is to increase our revenues through increasing our customer base and
the number of countries we access through our Internet network. The strategy to
achieve our goal and take advantage of market opportunities includes:
Identify Target Countries and Customer Groups. Our strategy is to provide
international long distance service to and from countries which have high
numbers of international long distance calls. We also target countries that
have high international long distance rates, which normally means full
deregulation has not yet occurred. We determine these countries through
research of publicly available international long distance calling patterns and
other sources.
Advertise on Web Sites and Portals Frequented by Target Groups. Once we have
identified a desired country and customer group, we research Web sites and
portals frequently visited by this customer group in the United States and
abroad. When a desirable Web site or portal has been found, we negotiate our
advertising arrangement and place a banner ad on the Web site which connects
directly to our Web site (www.wqn.com) when "clicked" by the customer. By
advertising in this way, we do not need physical retail sites to store and
display calling cards. The use of banner advertising on Internet Web sites and
portals allows us great flexibility in marketing. Banners can be changed easily
and quickly to feature new rates, seasonal specials, new art work and new
destinations. We placed our first banner ad on another Web site in April 1998
and currently have banner ads on nine Web sites.
Increase Our Name Recognition. We believe that brand name recognition is an
important component of customer loyalty. Our goal is for our Web site to be a
preferred Internet destination of choice for international long distance
telephone customers. We plan to increase our name and product recognition
through increased advertising on other Web sites and portals, direct e-mail
marketing to e-mail lists of our Internet service providers and other select
mailing lists, e-mail communications with our customer base and other
promotional activities.
Place Internet Gateways in Countries Currently Served and in Additional
Countries. Our future profitability is based in large part on our ability to
transmit our customers' international long distance telephone calls on a cost
effective basis over the Internet. We intend to place additional Internet
gateways in certain countries currently served and in additional countries. By
extending our Internet network, we expect to be able to lower our transmission
costs for international long distance calls.
Continue to Offer Enhanced Services and Products. We offer a selection of
virtual cards targeted with special rates for various international markets. We
intend to develop and offer additional products and services that complement
our existing products and services. We will evaluate and test these new
products and services and introduce them when we believe they will be accepted
by customers.
Promote Repeat Purchases. We are focused on promoting customer loyalty,
building repeat purchase relationships with our customers, leveraging our
customer acquisition costs and maximizing the lifetime value
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of our customer relationships. As our customer base grows, we continue to
collect significant data about our customers' buying preferences and habits in
an effort to increase repeat purchases by existing customers. We intend to
maximize the value of this information by delivering meaningful information and
special offers to our customers via e-mail and other means. From inception
through June 30, 1999, we had sold virtual calling cards purchased with
approximately 35,500 separately identifiable credit cards. Of these separately
identifiable credit cards, 15,897 had made more than two repeat purchases,
4,467 had made more than 10,894 had made more than 25, and 161 had made more
than 50 repeat purchases.
Focus on Convenience. We believe the most successful Internet Web sites are
those which allow a customer to complete the purchase transaction while
connected to the Web site. Our "buy it now, use it now" approach to our product
marketing permits the customer to make a purchase and begin using the product
within two to three minutes depending on the speed of the customer's Internet
connection.
Our Telephone Service Products
We sell virtual prepaid calling cards over the Internet. They are virtual
because we do not issue a physical card. Rather, we electronically issue a
personal identification number, or PIN, to the customer when the electronic
purchase transaction is completed. Once sold, the virtual calling card can be
used immediately to make international and domestic long distance calls. During
the first quarter of 1999, on average, 53.1% of the minutes purchased on our
virtual calling cards were used within three days of purchase, 85.1% within 13
days and 94.7% within 30 days. We believe this rapid use and the convenience of
our Web site and our "buy it now, use it now" capability fosters repeat
purchases and repeat customers.
Our system functions as follows. A potential customer accesses our Web site
follows the prompts to enter the credit card information to purchase the
virtual calling card, we verify the credit card within seconds and the
confidential PIN and a toll free number is displayed for the customer to
record, and the virtual calling card can be used immediately to place a call.
The customer information becomes part of our data base for future reference.
U.S. Access. Our U.S. Access virtual calling cards provide access to our
network for calls from the United States to more than 241 countries and
territories. When using the U.S. Access virtual calling card for a call from
the United States to another country, the customer uses a touch tone telephone
to dial a toll free number and enters the PIN and the telephone number the
customer seeks to reach. Our enhanced services platform determines the virtual
calling card is valid and the number of call minutes remaining on it, based on
the rate for the country being called. The platform then completes the call and
reduces the available credit balance on the virtual calling card at the
conclusion of the call.
World Access. When using the World Access virtual calling card for a call
from another country to the United States or from country to country outside
the United States, the customer initiates the call through the Internet by
accessing our Web site and going to the world access page. On this page, a
virtual card is displayed and the customer enters the telephone number where he
or she is, the telephone number he or she wants to call and his or her PIN and
then "clicks" on the call button. This information is transmitted over the
Internet to our platform. The platform determines the virtual calling card is
valid and has a sufficient balance and then routes a call to the customer at
the number where he or she is. When the customer answers, the platform
completes the call by connecting to the number the customer wanted to call.
This feature allows customers to make calls from anywhere in the world at our
international United States long distance rates using the virtual calling card
and Internet access to our Web site and platform.
In certain countries where we have an Internet gateway, we can e-mail to
customers a local telephone number to dial. This number connects to our
platform the same as if the toll free number in the United States had been
dialed and the process is the same from that point. This feature allows a
customer to place a call from that country to the United States or another
country with a touch tone telephone and without the need for Internet access to
our Web site and platform. These calls are also at our international United
States long distance rates.
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Phone Collect. Another service we have recently launched and intend to make
available in the fourth quarter of 1999 is our Phone Collect service. While on
our Web site and after going to the Phone Collect page, a customer will be able
to enter his or her name and address and we will issue a Phone Collect PIN
without charge. The customer will then be able to enter his or her PIN and the
telephone number where he or she is and "click" on the call button. This
information will be transmitted over the Internet to our platform. Our platform
will dial a United States operator service company and route a call to the
customer at the number where he or she is. When the customer answers, he or she
will have a connection to a United States operator and can place a collect or
operator assisted call. We will be paid by the United States operator service
company for the call.
Intelligent Address Book and Calendar. Another new service we have developed
and intend to make available on our Web site in the fourth quarter of 1999 is
our Intelligent Address Book and Calendar. The Intelligent Address Book and
Calendar is an electronic address book with names, telephone numbers and
scheduled events which will be maintained by us on our secure Web site. One
will be maintained free of charge for each approved customer. This service is
interactive so the customer can add and delete names, numbers and events. The
Intelligent Address Book and Calendar will enable an approved customer to make
an international long distance call or PC generated facsimile transmission from
any country to any other country at our international United States long
distance rates, by simply accessing our Web site and following the prompts to
the page for the Intelligent Address Book and Calendar for such customer,
selecting the number where the customer is located and then "clicking" the name
and number of the person to be called or to whom the facsimile transmission is
to be sent.
Resale of Virtual Calling Cards. We also buy virtual calling cards processed
through other companies' platforms. We buy them at a discount and sell them to
our customers on our Web site as our virtual calling cards. We sell these
virtual calling cards for calls from the United States to other countries where
we have not established our own Internet network and where our negotiated rates
with our international long distance carriers are not as favorable. We estimate
that approximately 70% of our revenues for the six months ended June 30, 1999
were generated from these virtual calling cards processed through other
companies' platforms. As we increase our infrastructure and negotiate better
rates with international carriers, it is expected that the resale of these
virtual calling cards will become a less significant part of our total
business.
Our International Networks
Our Enhanced Services Platform. Our enhanced services platform is a
specialized telephone switch. It is connected to our Web site and data base and
to our network of outgoing and incoming telephone lines and Internet lines. It
sets up all customer account and PIN information when a virtual calling card is
purchased and immediately activates the virtual calling card so it can be used
at the time of purchase. The platform also accepts and evaluates all calls from
virtual calling card holders over the toll free number and over the Internet
and confirms the validity of the virtual calling card and remaining balance. We
have also programmed into the platform a lowest cost routing matrix. This
matrix automatically routes each call over the route most economical to us.
This means it will select our international carrier with the lowest rate or the
Internet if we have a gateway in the call destination country. We believe our
platform can currently support approximately 288 simultaneous calls and over 4
million minutes of traffic per month. Our platform is expandable to carry more
traffic by adding additional telephone trunks and line cards. Focusing on the
international market, the use of our platform is spread throughout the day as a
result of the different world time zones. Many of our calls are routed during
night time in Dallas.
We plan to develop and offer new products and services which may require
modifications and enhancements to our platform. For any modification or
enhancement, we will either contract with the manufacturer to develop new
software or we may develop the software, or a combination of both. In the past,
we have experienced delays when we have tried to upgrade our platform. If the
software cannot be developed cost effectively, or there will be significant
delays, we may elect to abandon a potential product or service in favor of one
that can be timely developed on a cost effective basis. There can be no
assurance that we can successfully develop the software to enable us to offer
new products or services.
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Our Internet Gateway Network. We presently have international gateways
operational in Mexico and Indonesia, and expect to have gateways operational in
India and Sri Lanka by the end of September. We are negotiating for
installations in Brazil. We also have domestic gateways operational at our
offices in Dallas and at 60 Hudson Street in New York City. We intend to place
Internet gateways in various other countries. Before we place a gateway in
another country, we enter into contractual relationships with local persons or
entities to operate them. We typically own or lease the gateway or have the
right to purchase it and the local person or entity is responsible for
procuring local Internet provider connection and local telephone lines and
complying with local law. Our contracts with the local person or entity are
generally for a one year term and are renewable unless either party declines to
renew. We pay the local person or entity a negotiated rate per minute for
terminating or originating calls through the gateway.
Our gateways allow for voice quality transmission through the Internet. The
historical poor sound quality of Internet voice transmission is due to the
Internet not being created for simultaneous voice traffic. Unlike conventional
voice communication circuits, in which the entire circuit is reserved for a
call, Internet telephony uses packet switching technology, in which voice data
is divided into discrete packets that are transmitted over the Internet. These
packets must travel through several routers in order to reach their
destination, which may cause misrouting, and delays in transmission and
reception. The software in our gateways connect the packet switched data
transmitted over the Internet to circuit switched public telephone networks in
such a manner that virtually eliminates the delay in transmission normally
involved in Internet voice transmission and the resulting pause and echo
effect. We also select Internet service providers with Internet connections
that permit us to limit the delay between their Internet connections and ours
to less than 200 to 400 milliseconds. This also improves the voice quality of
our transmissions over the Internet.
Our Internet gateways enable us to route voice quality calls through our
enhanced server platform to and from the country via the public Internet or
private intranet networks such as a frame relay network. The cost of these
calls is based on the local telephone rates for the country where the gateway
is located. They are not based on international or local long distance rates.
During the six months ending June 30, 1999, approximately 25% of the minutes
transmitted through our platform were carried through our Internet gateway
network. As we add Internet gateways, we believe this percentage will increase.
Our Leased Lines Network. We also lease international telephone lines to
transmit calls. Our lease agreements obligate the carriers to terminate calls
routed by us to them at different rates for different countries and
territories. With these agreements, we have access to more than 241 countries
and territories. Leased capacity is typically obtained on a per-minute basis or
point-to-point fiscal cost basis. Our agreements are typically one year
agreements with 30-day cancellation rights by either party. Rates are adjusted
approximately every 30 days, are based on volume and our rates generally
decline as volume increases. We are dependent on these carriers to terminate
our calls, and the loss of one or more of them as a source for terminating
calls could have a material adverse affect on us. However, we believe there are
numerous international long distance carriers that transport calls to the
countries we desire to target and we believe we could replace any of the
carriers we lost. If the rates of any replacement carrier are higher, or our
existing carriers raise their rates, our profit margins would decrease. During
the six months ending June 30, 1999, approximately 75% of the minutes
transmitted through our platform were carried through our leased international
network. We also sell to other long distance carriers any excess line capacity
we have. Excess line capacity is the remaining capacity on our telephone lines
not used by us to terminate our own calls during any given month.
Credit Card Processing Arrangements
All sales of our virtual calling cards are made over the Internet through
credit card purchases. We use credit card processing companies to verify credit
cards. These companies are connected to our platform and data base and
verification or denial is usually accomplished within seconds. We pay these
processing
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companies a percentage of sales as their fee. Until May 1999, our former credit
card processing company restricted the amount of credit card purchases that
could be made from us per month. That company also would not allow purchases
with non United States issued credit cards. These restrictions prevented us
from increasing our sales as rapidly as desired. In May 1999, we began
processing with a new processing company which sets no limit on our monthly
credit card sales and agreed to accept purchases with non United States issued
credit cards. These changes will allow us to aggressively seek to increase our
sales, and will open our market for non United States purchased virtual calling
cards. We plan to use a portion of the proceeds of this offering to further
increase our allowed base for credit card sales by increasing the deposits we
maintain with our processing companies. We believe these developments may have
a positive effect on sales in the near-term.
Sales and Marketing
We have developed a marketing strategy based on increasing customer traffic
to our Web site and strengthening our brand name.
Internet Advertising. We have taken a selective approach in our advertising
strategy. We attempt to maximize the return from promotional expenditures by
choosing advertising media based on the cost relative to the likely audience
and ability to generate increased traffic for our Web site. We identify a
country and customer group to whom we desire to market our virtual calling
cards.
We place advertisements on various Web sites frequently visited by this
customer group in the United States and abroad. These advertisements usually
take the form of banner ads that encourage readers to click through directly to
our Web site.
We also advertise on Internet portals. An Internet portal is a super Web
site with search engines and multiple services available to site visitors. We
believe that placing banner advertising on these and other portals may
significantly increase our targeted exposure to prospective customers and
increase our name identity.
Customer Electronic Mail Broadcasts. We actively market to our base of
customers through e-mail broadcasts. All new virtual calling card purchasers
are automatically added to our electronic mailing list, which consists of over
36,800 prior purchasers and Internet customers of our local Internet service
providers in other countries. We currently send more than 5,000 e-mail messages
each month announcing new rates, new countries, new products and new features.
Electronic Mail to Select Mailing Lists. We also plan to deliver e-mail
broadcasts to certain select mailing lists from time to time announcing
pertinent information, including the addition of a new country, new products
and rates.
Other Methods. We will continually review other potential cost-effective
methods of advertising and marketing our products and services through the
Internet. Such methods may include the use of an affiliate program, chat rooms,
video e-mail and other methods.
Customer Support and Service
We believe that our ability to establish and maintain long-term
relationships with our customers and encourage repeat purchases is dependent,
in part, on the strength of our customer support and service operations and
staff. Our customer support and service personnel are available from 9:00 a.m.
to 5:00 p.m. Central Time, five days a week to provide assistance via e-mail or
telephone. They are responsible for handling all customer inquiries.
We provide pre- and post-sales support via both e-mail and telephone service
during business hours. If a customer has encountered a problem in ordering or
using our products, our customer service department will take the call, or the
e-mail, and respond immediately. If the virtual calling card is from our own
inventory and
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operates on our enhanced services platform, problems can be resolved
immediately and always within one business day. For virtual calling cards that
we sell as a reseller, directing traffic through someone else's switch, we are
able to respond to the customer immediately but resolution of the matter may
take up to two business days.
Our Web site has been designed around industry standard architectures to
reduce downtime in the event of outages or catastrophic occurrences. Our Web
site provides 24 hour a day, seven day a week availability. Our Web site
operations staff consists of systems administrators who manage, monitor and
operate our Web site. The continued uninterrupted operation of our Web site is
essential to our business, and it is the job of the site operations staff to
ensure, to the greatest extent possible, the reliability of our Web site. We
provide our own connection to the Internet through MCI Worldcom/UUNET's
backbone and through SAVVIS's backbone. We believe that these
telecommunications and Internet service facilities are essential to our
operation and we anticipate upgrading these facilities as volume and demand for
our services grow.
Technology
We use a combination of our own proprietary software applications and
commercially available licensed technology to conduct our Internet and
telephone routing operations.
Proprietary Technology. We have developed proprietary customer software
which permits a customer to purchase a virtual calling card on our Web site
using a credit card and to have the virtual calling card delivered while on our
Web site. We have also developed proprietary customer software to allow our
world access virtual calling cards and phone collect PINs to initiate calls
through regular telephone lines using our Web site and enhanced services
platform, and we have developed various proprietary credit and fraud management
applications which aid us in checking credit and limiting fraudulent
transactions.
Our engineering staff consists of three software development engineers and
consultants. We historically have developed and expect to continue to develop
proprietary software internally. Our engineering strategy focuses on the
development of our Web site, which includes the enhancement of features and
functionality of our existing software components, the development of
additional new software components, and the integration of off-the-shelf
components into our systems.
Commercially Available Licensed Technology. Our strategy has also been to
license commercially available technology whenever possible rather than seek a
custom-made or internally-developed solution. We believe that this strategy
enables us to reduce our operating costs and to respond to changing demands due
to growth and technological shifts. This strategy also allows us to focus our
development efforts on creating and enhancing the specialized, proprietary
software applications that are unique to our business. Listed below are some of
our key architectural components:
. High speed links to the Internet through MCI Worldcom/UUNET's and
SAVVIS's backbones;
. Dell 2300 and 4300 Servers for Web and data base application running
Windows NT and Oracle;
. Microsoft Internet Information Server 4.0 has been chosen for its
ability to secure sensitive customer information through SSL encryption;
and
. Oracle 8i and Microsoft SQL Servers are the relational database
providers. All customer names and addresses, PINs, number of purchases
and call records are stored within these data bases.
Government Regulation
Regulation of the Internet. The United States Congress and the Federal
courts have taken actions that, in some cases impose some forms of regulation
on the Internet, and in other cases protect the Internet from regulation. For
example, Congress has recently adopted legislation that regulates certain
aspects of the Internet. This includes restrictions on some forms of content.
These regulations have had mixed success in the Federal
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courts. The Supreme Court has struck down some restrictions on indecent
content, but has upheld other restrictions on harassing Internet messages.
Conversely, Congress last year passed legislation that imposes a moratorium on
the imposition of new taxes on internet transactions for three years. At the
same time, numerous new bills have been proposed that would further regulate
various aspects of Internet commerce, and ensure the continued deregulation of
others. It is impossible to say at this time whether and to what extent the
Internet may ultimately be regulated by the United States government.
The European Union has also enacted several directives relating to the
Internet, one of which addresses online commerce. As with the United States
Congress, the European Union, and the governments of individual foreign
countries, are actively considering proposed legislation that could result in
new regulations on the Internet. Increased regulation of the Internet may
decrease its growth, which may negatively impact the cost of doing business via
the Internet or otherwise materially adversely affect our business, results of
operations and financial condition. In addition, applicability to the Internet
of existing laws governing issues such as property ownership, copyrights and
other intellectual property issues, taxation, libel, obscenity and personal
privacy is uncertain. The vast majority of such laws were adopted prior to the
advent of the Internet and related technologies. As a result, these laws do not
contemplate or address the unique issues of the Internet and related
technologies.
Potential Regulation of Internet Telephony. To our knowledge, there are
currently no domestic and few international laws or regulations that prohibit
the transmission of voice communications over the Internet. If Congress, the
FCC, state regulatory agencies or governments of other countries impose
substantial regulations relating to Internet telephony, the growth of our
business could be adversely affected. In the United States, several efforts
have been made to enact federal legislation that would either regulate or
exempt from regulation telecommunication services provided over the Internet.
State public utility commissions may also attempt to regulate the provision of
intrastate Internet telephony services. In late 1998 and early 1999, however,
the FCC issued two decisions that suggest that all transmissions over the
Internet may be jurisdictionally interstate, and these decisions may restrict
the ability of state public utility commissions to regulate Internet telephony.
Internationally, a number of countries that currently prohibit competition in
the provision of voice telephony have also prohibited Internet telephony. Other
countries permit but regulate Internet telephony.
On April 10, 1998, the FCC issued a Report to Congress concerning its
implementation of the universal service provisions of the Telecommunications
Act. In the Report, the FCC indicated that it would examine the question of
whether any forms of "phone-to-phone" Internet Protocol telephony are
information services, which are unregulated, or telecommunications services,
which are fully regulated. The Report noted that the FCC did not have, as of
the date of the Report, an adequate record on which to make any definitive
pronouncements. The FCC did, however, note that the record before it suggested
that some forms of phone-to-phone Internet telephony appear to have the same
functionality as non-Internet Protocol telecommunications services.
While the FCC found that it needed a more complete record to establish new
rules, it tentatively concluded that providers of phone-to-phone Internet
telephony services should be treated like other providers of telephone service.
This means that they should be required to make payments into Federal universal
service subsidy programs. To date, the FCC has taken no further action, and has
not imposed this obligation on Internet telephony providers. It may do so at
some time in the future, however, and such a decision could have a material
adverse effect on our business, increasing our costs, and the price at which we
can offer our Internet telephony services.
State Laws. Several states have also proposed legislation that would limit
the uses of personal user information gathered online or require online
services to establish privacy policies. Changes to existing laws or the passage
of new laws intended to address these issues could reduce demand for our
services or increase the cost of doing business. In addition, because our
services are accessible worldwide, and we facilitate the sale of goods to users
worldwide, other jurisdictions may claim that we are required to comply with
their laws. We are qualified to do business in Delaware and Texas only, and
failure by us to qualify as a foreign corporation in a
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jurisdiction where we are required to do so could subject us to taxes and
penalties for the failure to qualify and could result in our inability to
enforce contracts in such jurisdictions. Any such new legislation or
regulation, or the application of laws or regulations from jurisdictions whose
laws do not currently apply to our business, could have a material adverse
effect on our business, financial condition and operating results.
Sales Taxes. We do not currently collect sales or other similar taxes for
virtual calling cards or other services sold through our Web site, other than
for virtual calling cards sold to Texas residents. However, one or more states
may seek to impose sales tax or similar collection obligations on out-of-state
companies, such as ours, which engage in Internet commerce. A number of
proposals have been made at the state and local level that would impose
additional taxes on the sale of goods and services through the Internet. Such
proposals, if adopted, could substantially impair the growth of online
commerce, and could adversely affect our opportunity to derive financial
benefit from such activities. Moreover, a successful assertion by one or more
states or any foreign country that we should collect sales or other taxes on
the sale of virtual calling cards or services on our system could have a
material adverse effect on our operations.
Legislation imposing a moratorium on the ability of states to impose taxes
on Internet-based transactions was passed by the United States Congress last
year. The tax moratorium will be in effect only for three years. The same
legislation that imposed the moratorium also established an Advisory Commission
to consider methods by which states could impose sales taxes on Internet
transactions. If the moratorium expires at the end of its three-year term,
there can be no assurance that the moratorium will be renewed at the end of
such period. Failure to renew the moratorium could allow various states to
impose taxes on Internet-based commerce. The imposition of such taxes could
have a material adverse effect on our business, financial condition and
operating results.
Competition
With respect to prepaid calling cards, we compete with many of the largest
telecommunications providers, including AT&T, MCI WorldCom, Cable & Wireless
and Sprint. These companies are substantially larger and have greater
financial, technical, engineering, personnel and marketing resources, longer
operating histories, greater name recognition and larger customer bases than we
do. We also compete with smaller, emerging carriers in the prepaid calling card
market, including PT-1 Communications, Inc., RSL Communications, IDT Corp.,
SmarTalk Teleservices, Inc., Pacific Gateway Exchange, Inc., FaciliCom
International, LLC and Telegroup, Inc. We may also compete with large operators
in other countries. These companies may have larger, more established customer
bases and other competitive advantages. Deregulation in other countries could
also result in significant rate reductions. We believe that additional
competitors will be attracted to the prepaid card market. These competitors
include Internet-based service providers and other telecommunications
companies. Competition from existing or new competitors could substantially
reduce our revenues from the sale of these cards. A general decrease in
telecommunication rates charged by international long distance carriers could
also have a negative effect on our operations.
An increasing number of large, well-capitalized companies are entering the
market for Internet telephony products and services. As a result, we may not be
able to compete effectively with our competitors in this market, or to increase
our customer base. Various major long distance providers, including AT&T, Bell
Atlantic Corporation and Deutsche Telekom AG, as well as other major companies,
including Motorola, Inc., Intel Corporation and Netscape Communications
Corporation, have all entered or plan to enter the Internet telephony market,
in some cases by investing in companies engaged in the development of Internet
telephony products. Our competitors also include a number of companies that
have introduced services that make Internet telephony solutions available to
businesses and consumers. Net2Phone, Delta Three, ITXC Corp. and OzEmail
Limited, which was recently acquired by MCI WorldCom, provide a range of
Internet telephony services to consumers and businesses that are similar to the
ones we offer. Several companies, including industry leaders, including AT&T,
Sprint and Qwest Communications, have announced their intention to offer these
services on a wider basis in both the United States and internationally.
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In addition, we compete in the market for Internet telephony services with
companies that produce software and other computer equipment that may be
installed on a user's computer to permit voice communications over the
Internet. Current Internet telephony products include VocalTec Communications,
Ltd.'s Internet Phone, QuarterDeck Corporation's WebPhone and Microsoft's
NetMeeting. Also, a number of large companies, including Cisco Systems, Inc.,
Lucent Technologies, Inc., Northern Telecom Limited, Neura Communications and
Dialogic Corp. offer or plan to offer server-based Internet telephony products.
These products are expected to allow communications over the Internet between
parties using a multimedia PC and a telephone and between two parties using
telephones.
We believe that the principal competitive factors affecting our market in no
particular order are:
. price and rates;
. quality of transmission;
. product accessability and ease of use;
. customer service;
. brand recognition;
. Web site convenience and accessibility;
. targeted marketing directly to probable users of the services;
. quality of search tools; and
. system reliability.
Increased competition may result in reduced operating margins, loss of
market share and diminished value in our brand. We cannot assure you that we
will be able to compete successfully against current and future competitors. As
a strategic response to changes in the competitive environment, we may, from
time to time, make certain pricing, service or marketing decisions that could
have a material adverse effect on our business, financial condition and
operating results.
New technologies and the expansion of existing technologies may increase
competitive pressures by enabling our competitors to offer lower-cost services.
Certain Web-based applications that direct Internet traffic to other Web sites
may channel users to services that compete with us. In addition, companies that
control access to transactions through network access or Web browsers could
promote our competitors or charge us substantial fees for inclusion. The
occurrence of any of these events could have a material adverse effect on our
business, financial condition and operating results.
Intellectual Property and Other Proprietary Rights
Our success depends in part upon our ability to protect our proprietary
technology and other intellectual property rights. We rely on a combination of
copyright, trademark, service mark and trade secret laws and contractual
restrictions to establish and protect our proprietary rights in our products
and services. We protect our proprietary software through United States
copyright laws, and the source code for our proprietary software is protected
under trade secret laws. In December 1996, we applied to the United States
Patent and Trademark Office to register the trademarks: "WorldQuest" and
"WorldQuest Networks." In April 1999, the Patent and Trademark Office granted
us a notice of allowance for "WorldQuest" for communication services, both
voice and facsimile transmissions. All that is required for us to receive a
registered trademark for "WorldQuest" is to file an affidavit of use with the
Patent and Trademark Office, which we intend to do in September 1999. In
October 1997, the Patent and Trademark Office issued a notice of publication
regarding our application to register "WorldQuest Networks" as a trademark. In
response to that notice, Qwest Communications filed a notice of opposition in
September 1998, which is currently pending before the Patent and Trademark
Office, and currently scheduled for submission and determination of a ruling in
July 2000. If we do not prevail, we will not be able to obtain a registered
trademark for "WorldQuest Networks" and we could be required to stop
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using the name or pay a fee to Qwest for permission to use it. Any trademark
may be challenged for a period of six years after its registration date. Thus,
we could also face a cancellation proceeding with the Patent and Trademark
Office relating to our trademark for "WorldQuest." Effective trademark, service
mark, copyright and trade secret protection may not be available in every
country in which our services are made available online, and thus, the steps
that we take may be inadequate to protect our rights. We cannot assure you that
we will be issued any of these trademarks and may find that such marks are
unavailable.
We currently hold various Internet domain names relating to our operations,
including "wqn.com," "creditcardphone.com" and "phonecollect.com." Governmental
agencies and their designees are responsible for regulating the acquisition and
maintenance of domain names. For example, the National Science Foundation has
appointed Network Solutions, Inc. as the current exclusive registrar for the
".com," ".net" and ".org" generic top-level domains in the United States. The
regulation of domain names in the United States and other countries may change
in the near future. Such changes in the United States are expected to include a
transition from the current system to a system that is controlled by a non-
profit corporation and the creation of additional top-level domains. Governing
bodies may establish additional top-level domain name registrars or modify the
requirements for holding domain names. As a result, we may be unable to acquire
or maintain relevant domain names in countries in which we conduct business.
Furthermore, the relationship between regulations governing domain names and
laws protecting trademarks and similar proprietary rights is unclear.
Therefore, we may be unable to prevent third parties from acquiring domain
names that are similar to, infringe upon or otherwise decrease the value of our
trademarks and other proprietary rights.
We have entered into confidentiality and assignment agreements with our
employees and contractors, and nondisclosure agreements with parties with whom
we conduct business. We do this in order to limit access to and disclosure of
our proprietary information. These agreements are designed to make it clear
that we own any technology developed by our employees and contractors during
their engagement by us and to protect us against unauthorized disclosure of our
proprietary information. We cannot assure you that these contractual
arrangements or the other steps taken by us to protect our intellectual
property will prove sufficient. To date, we have not actively policed
unauthorized use of our technology. This is because the global nature of the
Internet makes it difficult to control the ultimate destination or security of
software or other data transmitted.
In the future, we may license certain of our proprietary rights to third
parties. While we will attempt to ensure that the quality of the WorldQuest
Networks' brand is maintained by such licensees, we cannot assure you that such
licensees will not take actions that might materially adversely affect the
value of our proprietary rights or reputation, and have a material adverse
effect on our business, financial condition and operating results. We also rely
on certain technologies that we license from third parties. These may include
suppliers of key database technology, enhanced services platforms, gateway
server platforms, operating systems and specific hardware components for our
service. We cannot assure you that these third-party technology licenses will
continue to be available to us on commercially reasonable terms. The loss of
such technology could require us to obtain substitute technology of lower
quality or performance standards or at greater cost, which could materially
adversely affect our business, financial condition and operating results.
On July 9, 1999, we filed a patent application with the United States Patent
and Trademark office for the architecture of certain of our software
applications. These applications allow customers to Web initiate calls using
our world access virtual calling cards and to Web initiate collect calls using
our phone collect product.
Employees
As of July 31, 1999, we had 15 full-time employees. None of our employees
are represented by a labor union. We have not experienced any work stoppages
and consider our employee relations to be good.
Our future performance depends in significant part upon the continued
service of our key technical and senior management personnel, none of whom are
bound by an employee agreement requiring service for any defined period of
time. The loss of services of one or more of our key employees could have a
material adverse
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effect on our business, financial condition and operating results. Our future
success also depends in part upon our continued ability to attract, hire, train
and retain highly qualified technical and managerial personnel. Competition for
such personnel is intense and there can be no assurance that we can retain our
key personnel in the future.
Facilities
Our executive offices are presently located in Dallas, Texas, where we lease
approximately 3,298 square feet under a lease at a monthly rental of
approximately $5,500. The lease expires January 31, 2002. We believe our space
is adequate for our current needs. As we expand, we expect that suitable
additional space will be available on commercially reasonable terms, although
no assurance can be made in this regard. We also believe our property is
adequately covered by insurance.
Legal Proceedings
We occasionally become involved in litigation arising out of the normal
course of business. There are no material pending legal proceedings against us.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth the name, age as of July 31, 1999, and
position of all of our directors and executive officers:
<TABLE>
<CAPTION>
Directors and Executive
Officers Age Position
- ----------------------- --- --------
<S> <C> <C>
B. Michael Adler........ 52 Chairman of the Board and Chief Executive Officer
Michael R. Lanham....... 45 Director, President, Chief Operating Officer and Secretary
E. Denton Jones......... 48 Director
Hugh E. Humphrey, Jr.... 74 Director
Mark C. Levy............ 46 Chief Financial Officer and Treasurer
</TABLE>
B. Michael Adler is the founder of WorldQuest Networks and has been our
Chairman of the Board and Chief Executive Officer since our inception in 1996.
Mr. Adler is a director of Intellicall, Inc., a publicly traded manufacturer of
pay phones and call processing equipment (American Stock Exchange symbol
"ICL"). Mr. Adler founded Intellicall in 1984 and served as Chairman or Vice
Chairman of the Board from its inception until November 1993. For approximately
the last five years until July 1999, Mr. Adler was the Chairman of the Board of
The Payphone Company Limited, a company that installed and owns a wireless pay
phone network in Sri Lanka. For approximately the last four years, he has been
the Chief Executive Officer of Eagle Venture Capital, LLC, a Delaware limited
liability company, formerly known as WorldQuest Networks, LLC.
Michael R. Lanham joined WorldQuest Networks in December 1998 as a director
and the President and Chief Operating Officer. Mr. Lanham has been the acting
Chief Financial Officer since December 1998, and will be replaced by Mr. Levy
on July 19, 1999. From June 1997 to December 1998, he provided management
consulting services to Stratton Voice and Data, a telephone and data
integration company. Mr. Lanham was a member of the founding group of
MultiTechnology Services Corporation, a competitive local exchange carrier, and
served as Chief Executive Officer from May 1991 until June 1997.
E. Denton Jones has been Chairman of the Board and Chief Executive Officer
of New York City Telecommunications Company, Inc., a privately held
telecommunications company, since he co-founded it in June 1993. Mr. Jones has
been involved in the telecommunications industry since 1984 and owned or
operated several privately held telecommunications companies during that time
prior to co-founding New York City Telecommunications. These companies were
Altus Communications, Inc., MSC Services, Inc., MSC National, Inc. and NYLT,
Inc. (which was formerly known as New York Local Telephone, Inc.). He has been
a director of WorldQuest Networks since July 1999.
Hugh E. Humphrey, Jr. has been President, Chief Executive Officer and
Chairman of the Board of Algiers Bancorp, Inc., a publicly traded savings and
loan holding company based in New Orleans, Louisiana (trading symbol "ALGC"),
since 1996 and has been President since 1996 and Chief Executive Officer since
1984 of Algiers Homestead Association, the subsidiary of Algiers Bancorp, Inc.
He has been a director of WorldQuest Networks since 1996.
Mark C. Levy joined WorldQuest Networks in July 1999 as the Chief Financial
Officer and Treasurer. For the past five years before joining us, he was
engaged in financial management consulting services from September 1998 until
July 1999 for his own firm, Levy & Associates, was Vice President and
Controller from August 1996 until August 1998 of Darling International, Inc., a
recycling company, Vice President and Controller from April 1995 until August
1996 of Staffing Resources, Inc., a staffing services and consulting company,
and Vice President Financial Services from March 1993 until April 1995 of MBNA
Information Services, Inc., a credit card processing company.
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Board of Directors
Our Board of Directors currently has four members. Directors are elected
annually to serve until the next annual meeting of stockholders and until their
successors are elected and qualified, unless the Board is divided into classes.
Our Bylaws provide that the Board of Directors may be divided into three
classes, as nearly equal in number as possible, if approved by a majority of
the Board. If divided into classes, Class I Directors would serve until the
next annual meeting of stockholders and thereafter for terms of three years
until their successors have been elected and qualified; Class II Directors
would serve until the second succeeding annual meeting of stockholders and
thereafter for terms of three years until their successors have been elected
and qualified; and Class III Directors would serve until the third succeeding
annual meeting of stockholders and thereafter for terms of three years until
their successors have been elected and qualified.
Our Bylaws also provide that Directors may only be removed from office for
cause and only by the affirmative vote of holders of 67% or more of the voting
stock. Cause is defined exclusively to mean conviction of a felony, proof
beyond a reasonable doubt of the gross negligence or willful misconduct of a
director which is materially detrimental to the company or proof beyond a
reasonable doubt of a breach of fiduciary duty by a director which is
materially detrimental to the company.
Board of Directors Compensation
We intend to pay our non-employee directors annual compensation of $20,000
for their services. In addition, non-employee directors will receive a fee of
$1,000 for each meeting attended. Non-employee directors attending any
committee meeting will receive an additional fee of $1,000 for each committee
meeting attended, unless the committee meeting is held on the day of a meeting
of the Board of Directors, in which case they will receive no additional
compensation for attending the committee meeting. Non-employee directors will
also be reimbursed for reasonable costs and expenses incurred for attending any
director or committee meetings. Our officers who are directors will not be paid
any directors fees. Concurrently with this offering, we intend to grant options
to purchase shares of common stock under our Stock Option Plan to each of our
directors. See "--Stock Options."
Board of Directors Committees
Our Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee is comprised of Hugh E. Humphrey, Jr. and E. Denton Jones
and is responsible for making recommendations concerning the engagement of
independent certified public accountants, approving professional services
provided by the independent certified public accountants and reviewing the
adequacy of our internal accounting controls. The Compensation Committee is
comprised of B. Michael Adler and E. Denton Jones and is responsible for
recommending to the Board of Directors all officer salaries, management
incentive programs and bonus payments.
Limitations on Directors' Liabilities and Indemnification
Section 102(b)(7) of the Delaware General Corporation Law (the "DGCL")
permits a corporation to eliminate or limit the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided that such provision shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the DGCL relating to
unlawful dividends, stock purchases or redemptions or (iv) for any transaction
from which the director derived an improper personal benefit. Section 102(b)(7)
of the DGCL is designed, among other things, to encourage qualified individuals
to serve as directors of Delaware corporations. Our Certificate of
Incorporation provides that, except to the extent prohibited by the DGCL, our
directors shall not be personally liable to the Company or its stockholders for
monetary damages for any breach of fiduciary duty by our directors. We believe
this provision will assist us in securing the services of qualified directors
who
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are not our employees. Under Delaware law, the directors have fiduciary duties
to us that are not eliminated by this provision of the Certificate of
Incorporation and, in appropriate circumstances, equitable remedies such as
injunctive or other forms of non-monetary relief will remain available. In
addition, each director will continue to be subject to liability under Delaware
law for breach of the director's duty of loyalty to us for acts or omissions
that are found by a court of competent jurisdiction to be not in good faith or
involving intentional misconduct, for knowing violations of law, for actions
leading to improper personal benefit to the director and for payment of
dividends or approval of stock repurchases or redemptions that are prohibited
by Delaware law. This provision also does not affect the director's
responsibilities under any other laws, such as the federal securities law or
state or federal environmental laws. In addition, we intend to maintain
liability insurance for, and will enter into indemnification agreements with,
our officers and directors. If equitable remedies are found not to be available
to stockholders in any particular case, stockholders may not have any effective
remedy against actions taken by directors that constitute negligence or gross
negligence.
Section 145 of the DGCL permits us to, and the Certificate of Incorporation
provides that we shall, indemnify each person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
by reason of the fact that he or she is or was, or has agreed to become, our
director or officer, or is or was serving, or has agreed to serve, at our
request, as a director, officer or trustee of, or in a similar capacity with,
another corporation, partnership, joint venture, trust or other enterprise
(including any employee benefit plan), or by reason of any action alleged to
have been taken or omitted in such capacity, against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or her on his or her behalf in connection with such
action, suit or proceeding and any appeal therefrom. Such right of
indemnification shall inure to such individuals whether or not the claim
asserted is based on matters that antedate the adoption of the Certificate of
Incorporation. Such right of indemnification shall continue as to a person who
has ceased to be a director or officer and shall inure to the benefit of the
heirs and personal representatives of such a person. The indemnification
provided by the Certificate of Incorporation shall not be deemed exclusive of
any other rights that may be provided now or in the future under any provision
currently in effect or hereafter adopted by the Certificate of Incorporation,
by any agreement, by vote of stockholders, by resolution of directors, by
provision of law or otherwise.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors pursuant to the foregoing provision, or
otherwise, we have been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
Executive Compensation
Summary Compensation Table
The following table sets forth information concerning the annual and long-
term compensation earned by our Chief Executive Officer. No executive officer
had an annual salary and bonus during fiscal 1998 exceeding $100,000.
<TABLE>
<CAPTION>
Annual Compensation
-------------------------
Other annual
Name and principal position Year Salary($) compensation($)
--------------------------- ---- --------- ---------------
<S> <C> <C> <C>
B. Michael Adler................................. 1998 $-- $--
Chairman of the Board
and Chief Executive Officer(1).................. 1997 -- --
1996 -- --
</TABLE>
- --------
(1) Mr. Adler did not receive compensation from WorldQuest Networks for his
services during 1998, 1997 or 1996.
40
<PAGE>
Upon closing of this offering, B. Michael Adler will begin receiving an
annual salary of $175,000 through October 2000. Michael R. Lanham will receive
an annual salary of $125,000 through January 2000 and Mark C. Levy will receive
an annual salary of $120,000 through October 2000. We do not have employment
agreements with any of these officers relating to the payment of their salaries
or any other matter. Their salaries will be reviewed by the Compensation
Committee annually, who will make recommendations to the Board of Directors for
any adjustments. Adjustments will be based on our performance and condition,
the officer's performance and such other criteria deemed pertinent by the
Compensation Committee. We do not intend to pay these salaries from the
proceeds of this offering.
Stock Options
1997 Stock Option Plan
In January 1997, our Board of Directors and stockholders adopted our 1997
Stock Option Plan (the "Plan"), which provides for the grant of non-qualified
stock options under the Internal Revenue Code. The Plan is administered by our
Board of Directors. Options may be granted to our officers, directors and key
employees or any future subsidiaries. The exercise price for any option granted
under the Plan may not be less than the fair market value of the shares of
common stock at the time the option is granted as determined by the Board of
Directors in the exercise of their sole and exclusive judgement. The purpose of
the Plan is to provide a means of performance-based compensation in order to
attract and retain qualified personnel and to provide an incentive to those
whose job performance affects us.
The Plan authorizes the grant of options to purchase an aggregate of up to
500,000 shares of our unissued voting common stock. The number of shares
reserved for issuance under the Plan is subject to anti-dilution provisions for
stock splits, stock dividends and similar events. If an option granted under
the Plan expires or terminates, for any reason, the shares subject to any
unexercised portion of such option will again become available for the issuance
of further options under the Plan. Unless the Plan is terminated earlier, it
terminates 10 years from its effective date. Such termination will have no
effect on options previously granted.
Under the Plan, we may make loans available to stock option holders, subject
to our Board's approval, in connection with the exercise of stock options
granted under the Plan. If shares of common stock are pledged as collateral for
such indebtedness, such shares may be returned to us in satisfaction of such
indebtedness.
The term of each option shall be determined by the Board, but shall not be
for more than 10 years from the date the option is granted.
Options granted under the Plan will become exercisable according to the
terms of the grant made by the Board. The Board has discretionary authority to
select participants from among eligible persons and to determine at the time an
option is granted, the number of shares granted, form of payment, the terms and
provisions of the option and when and in what increments shares covered by the
option may be purchased. Options may be exercisable either in whole or in part,
but not less than 100 shares may be purchased at any one time unless the number
purchased is the total number of shares granted by the option.
The exercise price of any option granted under the Plan is payable in full
in cash or in such other consideration as the Board deems appropriate,
including shares of common stock of our company valued at fair market value as
of the date of exercise of the option. No option may be exercised during the
optionee's lifetime unless the optionee is then an employee or consultant of
our company or a subsidiary corporation; provided that, in the event the
optionee's employment terminates for reasons other than death or disability,
the option may be exercised during the three month period following the
termination of employment. Thereafter, the option terminates. In the case of
disability or death, the Board may extend the option for up to one year.
Notwithstanding the foregoing, options granted to directors may be exercisable
for a period of up to seven years following the date such director ceases to be
one of our directors.
41
<PAGE>
Options granted under the Plan are not transferable, except in the event of
death of the employee. In that event, the option may be exercised at any time
within one year after death by the personal representative of the estate.
The Board may from time to time revise or amend the Plan, and may suspend or
discontinue it at any time. However, no such revision or amendment may be made
without stockholder approval where there is any increase in the number of
shares subject to the Plan (with the exception of adjustments resulting from
changes in capitalization), any changes in the designation of the class of
participants eligible to receive options under the Plan or any material
increase in the benefits accruing to participants under the Plan.
In the event shares of common stock are changed into or exchanged for stock
in another unrelated corporation or are converted to cash pursuant to a plan of
merger, liquidation or dissolution as defined in the Plan, all options issued
shall be exercisable with respect to all the shares covered thereby.
Options to acquire 148,164 shares are outstanding under the Plan at an
average exercise price per share of $2.86 and an additional option to acquire
100,000 shares is outstanding at an exercise price equal to the initial public
offering price. Of these amounts, options to acquire 110,000 shares are held by
executive officers and directors. Options to acquire 167,867 shares have been
granted outside the Plan to our President at an exercise price of $3.33 per
share, all of which vest on the closing of this offering. On the effective date
of this offering, we expect to grant to certain other employees, officers and
directors options to acquire 45,000 shares of common stock at a per share
exercise price equal to the initial public offering price, vesting in 25%
increments on each anniversary from the date of grant for nondirectors, and
100% on the first anniversary of the date of grant for directors.
CERTAIN TRANSACTIONS
Effective at our formation in October 1996, Eagle Venture contributed $1,000
and various tangible and intangible assets to us in exchange for 100% of our
outstanding common stock. The assets had a book value of approximately
$184,000, which was determined to be the fair value of the assets by B. Michael
Adler, our Chairman of the Board, who was also our only director at the time.
Mr. Adler also owns 94% of Eagle Venture. The contributed assets had an initial
cost to Eagle Venture of approximately $230,000. We also assumed an existing
real estate lease from which premises we initially conducted operations. This
lease expired in April 1997 and provided for monthly rental payments of
approximately $4,000. During the first quarter of 1997, Eagle Venture
contributed an additional $316,000 in cash to us as additional equity without
requiring any additional shares of common stock to be issued to it.
We have a credit facility with Eagle Venture to provide loans to us of up to
$2.5 million at an annual interest rate of 8%. The outstanding amount owed to
Eagle Venture by us at June 30, 1999 was $1.6 million and at December 31, 1998
was $1.7 million. In May 1999, we amended this credit facility to convert $1.1
million to a term loan with interest and principal payable in May 2002. Eagle
Venture also agreed at such time to convert $200,000 of the loan into 60,061
shares of our common stock, at a conversion price of $3.33 per share. We also
continue to have a $1.4 million line of credit with Eagle Venture, which is
payable on demand. If no demand is made, accrued interest on the outstanding
line of credit accrues until December 18, 1999, at which time it is payable.
Thereafter, accrued interest on the outstanding line of credit is payable
monthly until May 2002, when the entire loan is due. Demand for payment of
$468,000 of the principal balance of the line of credit has been made effective
upon the closing of this offering, and we intend to repay such amount from the
proceeds of this offering.
In December 1998, we entered into a written agreement with WorldQuest
Communications, Inc. and Eagle Venture which formalized an earlier oral
agreement relating, among other things, to the grant of a license to us and
Eagle Venture by WorldQuest Communications of the name "WorldQuest." Pursuant
to this agreement, Eagle Venture also acknowledged its prior oral agreement to
transfer, and caused the transfer of, 360,000 shares of our common stock owned
by it to WorldQuest Communications in consideration of WorldQuest
42
<PAGE>
Communications canceling approximately $100,000 of payables owed by Eagle
Venture to WorldQuest Communications. As part of this transaction, E. Denton
Jones also cancelled $150,000 of payables owed to him by Eagle Venture, which
Eagle Venture also had funded to us as equity or as a loan. Mr. Jones, one of
our directors, beneficially owns 99% of WorldQuest Communications. Eagle
Ventures also contributed to us at our inception the right to use the name
"WorldQuest".
We entered into a Joint Venture Agreement with BDC, LLC, a Nevada limited
liability company owned by E. Denton Jones, in April 1999 to fund the
installation of an Internet gateway in each of Sri Lanka, Costa Rica and India.
BDC contributed $50,000 to the joint venture and we agreed to be responsible
for obtaining the Internet gateways and for installing and operating them. We
are entitled to 60% of the profits and losses from the operation of these
gateways and BDC is entitled to 40%.
During January 1999 and during 1998 and 1997, Robert M. Adler, Jr., B.
Michael Adler's brother, performed sales and marketing consulting services to
us relating to our facsimile transmission services. We paid him $5,500 for the
six months ended June 30, 1999, $61,500 during 1998 and $44,000 during 1997 for
these consulting services.
43
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of July 31, 1999, and as adjusted to reflect
the sale of the 2,400,000 shares of common stock offered hereby, by: (i) each
of our directors; (ii) each of our executive officers; (iii) each person known
to us to be beneficial owner of more than 5% of the common stock; and (iv) all
of our directors and executive officers as a group.
<TABLE>
<CAPTION>
Percentage of shares owned
-------------------------------
Name and address of Shares beneficially Before the After the
beneficial owner owned offering offering
- ------------------- ------------------- ------------- -------------
<S> <C> <C> <C>
B. Michael Adler........ 2,671,478(/1/) 83.4% 47.7%
16990 Dallas Parkway,
Suite 220
Dallas, Texas 75248
E. Denton Jones......... 360,000(/2/) 11.3 6.4
The Claridge, Suite 18D
3510 Turtle Creek Blvd.
Dallas, Texas 75219
Michael R. Lanham....... 167,867(/3/) 5.0 2.9
16990 Dallas Parkway,
Suite 220
Dallas, Texas 75248
Mark C. Levy............ 100,000(/4/) 3.0 1.8
16990 Dallas Parkway,
Suite 220
Dallas, Texas 75248
Hugh E. Humphrey, Jr.... 5,000(/5/) * *
No. 1 Westbank
Expressway
New Orleans, Louisiana
70174
All directors and
executive officers
as a group (5
persons)............... 3,304,345 95.1 56.2
</TABLE>
- --------
*Less than 1%
(1) Eagle Venture Capital, LLC is the record and beneficial owner of 2,666,478
of these shares. B. Michael Adler owns a controlling interest in Eagle
Venture and is also deemed to beneficially own these shares. The share
ownership for Mr. Adler also includes a vested option to purchase 5,000
shares.
(2) WorldQuest Communications, Inc. is the record and beneficial owner of these
shares. E. Denton Jones beneficially owns 99% of the outstanding capital
stock of WorldQuest Communications, Inc. and is also deemed to beneficially
own these shares.
(3) Represents options to purchase these shares, all of which vest on the
closing of this offering.
(4) Represents options to purchase 100,000 shares granted effective July 19,
1999, which vest 20%, 30% and 50% on the first, second and third
anniversaries of the date of grant.
(5) Represents vested options to purchase these shares.
44
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 50 million shares of common stock
and 10 million of preferred stock. After giving effect to this offering, there
will be 5,596,699 shares of common stock outstanding and no shares of preferred
stock outstanding. The following description of our capital stock does not
purport to be complete and is subject to and qualified in its entirety by our
Certificate of Incorporation and Bylaws, which are included as exhibits to the
registration statement of which this prospectus forms a part, and by the
provisions of applicable Delaware law.
Common Stock
Holders of common stock are entitled to one vote per share on matters to be
voted upon by the stockholders. There are no cumulative voting rights. Holders
of common stock are entitled to receive ratable dividends when, as and if
declared by the Board of Directors out of funds legally available therefor.
Upon our liquidation, dissolution or winding up, holders of common stock share
ratably in our assets available for distribution to our stockholders, subject
to the preferential rights of any then-outstanding shares of preferred stock.
No shares of preferred stock will be outstanding immediately following the
consummation of this offering. Holders of common stock have no preemptive,
subscription, redemption, conversion rights or any right of first refusal. All
shares of common stock outstanding upon the effective date of this prospectus,
and the shares offered hereby will, upon issuance and sale, be fully paid and
nonassessable.
Preferred Stock
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 10 million shares of preferred stock in one or
more series, and to fix the designations, rights, preferences, privileges,
qualifications and restrictions thereof including dividend rights, conversion
rights, voting rights, rights and terms of redemption, liquidation preferences
and sinking fund terms, any or all of which may be superior to the rights of
the common stock. The Board of Directors, without stockholder approval, can
issue preferred stock with voting, conversion and other rights which could
adversely affect the voting power and other rights of the holders of common
stock. Preferred stock could thus be issued quickly with terms calculated to
delay or prevent a change in control or to make removal of management more
difficult. In certain circumstances, such issuance could have the effect of
decreasing the market price of the common stock. The issuance of preferred
stock may have the effect of delaying, deterring or preventing a change in
control without any further action by the stockholders including, but not
limited to, a tender offer to purchase common stock at a premium over then
current market prices. We have no present plan to issue any additional shares
of preferred stock.
Warrants and Options
At August 31, 1999, we had outstanding warrants and options to purchase up
to 317,031 shares of common stock at an average weighted exercise price of
$3.11 per share and outstanding options to purchase 185,000 shares at an
exercise price equal to the initial public offering price. All of such options
and warrants will be subject to one-year lock-up agreements with the
underwriters. All of such warrants and options expire between 2003 and July
2006.
We will also grant the representative of the underwriters a warrant to
purchase 240,000 shares of common stock for an exercise price per share equal
to 140% of the initial public offering price at any time during the five years
following closing of this offering commencing one year after the closing of
this offering.
Registration Rights
We will endeavor to register, or file a post-effective amendment to this
registration statement to register shares of common stock underlying a warrant
granted to the representative of the underwriters in connection with this
offering. See "Underwriting" for a more complete description of the
representative's warrant.
45
<PAGE>
Anti-takeover Effects of Provisions of the Company's Charter and Bylaws
Our Bylaws provide that the Board of Directors may be divided into three
classes. If the Board is divided into classes, Class I Directors would serve
until the next annual meeting of stockholders and thereafter for terms of three
years and until their successors have been duly elected and qualified; Class II
Directors would serve until the second succeeding annual meeting of
stockholders and thereafter for terms of three years and until their successors
have been elected and qualified; and Class III Directors would serve until the
third succeeding annual meeting of stockholders and thereafter for terms of
three years and until their successors have been elected and qualified.
Stockholders have no cumulative voting rights and stockholders representing a
majority of the shares of common stock outstanding are able to elect all of the
directors. The Bylaws provide that a special meeting of the stockholders may
only be called by the Board of Directors, the Chairman of the Board, the Chief
Executive Officer, the President or stockholders owning not less than 67% of
our voting stock. Our Bylaws provide that Directors may be removed from office
only for cause and only by the affirmative vote of stockholders owning 67% of
our outstanding voting stock. Cause is exclusively defined to mean conviction
of a felony, proof beyond a reasonable doubt of the gross negligence or willful
misconduct of a director which is materially detrimental to the company or
proof beyond a reasonable doubt of a breach of fiduciary duty by a director
which is materially detrimental to the company.
The classification of the Board of Directors, lack of cumulative voting and
restrictions on stockholders' abilities to call special meetings and remove
directors makes it more difficult for existing stockholders to replace the
Board of Directors as well as for any other party to obtain control of us by
replacing the Board of Directors. Since the Board of Directors has the power to
retain and discharge our officers, these provisions could make it more
difficult for existing stockholders or another party to effect a change in
management.
These and other provisions may have the effect of deterring hostile
takeovers or delaying changes in control of management. They are intended to
enhance the likelihood of continued stability in the composition of the Board
of Directors and in the policies furnished by the Board of Directors and to
discourage certain types of actions that may involve an actual or threatened
change of control. These provisions are designed to reduce our vulnerability to
an unsolicited acquisition proposal and are also intended to discourage certain
tactics that may be used in proxy fights. However, such provisions could have
the effect of discouraging others from making tender offers for your shares,
which may inhibit fluctuations in the market price of your shares that could
result from actual or rumored takeover attempts.
Section 203 of the Delaware General Corporation Law
Generally, Section 203 of the DGCL prohibits a publicly held Delaware
corporation from engaging in a broad range of "business combinations" with an
"interested stockholder" (defined generally as a person owning 15% of more of a
corporation's outstanding voting stock) for three years following the date such
person became an interested stockholder unless (i) before the person becomes an
interested stockholder, the transaction resulting in such person becoming an
interested stockholder or the business combination is approved by the board of
directors of the corporation, (ii) upon consummation of the transaction that
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of the outstanding voting stock of the
corporation (excluding shares owned by directors who are also officers of the
corporation or shares held by employee stock plans that do not provide
employees with the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender offer or exchange offer), or
(iii) on or after such date on which such person became an interested
stockholder the business combination is approved by the board of directors and
authorized at an annual or special meeting, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock excluding
shares owned by the interested stockholders. The restrictions of Section 203 do
not apply, among other reasons, if a corporation, by action of its
stockholders, adopts an amendment to its certificate of incorporation or bylaws
expressly electing not to be governed by Section 203, provided that, in
addition to any other vote required by law, such amendment to the certificate
of incorporation or bylaws must be approved by the affirmative vote of a
majority of the shares entitled to vote. Moreover, an amendment so adopted is
not effective until 12 months after its
46
<PAGE>
adoption and does not apply to any business combination between the
corporation and any person who became an interested stockholder of such
corporation on or prior to such adoption. Our Certificate of Incorporation and
Bylaws do not currently contain any provisions electing not to be governed by
Section 203 of the DGCL.
Section 203 of the DGCL may discourage persons from making a tender offer
for or acquisitions of substantial amounts of common stock. This could have
the effect of inhibiting changes in management and may also prevent temporary
fluctuations in the market price of your common stock that often result from
takeover attempts.
Stockholder Proposals for Consideration at Annual Meeting
Our Bylaws provide that no matter may be brought before the annual meeting
of stockholders unless it is contained in our proxy statement delivered to
stockholders with regard to such annual meeting. Any stockholder who desires
to include a proposal for consideration at any annual meeting must submit such
proposal to the Board of Directors in writing, by delivering such notice to
the attention of the President at our executive offices, no earlier than
January 1 of the year in which such annual meeting will be held and not later
than February 15 of the year in which such annual meeting will be held.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is American Stock
Transfer & Trust Company.
47
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Shares Outstanding and Freely Tradeable Immediately Following this Offering
Prior to this offering, there has been no public market for our common
stock. No prediction can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Sales of substantial amounts of common stock in
the public market could adversely effect prevailing market prices.
After this offering, we will have outstanding 5,596,699 shares of common
stock. Of the outstanding shares, the 2,400,000 shares to be sold in this
offering will be freely tradeable without restriction or further registration
under the Securities Act unless purchased by "affiliates" as that term is
defined in Rule 144 under the Securities Act, which shares, if purchased by an
affiliate, will be subject to certain of the resale limitations imposed by Rule
144.
Immediately after this offering, we intend to register 667,867 shares of
common stock subject to outstanding options and reserved for issuance under our
stock option plan.
Shares Subject to Rule 144
The remaining 3,196,699 shares of common stock outstanding upon completion
of this offering are "restricted securities" as that term is defined in Rule
144, 2,606,417 of which will be eligible for sale under Rule 144 upon
completion of this offering, subject to the lock-up described below. As
described below, Rule 144 permits resales of restricted securities subject to
certain restrictions.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year, including any person who may be deemed an "affiliate," would be entitled
to sell within any three-month period a number of such shares that does not
exceed the greater of 1% of the shares of our common stock then outstanding
(55,967 shares immediately after this offering) or the average weekly trading
volume in our common stock during the four calendar weeks preceding the date on
which notice of the sale is filed with the Commission. A person who is not
deemed to have been an "affiliate" at any time during the three months
immediately preceding a sale and who has beneficially owned shares for at least
two years would be entitled to sell such shares under Rule 144 without regard
to the volume limitation described above.
Lock-Up Agreements
Each of our company and our executive officers, directors and the holders of
an aggregate of 3,196,699 outstanding shares and 497,031 shares covered by
outstanding options and warrants have agreed that they will not, without the
prior written consent of EBI Securities Corporation (which consent may be
withheld in its sole discretion) and subject to certain limited exceptions,
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
sell short, purchase any option or contract to sell, grant any option, right or
warrant to purchase, lend or otherwise transfer or dispose of, directly or
indirectly, any shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock, or enter into any swap or similar
agreement that transfers, in whole or in part, any of the economic consequences
of ownership of the common stock, for a period commencing on the date of this
prospectus and continuing to a date 180 days after such date with regard to
360,000 shares and one year after such date with regard to 3,333,730 shares
outstanding or covered by outstanding options or warrants; provided, however,
that such restrictions do not apply to shares of common stock sold or purchased
in this offering or to shares of common stock purchased in the open market
following this offering. EBI Securities Corporation, on behalf of the
underwriters, may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to these lock-up
agreements. In addition, we have agreed that, for a period of one year after
the date of this prospectus, we will not, without the consent of EBI Securities
Corporation, make any offering, purchase, sale, or other disposition of any
shares
48
<PAGE>
of common stock or other securities convertible into or exchangeable or
exercisable for shares of common stock (or agreement for such) except for the
grant of options to purchase shares of common stock pursuant to the Stock
Option Plan.
Resale of Shares Underlying Stock Options and Warrants
In general, under Rule 701 under the Securities Act, any of our employees,
directors, consultants or advisors who purchase shares from us in connection
with a compensatory stock or option plan or other written compensatory
agreement is entitled to resell such shares without having to comply with the
public information, holding period, volume limitation or notice provisions of
Rule 144, and are eligible to resell such shares 90 days after the effective
date of this offering in reliance on Rule 144, subject to the provisions of the
one year lock-up arrangements discussed above.
The Stock Option Plan authorizes the grant of options to purchase, and
awards of, an aggregate of up to 500,000 shares of the Company's common stock.
Options to purchase 248,164 shares are outstanding under the Stock Option Plan,
and an additional option for 167,867 shares outside of the Stock Option Plan
has been granted to our President. Of these options, 316,031 options have an
average weighted option price of $3.11 per share and 100,000 options have an
exercise price equal to the initial public offering price. After the expiration
of the one year lock-up period and subject to certain vesting restrictions, all
of the shares issued pursuant to the exercise of these stock options may be
resold pursuant to Rule 701. In addition, we expect to grant options to
purchase 45,000 shares to certain of our employees, officers and directors on
the effective date of this offering. We intend to file a registration statement
on Form S-8 covering the shares that have been reserved for issuance under the
Stock Option Plan, permitting the resale of such shares in the public market.
We have issued additional options and warrants to purchase an aggregate of
80,000 shares of common stock with an exercise price equal to the initial
public offering price and 1,000 shares with an exercise price of $3.33 per
share. The shares of common stock that are issued pursuant to these options and
warrants generally must be held for a minimum of one year from the date of
exercise prior to their resale.
Registration Rights
We will endeavor to register, or file a post-effective amendment to this
registration statement to register shares of common stock underlying a warrant
to be granted to the representative of the underwriters in connection with this
offering. See "Underwriting" for a more complete description of the
representative's warrant.
Effect of Substantial Sales on Market Price of Common Stock
We are unable to estimate the number of shares that may be sold in the
future by existing security holders, or the effect, if any, that such sales
will have on the market price of the common stock prevailing from time to time.
Sales of substantial amounts of common stock, or the prospect of such sales,
could adversely affect the market price of our common stock.
49
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the underwriting agreement,
the underwriters named below, for which EBI Securities Corporation is acting as
representative, have agreed to purchase from our company the respective number
of shares of common stock set forth opposite each underwriter's name.
<TABLE>
<CAPTION>
Underwriter Number of Shares
- ----------- ----------------
<S> <C>
EBI Securities Corporation....................................
----
Total.....................................................
====
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in WorldQuest Networks' business and the receipt
of certain certificates, opinions and letters from WorldQuest Networks, its
counsel and independent auditors. The nature of the underwriters' obligations
is that they are obligated to purchase and pay for all the shares of common
stock offered hereby, if any shares are purchased.
The underwriters propose initially to offer stock directly to the public at
the public offering price set forth on the cover page of this prospectus and to
certain dealers at such price less a concession not in excess of $ per
share. After the initial public offering of the shares, the offering price and
other selling terms may be changed by the representative of the underwriters.
The representative has advised WorldQuest Networks that the underwriters do not
expect sales to accounts for which any of the underwriters will exercise
discretion as to such sale to exceed five percent of the total number of shares
offered hereby.
Each of WorldQuest Networks, its executive officers, directors and other
security holders have agreed that they will not, without the prior written
consent of EBI Securities Corporation (which consent may be withheld in its
sole discretion) dispose of or hedge any of their common stock or securities
convertible into or exchangeable for shares of common stock during the period
from the date of this prospectus continuing to a date 180 days after such date
with respect to 360,000 shares and one year after such date with respect to
3,333,730 shares outstanding or covered by options or warrants. See "Shares
Eligible for Future Sale" for a discussion of these transfer restrictions.
WorldQuest Networks has granted to the representative an option, expiring at
the close of business on the 60th day after the date of this prospectus, to
purchase up to 360,000 additional shares at the initial public offering price,
less the underwriting discounts, all as set forth on the cover page of this
prospectus. The representative may exercise such option only to cover over-
allotments made in connection with the sale of common stock in this offering.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
Upon completion of this offering, WorldQuest Networks will sell to the
representative for $240 a warrant to purchase 240,000 shares of common stock.
The representative's warrant will become exercisable one year after the
effective date of this offering at a per share exercise price equal to 140% of
the initial public offering price and will expire five years from the effective
date of this offering. The representative's warrant and underlying shares of
common stock will be restricted from sale, transfer, assignment or
hypothecation for a
50
<PAGE>
period of one year from the date of this prospectus, except to the
representative, underwriters, selling group members and their officers or
partners. During the exercise period, holders of the representative's warrants
are entitled to certain demand and incidental rights with respect to the shares
of common stock issuable upon exercise of the representative's warrant. The
common stock issuable on exercise of the representative's warrant is subject to
adjustment in certain events to prevent dilution.
WorldQuest Networks will pay the representative a nonaccountable expense
allowance of 2% of the gross proceeds of the offering, which will include
proceeds from the over-allotment option, if exercised. The representative's
expenses in excess of the nonaccountable expense allowance will be borne by the
representative. WorldQuest Networks has paid $60,000 to the representative as
an advance for expenses.
WorldQuest Networks has agreed to indemnify the underwriters against certain
liabilities, including civil liabilities under the Securities Act, and to
contribute to payments which the underwriters may be required to make regarding
these liabilities.
WorldQuest Networks has agreed to give notice to the representative of
meetings of the board of directors and to grant access to such meetings to a
nominee of the representative to attend the meetings as an observer. EBI
Securities Corporation also has the right, but not the obligation, to nominate
one director to WorldQuest Networks' board of directors for four years from the
closing of this offering.
The underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Exchange Act. Over-allotment involves syndicate sales in excess of
the offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the securities in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the representative to reclaim a selling concession from a
syndicate member when the securities originally sold by such syndicate member
are purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
Neither WorldQuest Networks nor the underwriters can predict the effect that
the transactions described above may have on the price of the common stock. In
addition, neither WorldQuest Networks nor the underwriters represent that the
underwriters will engage in such transactions. If commenced, such transactions
may be discontinued at any time without notice. It is anticipated that certain
of the underwriters will make a market in the common stock on completion of
this offering, as permitted by applicable law. The underwriters are not
obligated to make a market in the common stock and if they do so may
discontinue making a market at any time. There is no assurance an active
trading market will ever develop for the common stock.
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiations
between WorldQuest Networks and the representative. The principal factors
considered in determining the initial public offering price will include:
. the information set forth in this prospectus and otherwise available;
. the history and the prospects for the industry in which WorldQuest
Networks will compete;
. the ability of WorldQuest Networks' management;
. the prospects for future earnings of WorldQuest Networks;
. the present state of WorldQuest Networks development and its current
financial condition;
. the general condition of the securities markets at the time of this
offering; and
. the recent market prices of, and the demand for, publicly traded stock
of generally comparable companies.
51
<PAGE>
LEGAL MATTERS
Certain matters relating to this offering are being passed upon for us by
Glast, Phillips & Murray, a professional corporation, Dallas, Texas. Certain
legal matters will be passed upon for the underwriters by Freshman, Marantz,
Orlanski, Cooper & Klein, a law corporation, Beverly Hills, California. Two
members of Glast, Phillips & Murray have options to acquire an aggregate of
10,000 shares of common stock at an exercise price equal to the initial public
offering price.
INDEPENDENT AUDITORS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1998 and for each of the two years in the
period ended December 31, 1998, as set forth in their report. We have included
our financial statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority
as experts in accounting and auditing.
WHERE YOU CAN GET MORE INFORMATION
At your request, we will provide you, without charge, with a copy of any
exhibits to our registration statement incorporated by reference in this
prospectus. If you want more information, write or call us at:
WorldQuest Networks, Inc.
16990 Dallas Parkway, Suite 220
Dallas, Texas 75248
Telephone: (972) 818-0460
Fax: (972) 818-0978
Our fiscal year ends on December 31. We intend to furnish our stockholders
with annual reports containing audited financial statements and other
appropriate reports. In addition, we intend to become a reporting company and
file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or
other information we file at the SEC's public reference room at 450 Fifth
Street, N.W., Washington D.C. 20549, and at the SEC's regional offices located
at Seven World Trade Center, 13th Floor, New York, New York 10048, and the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Please call the SEC at 1-800-SEC-0330 for further information
on the operation of the public reference rooms. You can also request copies of
these documents, upon payment of a duplicating fee, by writing the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549. Our SEC filings are also available
to the public on the SEC Internet site at http:\\www.sec.gov.
52
<PAGE>
WorldQuest Networks, Inc.
Index to Consolidated Financial Statements
Contents
<TABLE>
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and June 30, 1999
(unaudited).............................................................. F-3
Consolidated Statements of Operations for the years ended December 31,
1997 and 1998 and the six month periods ended June 30, 1998 and 1999
(unaudited).............................................................. F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for
the years ended December 31, 1997 and 1998 and the six month period ended
June 30, 1999 (unaudited)................................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1997 and 1998 and the six month periods ended June 30, 1998 and 1999
(unaudited).............................................................. F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
Board of Directors
WorldQuest Networks, Inc.
We have audited the accompanying consolidated balance sheet of WorldQuest
Networks, Inc., as of December 31, 1998 and the related consolidated statements
of operations, consolidated changes in stockholders' equity (deficit), and cash
flows for each of the two years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 consolidated financial position of WorldQuest
Networks, Inc., at December 31, 1998, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
July 7, 1999
Dallas, Texas
F-2
<PAGE>
WORLDQUEST NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 18,833 $ 85,993
Accounts receivable................................. 235,244 128,433
----------- ----------
Total current assets.................................. 254,077 214,426
Property and equipment, net........................... 252,485 373,774
Other assets.......................................... 740,212 706,654
----------- ----------
Total assets.......................................... $ 1,246,774 $1,294,854
=========== ==========
LIABILITIES
Current liabilities:
Accounts payable.................................... $ 1,234,726 $ 797,922
Accrued expenses.................................... 344,231 325,207
Deferred revenue.................................... 95,965 97,050
Note payable........................................ 100,000 426,000
Line of credit from principal stockholder........... 638,096 485,981
Current portion of capital lease obligation......... 107,728 170,950
----------- ----------
Total current liabilities............................. 2,520,746 2,303,110
Term loan............................................. 1,100,000 1,100,000
Accrued interest...................................... 111,814 188,278
Capital lease obligation.............................. 29,004 31,140
Minority interest..................................... -- 12,658
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, par value $.10 per share:
Authorized shares--5,000,000; none issued and
outstanding at December 31, 1998 and
June 30, 1999 (unaudited) -- --
Common stock, par value $.10 per share:
Authorized shares--10,000,000; issued and
outstanding shares--3,000,000 at December 31, 1998
and 3,196,699 at
June 30, 1999 (unaudited).......................... 300,000 319,670
Additional capital.................................. 995,253 1,718,083
Accumulated deficit................................. (3,810,043) (4,378,085)
----------- ----------
Total stockholders' equity (deficit).................. (2,514,790) (2,340,332)
----------- ----------
Total liabilities and stockholders' equity (deficit).. $ 1,246,774 $1,294,854
=========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE>
WORLDQUEST NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1997 and 1998 and the six months ended June
30, 1998 and 1999 (unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
------------------------ ----------------------
1997 1998 1998 1999
----------- ----------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Retail prepaid calling card
revenue.................... $ -- $ 1,466,322 $ 149,198 $2,343,736
Wholesale traffic and
other...................... 51,963 375,117 110,699 306,314
----------- ----------- ---------- ----------
Total revenue............. 51,963 1,841,439 259,897 2,650,050
Cost of sales............... 227,011 2,005,631 418,510 2,148,747
----------- ----------- ---------- ----------
Gross margin (deficit)...... (175,048) (164,192) (158,613) 501,303
Selling, general and
administrative............. 1,277,383 1,290,131 644,148 877,043
Research and development
costs...................... 438,860 186,638 94,923 103,776
----------- ----------- ---------- ----------
Operating loss.............. (1,891,291) (1,640,961) (897,684) (479,516)
Interest expense............ (28,265) (162,466) (56,704) (75,868)
Other income................ 155,000 50,000 50,000 --
----------- ----------- ---------- ----------
Loss before minority
interest and income taxes.. (1,764,556) (1,753,427) (904,388) (555,384)
Minority interest........... -- -- -- (12,658)
----------- ----------- ---------- ----------
Loss before income taxes.... (1,764,556) (1,753,427) (904,388) (568,042)
Income tax benefit.......... -- -- -- --
----------- ----------- ---------- ----------
Net loss.................... $(1,764,556) $(1,753,427) $ (904,388) $ (568,042)
=========== =========== ========== ==========
Weighted-average common
shares outstanding--basic
and diluted................ 3,000,000 3,000,000 3,000,000 3,064,607
=========== =========== ========== ==========
Net loss per share--basic
and diluted................ $ (0.59) $ (0.58) $ (0.30) $ (0.19)
=========== =========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
WORLDQUEST NETWORKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the years ended December 31, 1997 and 1998 and the six months ended June
30, 1999
(unaudited)
<TABLE>
<CAPTION>
Common Common
Stock Stock Additional Accumulated Stockholders'
Shares Amount Capital Deficit Equity (Deficit)
--------- --------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 10,000 $ 1,000 $ 36,000 $ (292,060) $ (255,060)
Additional capital
contribution......... -- -- 500,000 -- 500,000
Stock dividend........ 2,990,000 299,000 (299,000) -- --
Fair value of services
provided by
shareholder.......... -- -- 175,000 -- 175,000
Net loss.............. -- -- -- (1,764,556) (1,764,556)
--------- --------- ----------- ------------ ------------
Balance at December 31,
1997................... 3,000,000 300,000 412,000 (2,056,616) (1,344,616)
Issuance of stock
purchase warrants...... -- -- 408,253 -- 408,253
Fair value of services
provided by
shareholder............ -- -- 175,000 -- 175,000
Net loss................ -- -- -- (1,753,427) (1,753,427)
--------- --------- ----------- ------------ ------------
Balance at December 31,
1998................... 3,000,000 300,000 995,253 (3,810,043) (2,514,790)
Fair value of services
provided by
shareholder.......... -- -- 87,500 -- 87,500
Conversion of line of
credit from
shareholder.......... 60,061 6,006 193,994 200,000
Sale of common stock.. 136,638 13,664 441,336 455,000
Net loss (unaudited).. -- -- -- (568,042) (568,042)
--------- --------- ----------- ------------ ------------
Balance at June 30, 1999
(unaudited)............ 3,196,699 $ 319,670 $ 1,718,083 $ (4,378,085) $ (2,340,332)
========= ========= =========== ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
WORLDQUEST NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997 and 1998 and the six months ended June
30, 1998 and 1999
<TABLE>
<CAPTION>
December 31, June 30,
-------------------------- ----------------------
1997 1998 1998 1999
------------ ------------ ---------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Operating Activities
Net loss.................. $ (1,764,556) $ (1,753,427) $ (904,388) $ (568,042)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation............ 155,133 141,833 57,403 91,025
Amortization............ -- 121,222 7,764 42,279
Goodwill write-off...... -- -- -- 139,747
Minority interest in
loss of joint venture.. -- -- -- 12,658
Fair value of
shareholder services... 175,000 175,000 87,500 87,500
Changes in operating
assets and liabilities:
Accounts receivable... (41,715) (193,529) (23,481) 106,811
Accrued interest...... 27,387 84,427 47,114 76,464
Accounts payable and
accrued expenses..... 437,921 747,384 269,808 (455,828)
Note payable to
vendor............... -- -- -- 326,000
Deferred revenue...... -- 95,965 -- 1,085
Other assets.......... (5,433) (79,594) 351 (106,188)
------------ ------------ ---------- ----------
Net cash used in operating
activities............... (1,016,263) (660,719) (457,929) (246,489)
Investing Activities
Additions to property and
equipment................ (111,056) (148,047) (74,276) (141,159)
Proceeds from sale of
equipment................ -- -- -- 10,347
------------ ------------ ---------- ----------
Net cash used in investing
activities............... (111,056) (148,047) (74,276) (130,812)
Financing Activities
Proceeds from line of
credit, net.............. 788,137 919,294 562,641 47,885
Payments on capital
leases................... -- (53,519) -- (58,422)
Payment on note payable... -- (25,000) (25,000) --
Capital contribution...... 316,208 -- -- --
Sale of common stock...... -- -- -- 455,000
------------ ------------ ---------- ----------
Net cash provided by
financing activities..... 1,104,345 840,775 537,641 444,463
Increase (decrease) in
cash and cash
equivalents.............. (22,974) 32,009 5,436 67,162
Cash and cash equivalents
at beginning of period... 9,798 (13,176) (13,176) 18,833
------------ ------------ ---------- ----------
Cash and cash equivalents
at end of period......... $ (13,176) $ 18,833 $ (7,740) $ 85,995
============ ============ ========== ==========
Supplemental Disclosure of
Cash Flow Information
Interest paid............. $ 878 $ 54,075 $ 9,590 $ 6,983
============ ============ ========== ==========
</TABLE>
See accompanying notes.
F-6
<PAGE>
WORLDQUEST NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
Years ended December 31, 1997 and 1998 and the six months ended June 30, 1998
and 1999
1. Organization and Description of Business
WorldQuest Networks, Inc. (WorldQuest or the Company) was incorporated as a
Texas corporation effective October 14, 1996. The majority of the common stock
of the Company is owned by Eagle Venture Capital, LLC ( Eagle) (formerly
WorldQuest Networks, LLC), a limited liability company. WorldQuest was formed
when the principal stockholder of Eagle decided to pursue Internet telephony
opportunities. In conjunction with the formation, Eagle contributed cash and
other assets valued at approximately $185,000 ( the estimated fair value) in
exchange for 100% of the then outstanding common stock. During 1997, Eagle
contributed an additional $316,000 to further capitalize the Company but
received no additional shares of common stock.
WorldQuest is an international Internet telephony company that sells virtual
prepaid calling cards through its Internet website and transmits long distance
calls over its own enhanced server platform using its own network or leased
capacity from other long distance carriers. In late 1998, the Company began to
sell its excess capacity to other long distance carriers. The Company was
considered a development stage enterprise until 1998 when substantial revenues
from the sale of prepaid calling cards began.
In 1998 and the six months ended June 30, 1998 and 1999 (unaudited)
wholesale traffic and other revenues include approximately $221,000, $55,000
and $35,000, respectively relating to the Company's Costa Rican subsidiary in
which WorldQuest has a 90% interest. See Note 5.
As of December 31, 1998 and June 30, 1999 (unaudited) tangible assets
located in foreign locations totaled 7% and 11%, respectively of total
consolidated assets.
WorldQuest is headquartered in Dallas, Texas.
2. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated.
Interim Financial Statements
The consolidated unaudited financial statements as of June 30, 1999 and for
the six months in the periods ended June 30, 1998 and 1999 reflect all
adjustments (consisting only of normal recurring adjustments except as
described in Note 5) necessary for a presentation of the financial position and
results of operations for such periods.
Cash Equivalents
Cash equivalents include money market mutual funds and other highly liquid
investments purchased with maturities of three months or less.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed
principally using the double declining balance method over the estimated useful
lives of the assets. Amortization of capital leases and leasehold improvements
is provided on a double declining basis over the lives of the related assets or
the life of the lease, whichever is shorter, and is included with depreciation
expense.
F-7
<PAGE>
WorldQuest Networks, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Significant Accounting Policies (continued)
Intangible Assets
The cost in excess of the fair value of tangible and identified intangible
assets of the Costa Rican operation (goodwill) is being amortized on a
straight-line basis over 10 years.
Impairment of Long-lived Assets
The Company evaluates long-lived assets, including goodwill for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable and the undiscounted cash flows to be
generated by these assets are less than the carrying amounts of these assets.
Deferred Income Taxes
Deferred income taxes are determined using the liability method, which gives
consideration to the future tax consequences associated with differences
between the financial accounting and tax basis of assets and liabilities. This
method also gives immediate effect to changes in income tax laws.
Revenue Recognition
Retail prepaid phone card revenue is deferred when the cards are purchased
by the customer and recognized as calling services are used. Wholesale traffic
revenue is recognized as calls are processed.
Research and Development Costs
Research and development costs are expensed as incurred and consist
primarily of salaries, supplies and contract services.
Advertising Costs
The Company expenses the cost of advertising as incurred. Advertising
expense for the years ended December 31, 1997 and 1998 and the six months ended
June 30, 1998 and 1999 (unaudited), was $3,745, $46,528, $8,131 and $56,344,
respectively.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," in the primary financial
statements and has provided supplemental disclosures required by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (see Note 10).
Net Loss per Share
Basic and diluted net loss per share is computed using the Company's net
loss for each period presented divided by the average common shares
outstanding. Stock options and warrants convertible into 80,000, 455,841,
80,000 and 478,005 shares of the Company's common stock for the years ended
December 31, 1997 and 1998 and the six months ended June 30, 1998 and 1999
(unaudited), respectively, were not considered in the calculation of average
common shares outstanding as the effect would be anti-dilutive due to the
Company's net loss for all periods presented.
Concentration of Credit Risks
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash equivalents and accounts receivable.
Accounts receivable consist of amounts owed by credit
F-8
<PAGE>
WorldQuest Networks, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Significant Accounting Policies (continued)
card processing companies relating to prepaid phone card sales, and amounts
owed by telephone companies for processed call traffic. At June 30, 1999
(unaudited) and December 31, 1998, a single telephone company accounted for 29%
and 0% of total accounts receivable, respectively. A different telephone
company accounted for 22% and 59% of accounts receivable as of June 30, 1999
(unaudited) and December 31, 1998, respectively. At June 30, 1999 (unaudited)
and December 31, 1998 a credit card processing company accounted for 30% and 0%
of total accounts receivable, respectively. Another credit card processing
company accounted for 0% and 26% of total accounts receivable at the same
dates. Customers purchase the Company's prepaid calling cards primarily using
major credit cards which are reimbursed by credit card processing companies.
Accordingly, the Company does not routinely perform on-going credit evaluations
of its customers but does perform evaluations of its credit card processors.
Additionally, the Company does not require collateral.
Significant Customers
For fiscal 1997 and 1998 and the six months ended June 30, 1998 and 1999
(unaudited), no one customer accounted for more than 10% of total sales.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash equivalents,
accounts receivable, accounts payable and short term debt. The carrying amount
of financial instruments are representative of their fair values due to their
short maturities. The Company's line of credit with Eagle bears interest at
market rates and thus management believes their carrying amounts approximate
fair value.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130), which requires disclosure of total comprehensive income in interim and
annual financial statements. The Company adopted SFAS 130 during 1998. Items of
other comprehensive income for 1997 and 1998 and the for six months ended June
30, 1999 (unaudited), were not material.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" (SFAS 131), which requires disclosure by
public companies of information related to the Company's operating segments, as
defined. The Company has adopted SFAS 131 for the year ended December 31, 1998.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 provides guidance
on accounting for the costs of computer software developed or obtained for
internal use. This pronouncement identifies the characteristics of internal use
software and provides guidance on new cost recognition principles. SOP 98-1 is
effective for fiscal years beginning after December 15, 1998. SOP 98-1 is not
expected to have a material impact on the Company's results of operations,
financial position or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Similar
Financial Instruments and for Hedging Activities" (SFAS 133), which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. The Company will be required to adopt SFAS
133 at the beginning of fiscal 2000. The Company has not assessed the impact
this standard will have on its results of operations, financial position or
cash flows. However, the Company does not currently have any derivatives or
financial instruments that would be impacted by SFAS 133.
F-9
<PAGE>
WorldQuest Networks, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the 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. Actual results could differ from these estimates.
3. Property and Equipment
Property and Equipment consists of the following as of:
<TABLE>
<CAPTION>
Estimated
Useful
Lives December 31, June 30,
(Years) 1998 1999
--------- ------------ -----------
(unaudited)
<S> <C> <C> <C>
Leasehold improvements................ 5 $ 14,297 $ 17,442
Switch and other network equipment.... 2 to 3 596,902 833,704
Furniture and fixtures................ 5 37,010 37,010
Capitalized software.................. 5 22,915 40,870
--------- ---------
Total................................. 671,124 929,026
Less: accumulated depreciation and
amortization....................... (418,639) (555,252)
--------- ---------
$ 252,485 $ 373,774
========= =========
</TABLE>
Included in the above net totals for property and equipment in 1998 and 1999 is
approximately $84,556 and $166,058, respectively relating to capital leases.
4. Other Assets
Other Assets consists of the following as of:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(unaudited)
<S> <C> <C>
Lease options (see Note 11)...................... $ 514,500 $ 514,500
Capitalized initial public offering costs........ -- 101,620
Goodwill (see Note 5)............................ 139,747 --
Deposits......................................... 84,933 76,722
Other............................................ 1,032 13,812
--------- ---------
$ 740,212 $ 706,654
========= =========
</TABLE>
5. Costa Rican Operation
In January 1997, the Company and a Costa Rican national formed a Costa Rican
corporation, owned 50% by each party, to provide facsimile termination service.
In January 1998, the Company purchased 40% of such interest from the other
party for $125,000 resulting in 90% ownership. The purchase consideration was
in the form of a note payable to the other party, of which $25,000 was paid in
January 1998.
During the first quarter 1999, this operation ceased terminating traffic due
to the loss of available circuits resulting in the effective shutdown of its
operations. Management determined that the outlook for this operation
F-10
<PAGE>
WorldQuest Networks, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Costa Rican Operation (continued)
was not favorable and ceased efforts to reinstate service. Accordingly, the
Company wrote-off its remaining goodwill in the first quarter of 1999. Other
remaining assets are carried at their realizable value or will be used in other
Company operations.
6. Accrued Expenses
Accrued Expenses consist of the following as of :
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(unaudited)
<S> <C> <C>
Deposits received................................ $182,463 $171,000
Other............................................ 161,768 154,180
-------- --------
$344,231 $325,180
======== ========
</TABLE>
7. Credit Facility from Parent and Note Payable to Vendor
In December 1996, the Company entered into a $2,000,000 line of credit
agreement with Eagle. The outstanding amount as of December 31, 1998 and June
30, 1999 (unaudited) totals $1,738,096 and $1,585,981, respectively. The loan
from Eagle bears interest at 8% per year and is payable on December 18, 2001,
unless demand is made by Eagle for earlier payment. The proceeds of this loan
were used to provide working capital.
In May 1999, Eagle and the Company amended its credit facility whereby
$1,100,000 was converted into a term loan with interest and principal due May
5, 2002 and the line of credit agreement was reduced to $900,000 of which
$261,904 and $414,019 is available for future borrowings as of December 31,
1998 and June 30, 1999, respectively. Accordingly this amount has been treated
as long-term debt in the accompanying financial statements. Eagle also agreed
at such time to convert $200,000 of the line of credit into 60,061 shares of
common stock, at a conversion price of $ 3.33 per share. In August 1999, Eagle
and the Company amended its credit facility by increasing the total available
under the line of credit to $1.4 million.
In March 1999, the Company converted vendor accounts payable totaling
$326,000 into an interest bearing promissory note. Principal and accrued
interest on the note is due, as amended, in September 1999.
8. Related Party Transactions
General
The Company's founder and Chief Executive Officer (CEO) holds a controlling
interest in Eagle, which in turn holds approximately 2.6 million and 2.7
million outstanding shares of the common stock of the Company as of
December 31, 1998, and June 30, 1999 (unaudited), respectively. The founder and
CEO has also agreed to provide necessary funding to the Company in the event
that the Company's current capital raising efforts are unsuccessful.
Additionally the founder and CEO has elected to forego a cash salary until
the successful completion of an initial public offering. Subsequent to the
completion of such an offering, the founder and CEO will receive an annual
salary of $175,000. Management believes that this amount approximates the fair
value, on an annual basis, of the services rendered to the Company by the
founder and CEO, and accordingly has recognized this expense in the financial
statements since inception.
F-11
<PAGE>
WorldQuest Networks, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Related Party Transactions (continued)
On December 7, 1998, the Company entered into a written agreement with
WorldQuest Communications, Inc. and Eagle which formalized an earlier oral
agreement relating, among other things, to the grant of a license to Eagle and
the Company by WorldQuest Communications of the name "WorldQuest." Pursuant to
this agreement, Eagle also acknowledged its prior oral agreement to transfer,
and caused the transfer of 360,000 shares of WorldQuest common stock owned by
it to WorldQuest Communications in consideration of WorldQuest Communications
canceling approximately $100,000 of payables owed by Eagle to WorldQuest
Communications. As part of this transaction, the primary shareholder of
WorldQuest Communications ( a director of the Company) also cancelled $150,000
of payables owed to him by Eagle, which Eagle also had funded to the Company as
equity or as a loan. Effective with the formation of the Company, Eagle
transferred its exclusive rights to the name "WorldQuest" as part of the
initial capitalization of the Company.
Consulting Fees
In 1997 and 1998 and for the six months ended June 30, 1998 and June 30,
1999 (unaudited) a relative of the CEO was paid $44,000, $41,000, $16,500 and
$5,500, respectively, for providing consulting services to the Company.
9. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December
31, 1998
-----------
<S> <C>
Deferred tax assets:
Deferred revenue........................................... $ 32,628
Depreciation and amortization.............................. 70,937
Other...................................................... 52,754
Net operating loss carryforwards........................... 993,360
-----------
Total deferred tax assets................................ 1,149,679
Valuation allowance.......................................... (1,149,679)
-----------
Net deferred tax assets...................................... $ --
===========
</TABLE>
The Company has U.S. net operating loss carryforwards of approximately $2.9
million as of December 31, 1998 which expire beginning in 2011. The Company's
total deferred tax assets have been fully reserved due to the uncertainty of
future taxable income. Accordingly, no tax benefit has been recognized in the
accompanying financial statements. No other significant reconciling items exist
between the actual effective tax rate and the expected effective tax rate.
10. Stockholders' Equity (Deficit)
Common and Preferred Stock
On October 14, 1996, the Company was incorporated with authorized share
capital consisting of 10,000,000 shares of common stock with par value of $0.10
per share, and 5,000,000 shares of preferred stock with par value of $0.10 per
share. As of the incorporation date, 10,000 shares of Common Stock, with $.10
par value were issued and outstanding.
F-12
<PAGE>
WorldQuest Networks, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Stockholders' Equity (Deficit) (continued)
On January 6, 1997 the Company declared a stock dividend of 299 shares for
each share of common stock issued and outstanding as of this date. 2,990,000
shares of common stock were distributed at par value, and an amount of $299,000
was recorded as common stock.
During May 1999, the Company sold 136,638 shares of its common stock for
$3.33 per share. In addition, as discussed in Note 7, $200,000 owed to Eagle
under the line of credit was converted into 60,061 shares of common stock, at a
conversion price of $3.33 per share.
Warrants
In 1998, the Company issued warrants to a third party in connection with an
equipment lease entered into by the Company and the third party (see Note 11).
The warrants' entitle the third party to purchase 159,474 shares of common
stock at $3.33 per share. The warrants are fully vested, are immediately
exercisable and have a five-year term. The warrants also carry anti-dilution
provisions that are triggered if equity instruments are issued by the Company
for prices below the then existing exercise price of the warrant. The fair
value of these warrants of approximately $408,000 is being amortized as
additional lease expense.
Stock Options
The Company has a stock option plan (Option Plan) under which the Company
may grant Directors and key employees options to purchase up to 500,000 shares
of the Company's common stock at an amount at least equal to the fair value of
the Company's common stock on the date of grant. All options have a seven year
term.
On January 7, 1997, the Company granted options to Directors (the Directors
Options) to purchase 20,000 shares of common stock at $1 per share, vesting
immediately. On January 7, 1997, the Company granted options to Key Employees
(the Key Employees Options) to purchase 60,000 shares of common stock at $1 per
share. Ten percent of the Key Employees Options' vest immediately and the
remaining vest ratably over a three-year period.
On December 8, 1998, the Company granted options to employees to purchase
98,500 shares of common stock at $3.33 per share. 42,950 of the options vest
immediately, 45,550 vest eighteen months from the date of grant, and 10,000
vest ratably over a three-year period. The options are exercisable when vested.
In February 1999, the Company granted options to an employee under the
Option Plan, to purchase 21,164 shares of common stock at an exercise price of
$3.33, these shares vest ratably over a three year period.
F-13
<PAGE>
WorldQuest Networks, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Stockholders' Equity (Deficit) (continued)
Employee stock option transactions under the Option Plan for the years ended
December 31, 1998 and 1997, and the six months ended June 30, 1999 (unaudited)
are summarized below:
<TABLE>
<CAPTION>
Weighted
Shares Weighted Average
Under Average Remaining
Option Exercise Contractual
Plan Price Life
------- -------- -----------
<S> <C> <C> <C>
Beginning Balance................................. -- -- --
Granted........................................... 80,000 $1.00 5 years
Exercised......................................... -- -- --
Canceled.......................................... -- -- --
------- ----- ---------
Outstanding at December 31, 1997.................. 80,000 $1.00 5 years
Granted........................................... 98,500 3.33 7 years
Exercised......................................... -- -- --
Canceled.......................................... 50,000 1.00 --
------- ----- ---------
Outstanding at December 31, 1998.................. 128,500 $2.79 6.5 years
Granted........................................... 21,164 3.33 7 years
Exercised......................................... -- -- --
Canceled.......................................... (1,500) 1.0 --
------- ----- ---------
Outstanding at June 30, 1999...................... 148,164 $2.88 6.6 years
======= ===== =========
Available for granting in future periods.......... 350,336
=======
</TABLE>
At December 31, 1997 and 1998, and June 30, 1999 26,000, 66,950 and 68,900
options were exercisable under the Option Plan.
In December 1998, the Company issued options outside of the Option Plan to
purchase 167,867 shares of its common stock to its Chief Operating Officer (the
COO) at an exercise price of $3.33. These options have a seven-year term and
vest 20% on the first anniversary date, 30% on the second anniversary date and
50% on the third anniversary date. These options vest immediately upon the
closing of an initial public offering by the Company, certain changes of
control, a merger or liquidation or a sale of substantially all of the assets
of the Company.
As permitted under SFAS No. 123, the Company has not recognized compensation
expense for the theoretical value of its options at the grant date (in excess
of the recognition of the intrinsic value). Had compensation expense for the
Option Plan been based on the fair value of options at the grant date amortized
over the vesting period, the Company's pro forma net loss and net loss per
share would have been the same as reported net loss and basic and diluted net
loss per share.
In determining the fair value of options granted for purposes of the
preceding pro forma disclosures, the Company used the minimum value option-
pricing model with the following weighted-average assumptions for 1998 and
1997, respectively: risk-free interest rate of 5%, dividend yield of zero; and
an expected option life of 4 years. The options granted during 1997 and 1998
and the six months ended June 30, 1999 had a weighted-average fair value of
$.60, $.18 and $.60 per share, respectively.
F-14
<PAGE>
WorldQuest Networks, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Stockholders' Equity (Deficit) (continued)
Reserved Capital Shares
The Company has reserved the following shares of common stock as of June 30,
1999 (unaudited):
<TABLE>
<S> <C>
Stock Option Plan................................................. 500,000
Stock Purchase Warrants........................................... 159,474
Options issued outside of Stock Option Plan....................... 168,867
-------
Total............................................................. 828,341
=======
</TABLE>
11. Commitments
The Company has capital leases for internet gateway telecommunications
equipment and operating leases relating principally to office facilities. The
capital leases contain a bargain purchase option at the end of the lease term.
Future minimum lease commitments at December 31, 1998, for leases with initial
or remaining terms of more than one year are summarized by fiscal year as
follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ---------
<S> <C> <C>
1999................................................. $118,339 $ 62,662
2000................................................. 29,585 63,486
2001................................................. -- 63,486
2002................................................. -- 5,291
2003................................................. --
Thereafter........................................... --
-------- --------
147,924 $194,925
========
Less amount representing interest.................... 11,192
--------
Present value of minimum lease payments.............. 136,732
Less current portion................................. 107,728
--------
Long-term portion of obligations under capital
leases.............................................. $ 29,004
========
</TABLE>
Rental expense under operating leases was approximately $111,316, $75,185,
$56,640 and $28,919 for fiscal years 1997 and 1998, and the six months ended
June 30, 1998 and 1999 (unaudited), respectively.
The Company entered into a leasing agreement with a third party to lease
equipment to be used in the Company's prepaid calling card business. In
connection with this lease agreement, the Company's issued the warrants
described in Note 10 and received options to purchase 100,000 shares of the
lessor's common stock at an exercise price equal to the fair value of the
common stock on the date of grant. The fair value of the options was estimated
at approximately $514,500 on the grant date using the Black-Scholes option-
pricing model. This asset is included in other assets (see Note 4) and is being
treated as a reduction of future lease expense.
The monthly lease payments for the above equipment is equal to the greater
of a set per minute charge based on usage or 10% of the revenues generated by
the Company using the leased equipment. Contingent rent expense under this
lease was approximately $0, $10,000, $0 and $23,000 for 1997 and 1998 and the
six months ended June 30, 1998 and 1999 (unaudited), respectively.
Effective August 31, 1999, the parties reached an agreement whereby the
lease was terminated and the warrants described in Note 10 and the options
noted above were canceled. The effects of this transaction will
F-15
<PAGE>
WorldQuest Networks, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Commitments (continued)
be recorded in the Company's third quarter and will in substance reverse the
amounts previously recorded in the consolidated financial statements.
In June 1999, the Company leased internet gateway telecommunications
equipment from a third party. Future minimum lease payments amount to $38,497
and $70,577 in 1999 and 2000, respectively. The capital lease has a 18 month
lease term and contains a bargain purchase option at the end of the lease term.
In July 1999, the Company entered into a revolving leasing agreement with a
third party. This agreement, which has a term of 36 months, provides the
Company with a $300,000 leasing facility to acquire Internet and Internet
related equipment. As of July 31, 1999, the Company had utilized $129,448 of
this facility. At the end of the lease term the equipment may be purchased at
the fair market value, or the lease can be renewed on an annual basis.
In conjunction with this agreement, the Company agreed to issue 30,000
warrants to purchase its common stock. These warrants have a five year term and
are exercisable at the initial public offering price, or $3.33 per share if a
public offering is not concluded prior to expiration of the warrants. The
Company will grant up to 30,000 warrants proportionate with the funding under
the $300,000 leasing facility. The fair value of the warrants will be
recognized as additional interest expense on the lease line of credit.
12. Joint Venture
In April 1999, the Company formed a joint venture with BDC, LLC, a Nevada
limited liability company owned by a director of the Company. The joint venture
was formed for the purpose of installing Internet gateway's in foreign
locations. The Company owns 60% of the joint venture. As a result, the accounts
of the joint venture have been consolidated since inception. Activity in this
joint venture has been minimal since formation and the Company has no funding
obligations to the joint venture.
13. Contingencies
In October 1997, the Patent and Trademark Office issued a notice of
publication regarding our application to register "WorldQuest Networks" as a
trademark. In response to that notice, Qwest Communications (Qwest) filed a
notice of opposition in September 1998, which is currently pending before the
Patent and Trademark Office. If the Company does not prevail, it will not be
able to obtain a registered trademark for "WorldQuest Networks" and could be
required to stop using the name or pay a fee to Qwest for permission to use it.
Any trademark may be challenged for a period of six years after it has been
granted. Thus the Company could also face a cancellation proceeding with the
Patent and Trademark Office relating to the trademark for "WorldQuest."
The Company is defendant from time to time in lawsuits incidental to their
business. The Company believes that resolution of all known contingencies, is
uncertain, and there can be no assurance that future costs related to such
litigation would not be material to the Company's financial position or results
of operations.
F-16
<PAGE>
[Picture]
[description to be filed by amendment]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Please read this prospectus carefully. It describes our business, our
products and services and our financial condition and results of operations.
We have prepared this prospectus so that you will have the information
necessary to make an informed investment decision.
You should only rely on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. The information contained in this prospectus is
accurate only as of the date of the prospectus, regardless of the time the
prospectus is delivered or the common stock is sold.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Forward Looking Statements............................................... 13
Use of Proceeds.......................................................... 13
Dividend Policy.......................................................... 13
Capitalization........................................................... 14
Dilution................................................................. 15
Selected Financial Data.................................................. 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 17
Business................................................................. 25
Management............................................................... 38
Certain Transactions..................................................... 42
Principal Stockholders................................................... 44
Description of Capital Stock............................................. 45
Shares Eligible for Future Sale.......................................... 48
Underwriting............................................................. 50
Legal Matters............................................................ 52
Independent Auditors..................................................... 52
Where You Can Get More Information....................................... 52
Index to Consolidated Financial Statements............................... F-1
</TABLE>
---------------
Until , 1999 (25 days after the date of this prospectus), all
dealers effecting transactions in the common stock may be required to deliver
a prospectus, even if they do not participate in this offering. This is in
addition to the obligations of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[WorldQuest Logo to appear here]
www.wqn.com
2,400,000 Shares
Common Stock
---------------
PROSPECTUS
, 1999
---------------
EBI Securities Corporation
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits the Registrant
to indemnify directors and officers. Article X, Section 10.2, of the
Certificate of Incorporation, and Article VIII, Section 8.06, of the Bylaws,
provide that the Registrant shall indemnify each person who was or is a party,
or is threatened to be made a party, to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he or she is or was, or has agreed to
become, a director or officer of the Registrant or is or was serving, or has
agreed to serve, at the request of the Registrant, as a director, officer or
trustee of, or in a similar capacity with, another corporation, partnership,
joint venture, trust or other enterprise (including any employee benefit plan),
or by reason of any action alleged to have been taken or omitted in such
capacity, against all expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him or her
or on his or her behalf in connection with such action, suit or proceeding and
any appeal therefrom. Such right of indemnification shall continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such a
person.
ITEM 25. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimates,
except the SEC, NASD and Nasdaq fees.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................ $ 10,330
NASD filing fee.................................................... 4,215
Nasdaq National Market listing fee................................. 66,875
Underwriters' nonaccountable expense allowance..................... 528,000
Printing and engraving expenses.................................... 100,000
Accounting fees and expenses....................................... 175,000
Legal fees and expenses............................................ 130,000
Fees and expenses (including legal fees) for qualifications under
state securities laws............................................. 10,000
Transfer agent and registrar's fees and expenses................... 10,000
Miscellaneous expenses............................................. 50,000
----------
Total.......................................................... $1,084,420
==========
</TABLE>
ITEM 26. Recent Sales of Unregistered Securities
Set forth in the table below are the dates, the number of securities sold
and the total offering price of such securities sold by the Registrant within
the past three years. Unless otherwise indicated, all securities were sold to
the purchasers directly by the Registrant, and therefore, no underwriting
discounts or commissions were involved.
<TABLE>
<CAPTION>
Total
Date of Number of offering
Title of securities sold purchase shares price($)
------------------------ ------------- -------------- ----------
<S> <C> <C> <C>
Common Stock........................... October 1996 10,000(/1/) $ 501,000
Promissory Note........................ December 1996 (/2/) 2,500,000
Common Stock (stock dividend).......... January 1997 2,900,000(/1/)
Common Stock Purchase Warrant.......... June 1998 159,474(/3/)
Common Stock........................... May 1999 136,138(/4/) 455,000
Common Stock........................... May 1999 60,061(/2/) 200,000
Common Stock Warrant................... August 1999 30,000(/5/)
Common Stock Option.................... August 1999 30,000(/5/)
</TABLE>
II-1
<PAGE>
- --------
(1) This common stock and the dividend was issued to Eagle Venture Capital,
LLC, our founding stockholder.
(2) This note is a credit facility payable to our founding stockholder. On May
5, 1999, $200,000 of the facility was converted into 60,061 shares of
common stock.
(3) Represents a right to purchase 159,474 shares of common stock granted in
connection with a lease of equipment from the warrant holder. This Common
Stock Purchase Warrant was cancelled in August 1999 by mutual agreement
with the warrant holder in connection with a mutually agreed upon
termination of the equipment lease.
(4) These shares of common stock were sold to ten private accredited investors
during May 1999.
(5) The warrant was granted to the lessor under an equipment lease and the
option was granted to a telephone carrier as part of the modification of an
agreement for telephone call transmission and termination.
All of the above securities were sold by the Registrant in reliance on
Section 4(2) of the Securities Act of 1933, as amended.
ITEM 27. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1*** Form of Underwriting Agreement.
3.1* Certificate of Incorporation of the Registrant.
3.2* Bylaws of the Registrant.
4.1** Specimen common stock certificate.
4.2* Amended and Restated Note dated May 5, 1999 payable to WorldQuest
Networks, LLC (now known as Eagle Venture Capital, LLC).
4.3*** Form of Warrant Agreement between the Registrant and EBI Securities
Corporation, including form of Representative's Warrant.
4.4** Amended and Restated Note dated August 15, 1999 payable to Eagle
Capital Venture, LLC, which replaces the Amended and Restated Note
filed as Exhibit 4.2.
5.1*** Opinion of Glast, Phillips & Murray, a Professional Corporation.
Joint Venture Agreement dated April 9, 1999 between the Registrant and
10.1* BDC, LLC.
10.2** Amended 1997 Stock Option Plan.
Stock Option Agreement dated December 7, 1998 granted to Michael R.
10.3* Lanham by the Registrant.
10.4* Stock Transfer Agreement dated December 7, 1998 between WorldQuest
Communications, Inc., WorldQuest Networks, LLC and the Registrant.
10.5* Stock Purchase Warrant dated June 10, 1998 granted to InterVoice,
Inc., which was terminated by mutual agreement in August 1999.
10.6** Equipment lease between InterVoice, Inc. and Registrant, which was
terminated by mutual agreement in August 1999.
23.1** Consent of Ernst & Young LLP.
23.2 Consent of Glast, Phillips & Murray, P.C. (contained in Exhibit 5.1).
Power of Attorney (included on signature page of registration
24.1 statement).
27.1** Financial Data Schedule.
99.1* Consent of Mark C. Levy.
</TABLE>
- --------
* Previously filed
** Filed herewith
*** To be filed by amendment
II-2
<PAGE>
ITEM 28. Undertakings
The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made, a post-
effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(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 the volume of securities offered (if the total dollar
value of the securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range 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 this registration
statement; and
(iii) to include any additional or changed material information with
respect to the plan of distribution;
(2) that, for the purpose of determining any liability under the Securities
Act, 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;
(3) to remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
this offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised 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. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant 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 Registrant 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 and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide the underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
For purposes of determining any liability under the Securities Act, 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.
For the purpose of determining any liability under the Securities Act, 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.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this Amendment
No. 1 to the registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas
on September 3, 1999.
WORLDQUEST NETWORKS, INC.
/s/ B. Michael Adler
By: _________________________________
B. Michael Adler, Chairman of
the
Board and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the registration statement has been signed by the following persons in
the capacity indicated on September 2, 1999.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Michael R. Lanham Director September 3, 1999
____________________________________
Michael R. Lanham
/s/ Hugh E. Humphrey, Jr.* Director September 3, 1999
____________________________________
Hugh E. Humphrey, Jr.
/s/ E. Denton Jones* Director September 3, 1999
____________________________________
E. Denton Jones
/s/ Michael R. Lanham
*By: __________________________
Michael R. Lanham
Attorney-In-Fact
</TABLE>
POWER OF ATTORNEY
We, the undersigned directors and officers of WorldQuest Networks, Inc.,
hereby constitute and appoint B. Michael Adler and Michael R. Lanham, or either
of them, our true and lawful attorneys and agents, to do any and all acts and
things in our names in the capacities indicated below, which said attorneys and
agents, or either of them, may deem necessary or advisable to enable said
corporation to comply with the Securities Act of 1933, as amended, and any
rules, regulations, and requirements of the Securities and Exchange Commission,
in connection with this registration statement, including specifically, but
without limitation, power and authority to sign for us or in our names and in
the capacities indicated below, any and all amendments (including post-
effective amendments) to this registration statement, or any related
registration statement that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933, as amended; and we do hereby ratify
and confirm all that the said attorneys and agents, or either of them, shall do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the registration statement has been signed by the following person in
the capacity indicated on September 3, 1999.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ B. Michael Adler Director and Chief Executive September 3, 1999
____________________________________ Officer (Principal
B. Michael Adler Executive Officer)
/s/ Mark C. Levy Chief Financial Officer September 3, 1999
____________________________________ (Principal Financial and
Mark C. Levy Accounting Officer)
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1*** Form of Underwriting Agreement.
3.1* Certificate of Incorporation of the Registrant.
3.2* Bylaws of the Registrant.
4.1** Specimen common stock certificate.
4.2* Amended and Restated Note dated May 5, 1999 payable to WorldQuest
Networks, LLC (now known as Eagle Venture Capital, LLC).
4.3*** Form of Warrant Agreement between the Registrant and EBI Securities
Corporation, including form of Representative's Warrant.
4.4** Amended and Restated Note dated August 15, 1999 payable to Eagle
Capital Venture, LLC, which replaces the Amended and Restated Note
filed as Exhibit 4.2.
5.1*** Opinion of Glast, Phillips & Murray, a Professional Corporation.
Joint Venture Agreement dated April 9, 1999 between the Registrant and
10.1* BDC, LLC.
10.2** Amended 1997 Stock Option Plan.
Stock Option Agreement dated December 7, 1998 granted to Michael R.
10.3* Lanham by the Registrant.
10.4* Stock Transfer Agreement dated December 7, 1998 between WorldQuest
Communications, Inc., WorldQuest Networks, LLC and the Registrant.
10.5* Stock Purchase Warrant dated June 10, 1998 granted to InterVoice,
Inc., which was terminated by mutual agreement in August 1999.
10.6** Equipment lease between InterVoice, Inc. and Registrant, which was
terminated by mutual agreement in August 1999.
23.1** Consent of Ernst & Young LLP.
23.2 Consent of Glast, Phillips & Murray, P.C. (contained in Exhibit 5.1).
Power of Attorney (included on signature page of registration
24.1 statement).
27.1** Financial Data Schedule.
99.1* Consent of Mark C. Levy.
</TABLE>
- --------
* Previously filed
** Filed herewith
*** To be filed by amendment
<PAGE>
EXHIBIT 4.1
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
NUMBER SHARES
WORLDQUEST NETWORKS, INC.
COMMON STOCK CUSIP
THIS CERTIFICATE IS TRANSFERABLE IN SEE REVERSE FOR
DALLAS, TEXAS OR NEW YORK, NEW YORK CERTAIN DEFINITIONS
THIS CERTIFIES that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.01 PAR VALUE, OF
WORLDQUEST NETWORKS, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney, upon surrender of this certificate properly
endorsed.
This certificate is not valid unless countersigned by the Transfer Agent and
registered by the Registrar.
WITNESS, the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
DATED:
COUNTERSIGNED AND REGISTERED
CHAIRMAN OF THE BOARD BY TRANSFER AGENT AND REGISTRAR.
SECRETARY AUTHORIZED SIGNATURE
Corporate
Seal
1999
Delaware
<PAGE>
The Corporation will furnish, upon request and without charge, a full
statement of the designations and the powers, preferences and rights, and the
qualifications, limitations or restrictions of the shares of each class of stock
authorized to be issued by it, and the variations in the relative rights and
preferences between the shares of each series of any preferred or special class
so far as the same have been fixed and determined, and the authority of the
Board of Directors to fix and determine the relative rights and preferences of
subsequent series of any preferred or special class. Such request may be made
to the Secretary of the Corporation or to the Transfer Agent.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT -- ________ Custodian ________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right Under Uniform Gifts to Minors
of survivorship and not as Act_______________________
tenants in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received, __________________________________________________ hereby
sell(s), assign(s) and transfer(s) unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ----------------------------------------------------------
________________________________________________________________________________
________________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING POSTAL ZIP COD OF ASSIGNEE
________________________________________________________________________________
__________________________________________________________________________Shares
of the Stock represented by the within Certificate and do hereby irrevocably
constitute and appoint
________________________________________________________________________________
Attorney to transfer the said stock on the books of the within-named
Corporation, with full power of substitution in the premises.
Dated ________________________________
NOTICE:
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER
X___________________________________________
(SIGNATURE)
X___________________________________________
(SIGNATURE)
- --------------------------------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION AS
DEFINED IN RULE 17Ad-15 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
- --------------------------------------------------------------------------------
SIGNATURE(S) GUARANTEED BY:
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 4.4
AMENDED AND RESTATED NOTE
$2,500,000.00 August 15, 1999
FOR VALUE RECEIVED, the undersigned, WorldQuest Networks, Inc. (hereinafter
referred to as "Maker"), promises to pay to the order of Eagle Venture Capital,
LLC (f/k/a WorldQuest Networks, LLC) ("Holder"), in lawful money of the United
States of America, the principal sum of Two Million Five Hundred Thousand
Dollars ($2,500,000.00), or so much thereof as may be advanced from time to time
and noted on Schedule A hereof, with interest thereon from the date of each
advance until such advance is repaid at a rate of eight percent (8%) per annum.
Effective the date of each such subsequent advance and as advances are repaid,
Maker shall sign, date and deliver to Holder an updated Schedule A to replace
the prior Schedule A to this Note. Interest payable under this Note shall be
computed on the basis of a 365-day year and actual days elapsed.
This Note is partially a term note and partially a revolving note. The
term note portion represents $1,100,000 of the principal balance, which
$1,100,000 of principal balance is outstanding as of the date of this Note, with
accrued interest thereon of $168,631.66 as of the date of this Note. The term
note portion of the principal balance and such accrued interest, together with
interest accruing hereafter on such principal balance, is due and payable in
full on May 5, 2002.
The remaining principal balance of this Note, of up to $1,400,000, or so
much thereof as may be advanced from time to time and noted on Schedule A
hereof, constitutes the revolving portion of the Note. Maker may borrow, repay,
and reborrow the revolving portion of this Note until such time as Holder shall
have notified Maker in writing that no further advances will be made under such
revolving portion of this Note. As of the date of this Note, $467,755.72 in
principal has been borrowed pursuant to the revolving portion of this Note and
is outstanding as of the date hereof, together with accrued interest thereon of
$53,342.03. The principal balance of the revolving portion of this Note,
together with all accrued interest, is payable on demand by Holder. If no
demand is made, the accrued interest of $53,342.03, plus the interest accruing
after the date of this Note on the outstanding revolving portion of the
principal balance of this Note, shall accrue until December 18, 1999, at which
time such accrued interest shall be due and payable and, thereafter, accrued
interest on the outstanding revolving portion of the principal balance of this
Note shall be payable monthly in arrears, with the first payment due January 18,
2000 and thereafter on the 18th day of each succeeding month, and the
outstanding revolving portion of the principal balance of this Note shall be
paid in full on May 5, 2002.
Except as otherwise expressly provided herein, Maker and each surety,
endorser, and guarantor of this Note hereby severally waives demand and
presentation for payment, notice of non-payment, protest and notice of protest,
and the diligence of bringing suit against any party
1
<PAGE>
hereto and consents that time of payment may be extended from time to time
without notice thereof to him, her or it.
All amounts payable hereunder by Maker shall be payable to Holder at the
address set forth by Holder, from time to time, in writing to Maker, and shall
be made by Maker in lawful money of the United States in cash or its equivalent
at such place of payment.
If any payment required to be made hereunder becomes due and payable on a
non-business day, the maturity thereof shall extend to the next business day and
interest shall be payable at the rate applicable thereto during such extension.
The term "business day" shall mean a calendar day excluding Saturdays, Sundays
or other days on which banks in the State of Texas are required or authorized to
remain closed.
If this Note is placed in the hands of an attorney for collection, Maker
agrees to pay reasonable attorneys' fees and costs and expenses of collection,
including but not limited to court costs.
Upon the failure of prompt and timely payment when due of any installment
of principal or interest under this Note, then Holder, at Holder's option, may
declare the entire unpaid balance of principal and accrued interest hereunder to
be immediately due and payable.
This Note is given for an actual lending transaction for business purposes
and not for personal, residential or agricultural purposes.
This Note shall be governed by and construed in accordance with the laws of
the State of Texas and applicable laws of the United States.
In no contingency or event whatsoever shall the amount paid or agreed to be
paid by Maker, received by Holder, or requested or demanded to be paid by Maker
exceed the maximum amount permitted by applicable law. In the event any such
sums paid to Holder by Maker would exceed the maximum amount permitted by
applicable law, Holder shall automatically apply such excess to the unpaid
principal amount of this Note or, if the amount of such excess exceeds the
unpaid principal amount of this Note, such excess automatically shall be applied
by Holder to the unpaid principal amount of other indebtedness, if any, owed by
Maker to Holder, or if there be no such other indebtedness, such excess shall be
paid to Maker. All sums paid or agreed to be paid by Maker, received by Holder,
or requested or demanded to be paid by Maker which are or hereafter may be
construed to be or in respect of compensation for the use, forbearance, or
detention of money shall, to the extent permitted by applicable law, be
amortized, prorated, spread and allocated throughout the full term of all
indebtedness of Maker to Holder, to the end that the actual rate of interest
hereon shall never exceed the maximum rate of interest permitted from time to
time by applicable law.
2
<PAGE>
This Amended and Restated Note amends, restates and supersedes, but is not
intended to and shall not extinguish or cancel the indebtedness evidenced by,
that certain Note dated December 18, 1996 in the original principal amount of up
to $2,000,000 payable by Maker to Holder, as amended by that certain Amended and
Restated Note dated May 5, 1999 in the original principal amount of up to
$2,000,000 payable by Maker to Holder. However, Holder agrees as a condition to
Maker's execution of this Amended and Restated Note, that Holder will return the
Amended and Restated Note dated May 5, 1999 to Maker marked "canceled" and this
Amended and Restated Note shall govern the rights and obligations of the
parties. Maker and Holder acknowledge that the original Note dated December 18,
1996 has been previously returned by Holder to Maker and marked "cancelled".
EXECUTED as of the date first above written.
MAKER:
WORLDQUEST NETWORKS, INC.
By: /s/ B. MICHAEL ADLER
--------------------------------------------
B. Michael Adler, Chief Executive Officer
3
<PAGE>
SCHEDULE A
TO
AMENDED AND RESTATED NOTE DATED AUGUST 15, 1999
PAYABLE BY WORLDQUEST NETWORKS, INC.
TO EAGLE VENTURE CAPITAL, LLC
<TABLE>
<CAPTION>
Dollar Amount Dollar Amount
- ------------- -------------
of Advance Date of Advance of Repayment Date of Repayment
- ---------- --------------- ------------ -----------------
<S> <C> <C> <C>
$467,755.72 August 15, 1999
</TABLE>
MAKER:
WORLDQUEST NETWORKS, INC.
By: /S/ B. MICHAEL ADLER
-----------------------------------
B. Michael Adler, Chief Executive
Officer
Date of Schedule A: August 15, 1999
4
<PAGE>
EXHIBIT 10.2
AMENDED 1997 STOCK OPTION PLAN
OF
WORLDQUEST NETWORKS, INC.
1. Purpose. This plan (the "Plan") adopted effective as of January 14,
1997, as amended July 1, 1999, is designed to encourage key employees and
consultants of WORLDQUEST NETWORKS, INC. (the "Company"), as well as key
employees and consultants of any after-acquired subsidiary corporation, to
acquire a proprietary interest in the Company and thus share in the future
success of the Company's business. This Plan is intended as a means, not only
of attracting and retaining outstanding management personnel and consultants who
are in a position to make important and direct contributions to the success of
the Company, but also of promoting a closer identity of interests between the
Company's employees and its shareholders.
2. Stock Options. Options granted under this Plan shall be Nonstatutory
Stock Options ("Options") under the Internal Revenue Code of 1986, as amended
(the "Code").
3. Scope and Duration of the Plan. There will be reserved for sale upon
the exercise of Options granted under this Plan Five Hundred Thousand (500,000)
shares of the Company's authorized but unissued voting common stock. If an
Option expires or terminates for any reason without having been fully exercised,
the unpurchased shares will be available for other Options under the Plan.
Unless this Plan is terminated earlier pursuant to Section 15 hereof, it shall
terminate ten (10) years from its effective date and no Option shall be granted
after that date; provided, however, that termination of this Plan will have no
effect on the Options previously granted.
4. Administration. The Plan shall be administered by the Board of
Directors of the Company. Directors shall be eligible for the grant of Options
hereunder.
The Board of Directors has the responsibility to adopt such rules and
regulations as it deems necessary or desirable for the proper administration of
this Plan. Any decision or action taken or to be taken by the Board of
Directors, arising out of or in connection with the construction,
interpretation, and administration of this Plan shall, to the extent permitted
by law, be within its absolute discretion, but subject to the express provisions
of this Plan. Decisions of the Board of Directors shall be conclusive and
binding upon all recipients of Options and any person claiming under or through
any recipient of an Option.
5. Eligible Employees. Options may be granted to directors and key
employees of the Company and future subsidiary corporations who otherwise comply
with the requirements of this Plan. The Board of Directors has the authority,
subject to the terms of this Plan, to determine key employees to whom Options
shall be granted, the number of shares to be covered by each Option, form of
payment, the time or times at which Options shall be granted, and the terms and
provisions of the instruments evidencing Options. The term "key employee" shall
include officers, executives and supervisory personnel of the Company. In
determining the key employees
-1-
<PAGE>
and consultants to whom Options shall be granted and the number of shares to be
issued on the exercise of an Option, the Committee shall take into account the
duties of the key employees and consultants, their present and potential
contributions to the success of the Company and its subsidiary corporations, and
such other factors as the Committee deems relevant to accomplish the purpose of
this Plan.
6. Exercise Price. Subject to the provisions of Section 5 above, the
price of the shares of common stock to be issued on exercise of Options shall be
not less than the fair market value of such shares on the date an Option is
granted, as determined by the Board of Directors in the exercise of its sole and
exclusive judgment, which shall be binding upon all parties. If the Company's
common stock shall become listed on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ"), the fair market value shall be
deemed to be the closing sales price of the Company's common stock on NASDAQ on
the date the Option is granted, or if no sale of the Company's common stock
shall have been made on that date, on the next preceding day on which there was
a sale of such stock. If the Company's common stock shall become listed on an
established stock exchange, the fair market value shall be deemed to be the
closing sales price of the stock on such exchange on the date the Option is
granted, or if no sale of the Company's stock shall have been made on such day,
then on the next preceding day on which there was a sale of such stock.
Subject to the foregoing, the Board of Directors, in fixing the Option price,
shall have full authority and discretion and their good faith judgment in
establishing fair market value and in establishing the purchase price shall be
conclusive.
7. Term of Options. The term of each Option shall be determined by the
Board of Directors, but shall not be for more than ten (10) years from the date
the Option is granted.
8. Exercise of Options. An Option may vest and be exercised on such
terms and conditions as the Board of Directors shall determine, subject to the
requirements of this Plan. Unless otherwise determined by the Board of
Directors, the price of the shares purchased pursuant to an Option shall be paid
in full at the time of exercise in cash or in such other consideration as the
Board of Directors deems appropriate, including, without limitation, shares of
common stock of the Company valued at fair market value (in the manner
prescribed in Section 6 above) as of the date of exercise of the Option. No
Option may be exercised during the optionee's lifetime unless the optionee is
then an employee or consultant of the Company or a subsidiary corporation;
provided that, in the event the optionee's employment terminates for reasons
other than death or disability, the Option may be exercised during the three (3)
month period following the termination of employment. Thereafter, the Option
shall terminate and be at an end. In the case of disability or death, the Board
of Directors may extend the Option for up to one (1) year. Notwithstanding the
foregoing, Options granted to Directors may be exercisable for a period of up to
seven (7) years following the date such Director ceases to be a Director of the
Company.
Whether an authorized leave of absence, disability, or temporary absence
from employment for any other reason constitutes termination of employment for
the purposes of this Plan shall be determined by the Board of Directors.
-2-
<PAGE>
9. Additional Restrictions Upon Exercise of Options. Options may be
exercisable either in whole or in part. No less than one hundred (100) shares
common stock may be purchased at any one time unless the number purchased is the
total number of shares at that time purchasable under the Option. The Board of
Directors may impose such other restrictions upon the exercise of the Option or
the transfer shares of common stock acquired upon the exercise of the Option as
the Committee deems necessary to comply with federal and state securities law.
10. Nontransferability of Options. During the lifetime of the optionee,
the Option shall be exercised only by the optionee. An Option granted under
this Plan is not transferable by the optionee by operation of law or otherwise,
except that in the event of death of the optionee while in the employ of the
Company or a subsidiary, an Option granted hereunder may be exercised (subject
to the time restrictions set forth in Section 7 hereof) at any time within one
(1) year after death, by the duly appointed personal representative of the
optionee, or by any person or persons who shall acquire such Option directly
from the optionee by bequest or inheritance.
11. Adjustments for Changes in Capitalization. Notwithstanding any other
provision of this Plan, each instrument evidencing an Option may contain such
provision as the Board of Directors determines to be appropriate, if any, for
the adjustment of the number and class of shares of common stock covered by the
Option, the Option price, and the number of shares of common stock as to which
the Option shall be exercisable at any time, in the event of changes in the
outstanding shares of common stock of the Company by reason of stock dividends,
split-ups, recapitalizations, mergers, consolidations, reorganizations, or
liquidations. In the event of any such change in the outstanding shares of
common stock of the Company (other than the dividend of 299 shares of common
stock for each outstanding share of common stock approved on January 6, 1997),
the aggregate number of shares available under this Plan shall be appropriately
adjusted.
12. Events Accelerating Exercise of Options. If the shares of common
stock of the Company are changed into or exchanged for shares of stock of
another unrelated corporation or are converted to cash pursuant to a plan of
merger, partial or complete liquidation or dissolution, each Option then
outstanding (to the extent this Plan is not continued, as adjusted in the manner
specified in Section 11 by the successor entity) shall be exercisable, with
respect to all the shares of common stock covered thereby and without regard to
the time the Option has been outstanding, beginning with the date the Board of
Directors approves or authorizes such change or conversion, and ending two (2)
days prior to the effective date of such change or conversion.
13. Loans to Holders of Options. The Company may, in the sole discretion
of the Board of Directors, directly or indirectly, lend money or credit to any
employee for the purpose of assisting an optionee in purchasing shares of common
stock to be issued upon the exercise of an Option granted under this Plan.
14. Employment Rights; Noncompetition Covenants. Nothing in this Plan or
any instrument evidencing an Option shall confer upon any employee any right to
continue in the employment of the Company or a subsidiary corporation, nor be
construed to interfere in any way with the right otherwise available to the
Company or a subsidiary corporation to terminate the
-3-
<PAGE>
employee's employment at any time for any reason. The Board of Directors may
condition each grant of an Option upon the recipient's agreement to execute and
be bound by a noncompetition covenant following termination of such recipient's
employment by the Company voluntarily by such recipient, or by the Company with
or without cause, as the Board of Directors may determine in each individual
instance.
15. Amendment/Termination. The Board of Directors may amend or terminate
this Plan from time to time in such respects as it may deem advisable; provided
that the following revisions or amendments shall require approval at a duly held
shareholders' meeting of the holders of a majority of the voting power of the
outstanding shares of the Company entitled to vote;
(1) Any increase in the number of shares subject to the Plan, other
than in connection with an adjustment under Section 12;
(2) Any change in the designation of the class of employees or
consultants eligible to be granted Options; or
(3) Any material increase in the benefits accruing to participants in
this Plan.
16. Rights as a Shareholder. An optionee, or permitted transferee of an
Option upon the death of an optionee, shall have no rights as a stockholder with
respect to any shares of common stock covered by an Option until the date of the
issuance of a stock certificate to and for such shares. No adjustment shall be
made for dividends (ordinary or extraordinary, whether in cash, securities, or
other property) or distributions or other rights for which the record date is
prior to the date such stock certificate is issued, except as provided in
Section 12 above.
17. Investment Purpose. Common stock acquired upon the exercise of an
Option granted under this Plan may only be resold in the event such stock is
registered under the Securities Act of 1933, as amended, or if, in the opinion
of responsible counsel for the Company, such stock can be resold without such
registration. Unless a registration statement with respect to such stock
covering the holder of such Option is then in effect, each certificate issued
pursuant to the exercise of such Option shall contain a legend to this effect.
18. Other Provisions. The Option Agreements authorized under this Plan
may contain such other provisions, including without limitation, restrictions
upon the exercise of Options, as the Board of Directors shall deem advisable.
19. Indemnification of Committee. In addition to such other rights of
indemnification as they may have as Directors, the Board of Directors shall be
indemnified by the Company against the reasonable expenses, including attorneys'
fees actually and necessarily incurred in connection with the defense of any
action, suit or proceeding, or in connection with any appeal therein, to which
they or any of them may be a party by reason of any action taken or failure to
act under or in connection with this Plan or any Option granted hereunder, and
against all amounts
-4-
<PAGE>
paid by them in settlement thereof (provided such settlement is approved by the
Company), or paid by them in satisfaction of a judgment in any such action, suit
or proceeding, except in relation to matters as to which it shall be adjudged in
such action, suit, or proceeding that such Director is liable for negligence or
misconduct in the performance of his duties; provided that within sixty (60)
days after the institution of any such action, suit or proceeding, the Director
shall, in writing, offer the Company the opportunity, at its own expense, to
defend the same.
This Plan, as amended, is executed July 1, 1999.
WORLDQUEST NETWORKS, INC.
By: /S/ B. MICHAEL ADLER
---------------------------------
B. Michael Adler,
Chief Executive Officer
-5-
<PAGE>
EXHIBIT 10.6
EQUIPMENT LEASE
---------------
InterVoice Inc. (herein called "Lessor") agrees to lease to WorldQuest Networks,
Inc. (herein called "Lessee"), and Lessee agrees to lease and rent from Lessor,
the equipment for the 400 Ports (as defined in Section 14 below), which
equipment includes a license to all software ("Software") associated with the
use and operation of such equipment (as such license is described in Section 15
below), (herein with all replacement parts, additions and accessories called the
"Equipment"), on the terms and conditions hereof.
1. TERM AND RENT. The lease term shall commence as of the date that the
-------------
Equipment is accepted by Lessee or Lessee's agent in accordance with
Section 10 below (the "Commencement Date") and shall continue until the
obligations of Lessee under this Lease shall have been fully performed.
Monthly Rent, in the amount per month determined in accordance with Section
11 below, shall be due and payable on the fifteenth (15th) day of the
following month beginning on the fifteenth day of the month following the
month in which acceptance occurs, and shall continue for a period of thirty
six (36) months (the "Term of this Agreement"). THIS LEASE CANNOT BE
CANCELLED BY THE PARTIES HERETO DURING THE TERM HEREOF, except by mutual
written agreement of the parties, or as otherwise provided for in this
Lease.
2. TITLE: PERSONAL PROPERTY. The Equipment is, and shall at all times, remain
------------------------
the property of Lessor, and, except as provided herein, Lessee shall have
no right, title or interest therein. If Lessor supplies Lessee with labels
indicating that the Equipment is owned by Lessor, Lessee shall affix such
labels to and keep them in a prominent place on the Equipment. In order to
perfect Lessor's security interest in the Equipment in the event this Lease
is determined to be a security agreement, Lessee hereby grants Lessor a
security interest in the Equipment and authorizes Lessor, at Lessee's
expense, to cause this Lease, or any statement or other instrument in
respect of this Lease showing the interest of Lessor in the Equipment,
including Uniform Commercial Code Financing Statements, to be filed or
recorded and re-filed and re-recorded, and grants Lessor the right to
execute Lessee's name thereto. Lessee agrees to execute and deliver any
statement or instrument requested by Lessor for such purpose. Lessee shall,
at its expense, protect and defend Lessor's title (provided Lessee shall
have no obligations to protect and defend Lessor's title with respect to
claims of Lessor's creditors) against all persons claiming against or
through Lessee, at all times keeping the Equipment free from any legal
process or encumbrance whatsoever, including but not limited to liens,
attachments, levies and executions, and shall give Lessor immediate written
notice thereof and shall indemnify Lessor from any loss caused thereby.
Lessee shall execute or obtain from third parties and deliver to Lessor,
upon Lessor's request and expense, such further instruments and assurances
as Lessor deems necessary or advisable for the confirmation or perfection
of Lessor's rights hereunder. The Equipment is, and shall at all times be
and remain, personal property notwithstanding that the Equipment or any
part thereof may now be, or hereafter become, in any manner affixed or
attached to real property or any improvements thereon.
3. CARE, USE, LOCATION AND ALTERATION. Lessee shall not misuse the Equipment,
----------------------------------
shall exercise reasonable care in using the Equipment, shall use the
Equipment lawfully and shall not alter the Equipment without Lessor's prior
written consent.
4. REDELIVERY. Upon expiration or earlier termination of this Lease, Lessee
----------
shall return the Equipment covered thereby, freight prepaid, to Lessor in
good repair, condition and working order, ordinary wear and tear resulting
from proper use thereof only excepted, in a manner and to a location within
the continental United States designated by Lessor. Any and all costs
associated with returning the Equipment, including discontinuance,
disassembly, rigging, and transportation expenses, duties, tariffs and/or
taxes, shall be paid by Lessee.
1
<PAGE>
5. NET LEASE, TAXES AND FREIGHT. Lessee intends the rental payments hereunder
----------------------------
to be net to Lessor and Lessee shall pay all sales, use, excise, stamp,
documentary and ad valorem taxes, license and registration fees,
assessments, fines, duties, tariffs, penalties and similar charges imposed
on the lease, license, delivery, transportation, ownership, possession or
use of the Equipment during the term of the lease; shall pay all taxes
(except Lessor's Federal or State net income taxes) imposed on Lessor or
Lessee with respect to the rental payments hereunder and shall reimburse
Lessor upon demand for any taxes paid by or advanced by Lessor. Unless
otherwise agreed to in writing, Lessor shall file for and pay all personal
property taxes assessed with respect to the Equipment during the term of
this Lease and Lessee shall, upon Lessor's demand, forthwith reimburse
Lessor therefor. The Equipment is provided to Lessee F.O.B, Lessee's
facilities in New York, and Lessor is responsible for paying all freight
and other transportation charges associated with the Equipment.
6. TAX TREATMENT. With respect to each item of the Equipment leased
-------------
hereunder, Lessee agrees that Lessor shall be entitled to such deductions
and other benefits as are provided to an owner of personal property leased
by the owner under a capital lease, under the Internal Revenue Code of 1986
(as defined in Section 2 of the Tax Reform Act of 1986), as amended or
superseded from the time (hereinafter the "Code"), including without
limitation depreciation deductions based upon the Accelerated Cost Recovery
Equipment all at the federal tax rates in effect on the Commencement Date
(hereinafter "Tax Benefits"). The parties further agree that the applicable
provisions of this lease cannot be changed without endangering Lessor's tax
benefits.
7. DEFAULT AND REMEDIES. If Lessee defaults in any payment or other
--------------------
obligation required under this Lease, and such default is not cured within
thirty (30) days after receipt from Lessor of notice of such default, the
Lessor may declare the aggregate balance of rent for the full term of this
Lease immediately due and payable and the Lessor shall have all remedies
made available to it at law and in equity.
8. ASSIGNMENT; QUITE ENJOYMENT. Lessor may with Lessee's consent, which
---------------------------
consent will not be unreasonably withheld, assign this Lease and/or the
rentals due hereunder or sell or grant a security interest in the
Equipment. Provided Lessee is not in default hereunder, Lessee shall
quietly enjoy use of the Equipment subject to the terms and conditions of
this Lease.
WITHOUT LESSOR'S PRIOR WRITTEN CONSENT LESSEE SHALL NOT ASSIGN, TRANSFER,
PLEDGE, HYPOTHECATE, OR OTHERWISE DISPOSE OF THE EQUIPMENT OR ANY INTEREST
THEREIN, OR SUBLET OR LEND THE EQUIPMENT OR PERMIT IT TO BE USED BY ANYONE OTHER
THAN LESSEE OR LESSEE'S EMPLOYEES.
Provided Lessee is not in default hereunder or under any other lease or
agreement with Lessor, Lessee and Lessor shall use all reasonable efforts to
negotiate a purchase price for Lessee to purchase the Equipment (other than
Software licensed hereunder) in whole and not in part, and to license all
Software licensed hereunder (including appropriate new releases and updates
thereto) on an AS IS BASIS WHERE IS BASIS, WITH NO WARRANTIES, EXPRESS OR
IMPLIED, based on the depreciated fair market value of the Equipment and
Software licenses (and the estimated value of such new releases and updates) as
of the date this Agreement terminates.
2
<PAGE>
9. NOTICES. Service of all notices under this Lease shall be sufficient if
-------
given personally or mailed to the intended party at its respective address
set forth below, or at such other address as said party may provide in
writing from time to time. Any such notice mailed to the other party at the
following address shall be effective, upon mailing, duly addressed and with
postage prepaid, certified mail, return receipt requested:
LESSOR: InterVoice, Inc.
Chief Financial Officer
17811 Waterview Parkway
Dallas, TX 75252
LESSEE: WorldQuest Networks, Inc.
------------------------------
------------------------------
------------------------------
10. ACCEPTANCE. Lessor shall install the Equipment and Software at the
----------
locations of Lessee in the United States and as otherwise agreed to between
the parties. Lessee shall have thirty (30) days to test the Equipment and
Software following installation, and such Equipment and Software shall be
deemed accepted at the end of such thirty-day period unless Lessee has
notified Lessor in writing of specific material nonconformities to the
specifications set forth on Schedule A hereto, and any other specifications
mutually agreed to in writing after the date of this Agreement
(collectively, the "Specifications"), and Lessee has not deployed such
Equipment and Software into Production. If nonconformities to the
Specifications are reported on a timely basis, Lessor shall have up to
thirty (30) days to cure such nonconformities, and Lessee shall have up to
fifteen (15) days to notify Lessor in writing that any such reported
nonconformities are continuing, otherwise the Equipment and Software will
be deemed accepted.
11. PORT AVAILABILITY AND MONTHLY RENT. The monthly lease payment (the
----------------------------------
"Monthly Rent") for the Equipment is the amount equal to the greater of:
(a) 10% of the aggregate monthly Revenues recognized by Lessee for such
month; or (b) the Minimum Monthly Rent. On a case-by-case basis the parties
can mutually agree in writing and in advance, to a different method for
determining rent for all or part of the Equipment and Ports. If Lessor, in
its discretion, determines that the average actual usage of the leased
Equipment for any consecutive three (3) month period, excluding the three
(3) month period following the date of initial acceptance of the Equipment,
is less than 50% of the call capacity reasonably estimated by Lessor,
Lessor may reduce the number of Ports available to Lessee under this Lease
by requiring Lessee to return Equipment and Software such that the number
of Ports available to Lessee pursuant to this Lease will equal seventy-five
percent (75%) of Lessee's call capacity as reasonably estimated by Lessor.
In addition to Monthly Rent payments under this Agreement, Lessee will pay
Lessor a one-time installation fee, equal to $1,500.00. For purposes of
this Lease, the following terms have the meanings set forth below:
"Enhanced Services Business" means all services of any kind related to
the sale, lease and/or license of enhanced voice and/or call
processing telephone services (including the services discussed in the
Specifications) in connection with the use and/or operation of the
Equipment and Software.
"Minimum Monthly Rent" for any month means the amount which is equal
to total number of billable minutes charged by Lessee in connection
with its Enhanced Services Business for the month multiplied by $.02.
For purposes of this definition, any billable minutes which are
3
<PAGE>
processed in connection with the leased Equipment, but which are not
charged, shall be deemed billable minutes charged.
"Monthly Rent Per Port" for any month means the Monthly Rent for such
month divided by the number of Ports in Production as of the beginning
of such calendar month.
"Port" means a single digital or analog voice channel telephony input
to a T - span or E - span computer card or similar card included in
the Equipment.
"Production" means Equipment which is receiving and/or sending and
processing telephone calls in order to generate Revenue.
"Revenues" mean all revenues of any kind recognized by Lessee, net of
charge-backs, which directly or indirectly relate to its Enhanced
Services Business, including all revenues realized by Lessee for
billable minutes in connection with its Enhanced Services Business,
less all access charges paid by Lessee in connection with such
Enhanced Services Business to local exchange carriers, inter-exchange
carriers and internet service providers.
12. FINANCIAL STATEMENTS. Lessee represents that the income statements
--------------------
("Income Statements") and balance sheets prepared by Lessee (collectively,
the "Financial Statements") will (i) represent actual bona fide
transactions, (ii) be prepared from the books and records of Licensee in
conformance with generally accepted accounting principals consistently
applied and (iii) will accurately, completely and fairly present in all
material respects the financial position of the business of Licensee as of
the date thereof. An Income Statement shall be prepared for each calendar
quarter ending on the last day of March, June, September and December, and
Financial Statements shall be prepared for each calendar year. The
quarterly Income Statements should be delivered to Licensor within thirty
(30) days following the end of the calendar quarter, and the unaudited
annual Financial Statements should be delivered to Licensor within forty-
five (45) days following the end of the calendar year. Lessee will certify
that each set of quarterly and annual financial statements are true,
correct and complete.
13. PAYMENTS AND REPORTS. Lessee will pay the Monthly Rent for each month on
--------------------
or before the fifteenth day of the following month. Each payment of Monthly
Rent should be accompanied by a "Revenue Report", which shall set forth the
Revenues for the month and provide a reasonable summary of how such
Revenues were determined, including (a) the number of units of services
(including call minutes) sold, (b) the associated prices per unit (such as
the price per minute), and (c) the number of Ports in Production at the
beginning and end of the month. An officer of Lessee shall sign the Revenue
Report to certify that it is true, correct and complete. Lessee hereby
grants to Lessor's duly accredited representative the right to periodically
inspect and make copies of books of accounts and records pertaining to
Revenues during ordinary business hours, only for the purpose of (1)
verifying any Revenue Report or payment of Monthly Rent made under this
Lease, and/or (b) to obtain information as to Monthly Rent due and payable
in case of failure of Lessee to deliver a Revenue Report. Such inspections
shall be made no more often than semi-annually. If upon examination it is
agreed that Monthly Rent has been underpaid by 5% or more to Lessor by
Lessee, then the amount of such underpayment and all reasonable costs
associated with the examination shall be paid by Lessee within ten (10)
days following such agreement.
With respect to any Monthly Rent and/or other invoice due Lessor which is
not paid when due, Lessee shall pay Lessor interest from maturity date to
date of payment at an annual rate of ten percent (10%) on the unpaid
balance (or such lower rate as may be the maximum allowable by law),
together with Lessor's costs of collection (including reasonable attorney's
fees).
4
<PAGE>
14. INSTALLATION AND PORTS. Lessor will be responsible for installing the
----------------------
Equipment initially delivered hereunder at the Equipment locations mutually
agreed to by the parties. The Equipment initially delivered pursuant to
this Lease will include 400 Ports with ISDN primary rate network
connectivity (unless otherwise agreed to in writing after the date of this
Agreement, InterVoice is not providing any equipment or other
infrastructure necessary to provide voice over the internet). The parties
will mutually agree which types of Enhanced Services will be offered in
connection with the 400 Ports. Unless otherwise agreed to in writing, the
Enhanced Services which Lessor may offer through the Leased Equipment will
not include voice messaging or fax service. By mutual agreement of the
parties, additional "Equipment" can be leased to Licensee pursuant to this
Lease, subject to mutual agreement as to the functionality, installation
and implementation requirements and responsibilities for such additional
Equipment, in which case such Equipment and the Ports associated with such
Equipment shall be, unless otherwise specifically agreed to in writing,
subject to all the terms of this Lease applicable to Equipment and Ports
previously delivered pursuant to this Lease, including without limitation,
the provisions governing the determination and payment of Monthly Rent.
During the Term of this Agreement, Lessee, and any company or other entity
directly or indirectly controlled by Lessee or any officer of Lessee, will
not directly or indirectly purchase, license, lease or otherwise acquire
any voice processing and/or call processing software or equipment, other
than Equipment and/or Software acquired from Lessor pursuant to this
Agreement, for the purpose of directly or indirectly providing Enhanced
Services Business (including services discussed in the Specifications).
Without limiting the foregoing, during the term of this Agreement Lessee
agrees that with respect to any companies referred to Lessee by Lessor,
including Telcel Cellular, C.A., Lessee will only provide Enhanced Services
Business to such customer through the use and operation of Equipment leased
under this Agreement.
15. SOFTWARE LICENSES. Lessor grants to Lessee a non-exclusive license to use
-----------------
the Software only in the Equipment in which such Software is initially
installed and which is valid during the term of this Agreement. Lessee
acknowledges that the Equipment may incorporate components which ensure
that Software is only used with the Equipment in which it is initially
installed. All copies of the Software remain the property of Lessor or its
affiliates or suppliers. Lessee will not modify, reverse engineer,
decompile, disassemble, or derive source code from the Software. Lessee
shall not sublicense, assign, or otherwise transfer the Software or use it
for any other purpose or with other equipment without Lessor's consent.
16. PROPRIETARY RIGHTS. Except in connection with its authorized use with the
------------------
Equipment, Lessee agrees that information (including Software) furnished it
by Lessor marked as confidential or proprietary will be accepted by Lessee
in confidence and will not be directly or indirectly used, published,
reproduced, disseminated or otherwise disclosed without the prior written
consent of Lessor. Upon Lessee's material breach of the terms of this Lease
Lessor may, without limiting other remedies which may be available to
Lessor, terminate the Software license at any time by written notice to
Lessee.
Lessor reserves all proprietary rights in all designs, engineering details
and other data pertaining to the Equipment and Software and to all
discoveries, inventions, patent rights, trade secrets, know-how and other
proprietary data arising out of work done in connection with designing,
manufacturing, servicing, installing, using and testing the Equipment and
Software, including the sole right to manufacture and market the Equipment
and Software. Lessee agrees to hold the Equipment and Software subject to
such reservations.
5
<PAGE>
17. WARRANTY. The Equipment and Software is warranted free from defects in
--------
design, material and workmanship for 12 months after the date of shipment.
After the warranty period, Lessor will provide remedial service and support
to correct any defects in design, material or workmanship during the
remaining term of this Agreement. Lessor's warranty and remedial service
and support obligations are contingent upon proper use and application of
the Equipment and Software in accordance with Specifications and does not
cover repair or replacement caused by: (i) failure to provide a suitable
environment prescribed by Lessor; (ii) neglect, accident, disaster
(including water, wind and lightning), transportation or vandalism; (iii)
alterations or modifications which are not approved by Lessor; (iv)
attachments, machines or accessories not provided by or approved by Lessor;
or (v) maintenance or repair not performed by Lessor. Lessor shall, at its
option, repair or replace any defective Equipment or Software reported to
Lessor during the warranty period and the term of this Agreement. Lessee
acknowledges that Lessor has not made any representation or warranty
(regarding the products and services which are the subject of this Lease)
which is not expressly set forth herein. EXCEPT AS SET FORTH HEREIN, LESSOR
DISCLAIMS ANY WARRANTY WITH RESPECT TO THE MERCHANTABILITY, DESIGN,
CONDITION, DURABILITY, PERFORMANCE, QUALITY, CAPACITY OR FITNESS FOR A
PARTICULAR PURPOSE OF SUCH SERVICES OR PRODUCTS. Lessee acknowledges and
agrees that the pricing of the products and services which are the subject
of this Lease reflects the intent of the parties to limit Lessor's
liability as provided herein. Accordingly, Lessee agrees to assume the
responsibility of insuring against or otherwise bearing the risk of greater
damages.
18. PATENT, COPYRIGHT AND TRADE SECRET INDEMNITY. Lessor will indemnify, hold
--------------------------------------------
harmless and defend Lessee at its own expense against any claim that any
Equipment or Software as provided by Lessor hereunder, exclusive of any
Software programs at any time specifically developed pursuant to customized
functional specifications for applications identified by Lessee, infringes
any United States copyright, patent or trade secret; provided that Lessee
promptly notifies Lessor of any such claim after receiving service of
process, provides all reasonable assistance to Lessor and allows Lessor to
control any resulting litigation and/or settlement negotiations. Lessor
shall have no obligation with respect to any such claim of infringement
based upon Lessee's modification of any Equipment or Software or their
combination, operation or use with apparatus, data or computer programs not
furnished by Lessor. If a claim of infringement described in this paragraph
does occur, or in Lessor's opinion is likely to occur, Lessee will permit
Lessor, at its option and expense, (i) to modify the Equipment or Software
so that it is no longer infringing while performing substantially the same
function, (ii) to obtain for Lessee the right to continue using the
Equipment or Software, or (iii) if (i) and (ii) are not reasonably
procurable, require Lessee to return the Equipment and Software in exchange
for a refund of Monthly Rent previously paid. Lessee will indemnify, hold
harmless and defend Lessor at its own expense against any claim of
copyright infringement based on a specification or script provided to
Lessor by Lessee. Notwithstanding any provision of this Lease to the
contrary, including without limitation, this Sectionl8, Lessor is not in
any way indemnifying or agreeing to defend Lessee with respect to
infringement of any claim or claims of United States Patent No. 4,706,275
(the "Aerotel Patent"), until after Lessee has obtained a valid and
enforceable license to practice the Aerotel Patent in connection with the
use and operation of all "debit card services" offered by Lessee (as
generally described in the Calling Card Services and Billing Methods
Sections of Lessor's IN*Control ESP Feature 5.5 document). The limitation
in the preceding sentence only applies to the use and operation of such
debit card services. Lessee represents that following execution of this
Agreement, in connection with any debit card services Lessee decides to
offer, it will promptly commence negotiations to enter into a valid and
enforceable license to practice the Aerotel Patent in connection with the
use and operation of all "debit card services" offered by Lessee; and if
such a license agreement is not executed and delivered on or before the
six-month anniversary of the commencement date of such negotiations, this
Agreement will terminate unless an officer of Lessee certifies in writing
that such debit card services
6
<PAGE>
have been terminated on or before such six-month anniversary date. The
parties acknowledge and agree that Licensee will not have any obligation to
negotiate or obtain a license to practice the Aerotel Patent until if and
when Lessee decides to provide debit card services. Lessee will indemnify,
hold harmless and defend Lessor at its own expense against any claim that
any Equipment or Software, and/or services provided in connection with the
Equipment and Software, infringes the Aerotel Patent.
THE FOREGOING STATES THE SOLE AND EXCLUSIVE LIABILITY OF LESSOR, FOR
PATENT, COPYRIGHT AND OTHER INTELLECTUAL PROPERTY RIGHTS INFRINGEMENT OR
CLAIMS OF INFRINGEMENT.
19. RECOVERY. In each instance in which Lessee seeks to recover damages from
--------
Lessor regardless of the legal theory upon which Lessee's claim is based
(whether contract, tort, strict liability or some other theory), Lessor
will only be liable for (1) bodily injury (including death) and damage to
real property and tangible personal property which Lessor is legally
prohibited from disclaiming or limiting and (2) the amount of any other
direct actual loss or damage arising from Lessor's performance or
nonperformance under this Lease, up to $100,000 ($25,000 for Software).
Under no circumstances will Lessor be liable for losses or damages
resulting from (i) third party claims against Lessee or claims by Lessee
based on third party claims (other than those referred to in Item 1 of this
Section or Section 18), (ii) loss of stored, transmitted or recorded data,
(iii) CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), INCIDENTAL DAMAGES OR
PUNITIVE DAMAGES, EVEN IF LESSOR IS INFORMED OF THEIR POSSIBILITY or (iv)
delays in delivery or by any event which is beyond Lessor's control. This
Section sets forth the maximum collective responsibility of Lessor, its
suppliers, subcontractors and other agents and all such parties are
intended beneficiaries of this Section.
20. GENERAL. This lease inures to the benefit of and is binding upon the
-------
heirs, legatees, personal representative, successors and assignees of the
parties hereto. Time is of the essence of this Lease. This Lease and all
Schedules attached hereto contain the entire agreement between Lessor and
Lessee, and no modification of this Lease shall be effective unless in
writing and executed by an executive officer of Lessor. In the event any
provision of this Lease should be unenforceable, then such provision shall
be deemed deleted, however, no other provision hereof shall be affected
thereby.
21. GOVERNING LAW. This Lease shall be governed by and interpreted in
-------------
accordance with the laws of the State of Texas applicable to contracts to
be executed and performed entirely within such State. No action shall be
brought under this Lease more than one year after accrual of the cause of
action therefore.
22. COMPLIANCE WITH EXPORT REGULATIONS AND OTHER LAWS. Lessee shall comply
-------------------------------------------------
with the rules and regulations under the United States Export
Administration Act, the United States Anti-Boycott provisions, and the
United States Foreign Corrupt Practices Act, as well as all of the
applicable United States federal, state and municipal statutes, rules and
regulations and all export regulations of any other applicable
jurisdiction, as the same may be amended from time to time.
Lessee acknowledges that it is familiar with and understands the provisions
of the United States Foreign Corrupt Practices Act of 1977 (the "Act") and
with respect to the Act neither Lessee, nor any officer, director,
employee, or agent of Lessee: (i) shall pay or be instructed to pay or give
(or agree to pay or give) anything of value, either directly or indirectly,
to an official of any government or any political party or to any person
who is at present, or who will be at any time during the term of this
Lease, an official, officer, a representative of any government, or a
candidate for political office for the purpose of influencing an act or
decision in such political party's or person's official capacity, or to do
or omit to do any act in violation of law, or inducing such party or person
to use their influence
7
<PAGE>
with the government, in order to assist Lessor in obtaining or retaining
business for or with, or directing business to, any person, or for any
other purpose whatsoever or (ii) shall use or be instructed to use any
compensation received from Lessor for any purpose, nor take any action,
which would constitute a violation of any law of the United States
(including the Act), Mexico, or any other applicable jurisdiction.
Lessee by execution below certifies that it will not transfer, directly or
indirectly, any Equipment and/or Software, or technical information
received from Lessor or any copies thereof, or any product produced from
such technical information, to any of the countries contained within the
country groups for which special export or re-export approval is required
under United States Government Regulation 15 C.F.R. Section 379.4(f)(1).
23. ENTIRE AGREEMENT AND ASSIGNMENT. This Lease is the entire agreement,
-------------------------------
supersedes any prior purchase order or correspondence and may not be
changed, modified or canceled except in a written document signed by both
parties. The obligations of Sections 13, 17, 18, 19, 20, 22 and 23 shall
survive the termination of this Lease. If any provision or provisions of
this Lease are held to be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions will not be
affected or impaired thereby. To protect the parties' proprietary rights,
neither this Lease nor any rights under it may be assigned without the
other party's prior written consent.
LESSOR: LESSEE:
INTERVOICE, INC. WORLDQUEST NETWORKS, INC.
By: /s/ DAVID D. HAMMOND By: [SIGNATURE ILLEGIBLE]
--------------------------------- ----------------------------------
Name: David D. Hammond Name:
------------------------------- --------------------------------
Title: CEO Title:
------------------------------ -------------------------------
Date: 6/10/98 Date:
------------------------------- --------------------------------
8
<PAGE>
EXHIBIT 23.1
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated July 7, 1999, in Amendment No. 1 to the Registration
Statement on Form SB-2 and related Prospectus of WorldQuest Networks, Inc. filed
with the Commission on September 7, 1999.
/s/ Ernst & Young LLP
Dallas, Texas
September 3, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1998 AND JUNE 30, 1999 AND THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE YEAR ENDED DECEMBER
31, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1999, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 JUN-30-1999
<CASH> 18,833 85,993
<SECURITIES> 0 0
<RECEIVABLES> 235,244 128,433
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 254,077 214,426
<PP&E> 671,124 929,026
<DEPRECIATION> 418,639 555,252
<TOTAL-ASSETS> 1,246,774 1,294,854
<CURRENT-LIABILITIES> 2,520,746 2,303,110
<BONDS> 1,240,818 1,319,418
0 0
0 0
<COMMON> 300,000 319,670
<OTHER-SE> (2,814,790) (2,660,002)
<TOTAL-LIABILITY-AND-EQUITY> 1,246,774 1,294,854
<SALES> 1,841,439 2,650,050
<TOTAL-REVENUES> 1,841,439 2,650,050
<CGS> 2,005,631 2,148,747
<TOTAL-COSTS> 2,005,631 2,148,747
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 162,466 75,868
<INCOME-PRETAX> (1,753,427) (568,042)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,753,427) (568,042)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,753,427) (568,042)
<EPS-BASIC> (0.58) (0.19)
<EPS-DILUTED> (0.58) (0.19)
</TABLE>
