<PAGE>
As filed with the Securities and Exchange Commission on January 7, 2000
Registration No. 333-93019
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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 75-2838415
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification Number)
incorporation or
organization)
16990 Dallas Parkway, Suite 220
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 East
Facsimile (972) 419-8329 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. [_]
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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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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 January 7, 2000
2,500,000 Shares
[Logo of WorldQuest Networks appears here]
Common Stock
This is our initial public offering. No public market currently exists for
our shares. 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 5.
<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 45-day option to purchase up to
375,000 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.
Kaufman Bros., L.P.
John G. Kinnard and Company Incorporated
WestPark Capital, Inc.
Prospectus dated , 2000
<PAGE>
[The inside front cover contains the following:]
[1. The following text appears at the top of the page:]
WorldQuest Networks [with logo]
[2. A picture of three globes appear in the middle of the page. A yellow star
indicates locations included in WorldQuest's present Internet phone
network. A white star indicates countries included in WorldQuest's Internet
phone network leased from another provider.]
[3. The following text appears below the globes:]
Using the Internet to build a global phone network
WorldQuest Gateway Network [with a key referring to the yellow star]
Partner Gateway Network [with a key referring to the white star]
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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 sell virtual prepaid
calling cards through our interactive and easy to use Web site and transmit
international long distance calls at discounted rates 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.
Our Company
We were incorporated in October 1996 as a Texas corporation. We
reincorporated in Delaware in October 1999. Our executive offices are located
at 16990 Dallas Parkway, Suite 220, Dallas, Texas 75248. Our telephone number
is (972) 818-0460 and our Web site can be found at www.wqn.com. The information
on our Web site is not part of this prospectus.
The Offering
Shares offered by WorldQuest 2,500,000 shares
Networks........................
Shares to be outstanding after 5,696,699 shares
the offering....................
Use of proceeds................. To expand our sales and marketing efforts; to
repay indebtedness; to fund equipment
purchases including certain additional back-
up systems; to fund software development; to
increase deposits with credit card processing
companies; and for working capital and other
general corporate purposes.
We have applied to have our shares approved for quotation on the Nasdaq
National Market under the symbol "WQNI."
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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 not assume that the summary financial data is
indicative of our future performance.
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
------------------------ ----------------------
1997 1998 1998 1999
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<S> <C> <C> <C> <C>
Statement of Operations
Data:
Total revenue............... $ 51,963 $ 1,841,439 $ 784,931 $4,009,236
Gross margin (deficit)...... (175,048) (164,192) (113,845) 887,643
Operating expenses:
Selling, general and
administrative .......... 1,277,383 1,290,131 979,986 1,463,929
Research and development.. 438,860 186,638 135,627 158,469
Net loss.................... (1,764,556) (1,753,427) (1,307,684) (908,095)
Weighted-average common
shares outstanding - basic
and diluted (1)............ 3,000,000 3,000,000 3,000,000 3,108,638
Net loss per share - basic
and diluted (1)............ $ (.59) $ (.58) $ (.44) $ (.29)
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1999
--------------------------------------
At December 31, Pro Pro forma
1998 Actual forma(2) as adjusted(3)
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<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 18,833 $ 59,419 $1,687,419 $22,568,528
Working capital
(deficit).............. (2,266,669) (2,442,890) (814,890) 23,198,483
Total assets............ 1,246,774 1,382,250 3,282,250 23,891,359
Long-term debt and
capital lease
obligations............ 1,129,004 1,154,186 1,154,186 1,154,186
Stockholders' equity
(deficit).............. (2,514,790) (2,592,322) (1,129,132) 21,149,051
</TABLE>
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(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 a private placement in December 1999 of $1.9 million of promissory
notes and common stock purchase warrants.
(3) Reflects our sale of 2,500,000 shares of common stock at an assumed public
offering price of $11.00 per share and our application of the estimated net
proceeds.
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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.
We have a limited operating history with which to judge our performance.
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 September 30,
1999, we had an accumulated deficit of $(4.7) million. We incurred net losses
of $(1.8) million for the fiscal year ended December 31, 1998 and $(908,095)
for the nine months ended September 30, 1999.
We expect operating losses and negative cash flow to continue through at
least the second quarter of 2000. However, there can be no assurance that we
will be profitable beginning in the third quarter of 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.
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
5
<PAGE>
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.
If we do not increase the number of Web sites and portals upon which we
advertise our anticipated expansion could be adversely affected.
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 and Internet telephony markets are highly competitive
and our failure to compete effectively could adversely affect us.
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. 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 our competitors 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
and other services. A general decrease in telecommunication rates charged by
international long distance carriers could also have a negative effect on our
operations. Our ability to compete also depends on our ability to anticipate
and adapt to rapid technological and other changes occurring in the
telecommunications industry.
We may be vulnerable to technical malfunctions which could adversely affect our
operations.
We depend upon our software systems, communications hardware and enhanced
services platform to conduct our virtual calling card sales and telephone
routing, manage our network, track virtual calling card balances and perform
other vital functions. 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;
. hardware defects;
. computer viruses; and
. intentional acts of vandalism and similar events.
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. 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.
6
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Our systems may not accommodate significant growth in the number of users which
could have a negative effect on our operations.
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.
If the Internet telephony and prepaid calling card markets do not gain market
acceptance by potential customers our business will be adversely affected.
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.
If the e-commerce market does not continue to develop and gain market
acceptance our revenues may be negatively affected.
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 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.
If the Internet and Internet infrastructure do not continue to develop as
anticipated our operations will be negatively affected.
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.
7
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The failure to manage our growth in operations and hire additional qualified
employees could have a material adverse effect on us.
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.
Our potential customers may have concerns about Internet commerce security
which could inhibit our growth and we may incur losses resulting from 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 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, which could cause you
to lose substantial portions of your investment.
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.
Our business may be adversely affected if we are not able 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 was filed in
September 1999. We have a pending trademark application on file with the Patent
and Trademark Office for "WorldQuest Networks."
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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
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
which could have a negative effect on our operations.
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.
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.
The loss of key personnel could adversely affect our business.
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. We 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 conducted an assessment of the Y2K readiness of our systems and those of
our third-party vendors and suppliers. This Y2K review was completed during the
fourth quarter of 1999. Based upon our assessment, we believe that our
internally developed proprietary software and that provided by third parties is
Y2K compliant. We made the transition through the year end change to 2000
without apparent service interruption to our customers and with no apparent
effects from the Y2K change. We will continue to monitor our systems and those
of our vendors and suppliers to attempt to identify latent problems and to
correct them before they interrupt service to our customers. At this time, the
expenses associated with identifying and correcting latent problems cannot be
determined. We cannot assure you that latent Y2K problems of ours or third
parties with which we do
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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.
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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 2,500,000 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 $24.0 million (and an additional $3.7 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 $3.6 million);
. repayment of indebtedness (approximately $3.0 million);
. equipment purchases including certain additional back-up systems
(approximately $2.5 million);
. software development (approximately $850,000);
. 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 $13.9 million).
Part of 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, our controlling stockholder. B. Michael Adler, our Chairman of
the Board, owns a controlling interest in Eagle Venture. At September 30, 1999,
$1.9 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 February 18, 2000
and thereafter is payable monthly. Demand for payment of $780,000 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.
The remainder of the indebtedness to be repaid is $1.9 million of principal
owed under 33 promissory notes payable to 33 persons and entities. These notes
bear interest at 8% per year and are payable on the earlier of the closing of
this offering or December 31, 2000. These notes were sold by us in a private
placement of units consisting of notes and common stock purchase warrants that
closed in December 1999. The proceeds from these notes were used to provide us
with working capital. The fair value of the stock purchase warrants of $1.5
million will be recognized as additional interest expense over the term of the
promissory notes.
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.
11
<PAGE>
CAPITALIZATION
The following table sets forth, as of September 30, 1999, our (A) actual
short-term debt and capitalization at September 30, 1999, (B) pro forma to
reflect the sale of $1.9 million of promissory notes by us in December 1999 and
(C) pro forma as adjusted to reflect the sale by us of 2,500,000 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 September 30, 1999
------------------------------------
Pro forma
Actual Pro forma as adjusted
----------- ----------- -----------
<S> <C> <C> <C>
Short-term debt....................... $ 1,232,264 $1,669,074 $ --
=========== =========== ===========
Long-term debt and capital lease
obligations.......................... $ 1,154,186 $1,154,186 $ 1,154,186
----------- ----------- -----------
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; 5,696,699 shares issued
and outstanding as adjusted (1)... 31,967 31,967 56,967
Additional capital.................. 2,093,849 3,557,039 27,545,412
Accumulated deficit................. (4,718,138) (4,718,138) (6,453,328)(2)
----------- ----------- -----------
Total stockholders' equity
(deficit)...................... (2,592,322) (1,129,132) 21,149,051
----------- ----------- -----------
Total capitalization............ $(1,438,136) $ 25,054 $22,303,237
=========== =========== ===========
</TABLE>
- --------
(1) As part of the private placement of $1.9 million of notes in December 1999,
we granted five-year warrants to the noteholders to purchase 323,000 shares
of common stock at an exercise price of $6.00 per share. The table above
does not reflect the effect of any future exercise of these warrants.
(2) The pro forma as adjusted accumulated deficit also reflects additional
interest expense of $1.5 million representing the fair value of the common
stock purchase warrants sold as a unit with the $1.9 million of notes.
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.
12
<PAGE>
DILUTION
Our net tangible book value (deficiency) at September 30, 1999 was $(2.6)
million or $(0.81) 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 a private placement of
$1.9 million of notes and common stock purchase warrants in December 1999 and
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 September
30, 1999 would have been $21.1 million or $3.71 per share. This represents an
immediate increase in net tangible book value of $4.52 per share to the
existing stockholders and an immediate substantial dilution of $7.29 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....................................................... $(0.81)
Increase per share attributable to new investors ............... 4.52
------
Net tangible book value per share after this offering............. 3.71
-----
Dilution per share to new investors............................... $7.29
=====
</TABLE>
The following table summarizes as of September 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 56.1% $ 1,156,000 4.0% $ 0.36
New investors............... 2,500,000 43.9 27,500,000 96.0 $11.00
--------- ----- ----------- -----
Total..................... 5,696,699 100.0% 28,656,000 100.0%
========= ===== =========== =====
</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.
13
<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 for
the nine months ended September 30, 1999, and the selected balance sheet data
as of December 31, 1998 and September 30, 1999 have been derived from our
audited consolidated financial statements appearing elsewhere in this
prospectus. The statement of operations data for the nine months ended
September 30, 1998 has been derived from our unaudited consolidated financial
statements. Our unaudited consolidated financial statements include all
adjustments 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.
<TABLE>
<CAPTION>
Year ended December 31, Nine months ended September 30,
------------------------ ---------------------------------
1997 1998 1998 1999
----------- ----------- ---------------- ---------------
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Retail prepaid calling
card revenue........... $ -- $ 1,466,322 $ 618,882 $ 3,646,099
Wholesale traffic and
other.................. 51,963 375,117 166,049 363,137
----------- ----------- ---------------- --------------
Total revenue......... 51,963 1,841,439 784,931 4,009,236
Cost of sales........... 227,011 2,005,631 898,776 3,121,593
----------- ----------- ---------------- --------------
Gross margin (deficit).. (175,048) (164,192) (113,845) 887,643
Selling, general and
administrative......... 1,277,383 1,290,131 979,986 1,463,929
Research and development
costs.................. 438,860 186,638 135,627 158,469
----------- ----------- ---------------- --------------
Operating loss.......... (1,891,291) (1,640,961) (1,229,458) (734,755)
Interest expense........ (28,265) (162,466) (128,226) (173,340)
Other income............ 155,000 50,000 50,000 --
----------- ----------- ---------------- --------------
Loss before income
taxes.................. (1,764,556) (1,753,427) (1,307,684) (908,095)
Income tax benefit...... -- -- -- --
----------- ----------- ---------------- --------------
Net loss................ $(1,764,556) $(1,753,427) $ (1,307,684) $ (908,095)
=========== =========== ================ ==============
Weighted-average common
shares
outstanding - basic and
diluted................ 3,000,000 3,000,000 3,000,000 3,108,638
=========== =========== ================ ==============
Net loss per share -
basic and diluted...... $ (0.59) $ (0.58) $ (0.44) $ (0.29)
=========== =========== ================ ==============
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1998 At September 30, 1999
-------------------- ---------------------
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.......... $ 18,833 $ 59,419
Working capital (deficit).......... (2,266,669) (2,442,890)
Total assets....................... 1,246,774 1,382,250
Long-term debt and capital lease
obligations....................... 1,129,004 1,154,186
Stockholders' equity (deficit)..... (2,514,790) (2,592,322)
</TABLE>
14
<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 September 30, 1999, no
telephone company accounted for more than 10% of total accounts receivable, but
a telephone company accounted for 59% of total accounts receivable at December
31, 1998. At September 30, 1999, a credit card processing company accounted for
22% 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 receivable at December 31, 1998. No individual customer
accounted for more than 10% of total
15
<PAGE>
sales either for the first nine 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.
Certain Assumptions. Unless otherwise indicated, all information in this
prospectus gives effect to: our reincorporation in Delaware in October 1999;
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 representatives'
warrant; assumes no exercise of outstanding warrants and stock options to
purchase 865,031 shares of common stock; assumes no exercise of stock options
to purchase 10,000 shares of common stock to be granted at the effective date
of this offering at an exercise price equal to the initial public offering
price; assumes no issuance of options for 196,836 shares of common stock
available at the effective date of this offering for future issuance under our
stock option plan; and assumes no exercise of options for up to 250,000 shares
of common stock that may be granted at an exercise price of $6.00 per share
pursuant to an existing consulting agreement. If options are granted pursuant
to this consulting agreement, the fair value of the options will be recognized
as additional expense over the length of the estimated service period.
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 nine months of 1999, our capital
expenditures and payments on capital leases totaled $262,000. 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 September
30, 1999, had an accumulated deficit of $(4.7) million. We expect operating
losses and negative cash flow to continue through at least the second quarter
of 2000. 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;
. the hiring of additional personnel; and
. the payment of commissions to various Internet portals and Internet
service providers for marketing our address book/calendar product to
their customers.
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
16
<PAGE>
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.
Results of Operations
The following table sets forth statement of operations data as a percentage
of revenues for the periods indicated:
<TABLE>
<CAPTION>
Nine months
ended
Year ended September
December 31, 1998 30,
----------------- --------------
1998 1999
------ -----
<S> <C> <C> <C>
Retail prepaid calling card revenue.......... 79.6% 78.8% 90.9%
Wholesale traffic and other(1)............... 20.4 21.2 9.1
----- ------ -----
Total revenue.............................. 100.0 100.0 100.0
Cost of sales................................ 108.9 114.5 77.9
----- ------ -----
Gross margin (deficit)....................... (8.9) (14.5) 22.1
Selling, general and administrative.......... 70.1 124.8 36.5
Research and development..................... 10.1 17.3 3.9
----- ------ -----
Operating loss............................... (89.1) (156.6) (18.3)
Interest expense............................. (8.8) (16.3) (4.3)
Other income................................. 2.7 6.3 --
----- ------ -----
Net loss..................................... (95.2)% (166.6)% (22.6)%
===== ====== =====
</TABLE>
- --------
(1) Wholesale traffic represents the sale of excess line capacity and other
revenue represents facsimile transmission revenues in 1998.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
30, 1998
Revenue
Revenue increased to $4.0 million for the nine months ended September 30,
1999 from $785,000 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 $4.0 million revenue
for the nine months ended September 30, 1999, $3.6 million represents prepaid
virtual calling card revenue and the remainder represents wholesale traffic of
$328,000 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 $3.1 million for
the nine months ended September 30, 1999 from $899,000 for the comparable
period in 1998. This $2.2 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 $1.5
million for the nine months ended September 30, 1999 from $980,000 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
17
<PAGE>
dollars as we continue 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 $158,000 for the nine
months ended September 30, 1999 from $136,000 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 $173,000 for the nine months ended September 30,
1999 from $128,000 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 period.
Other Income
Other income consists of license fees received from our previous fax
services business model. Other income was zero for the nine months ended
September 30, 1999 as compared to $50,000 for the comparable period in 1998.
Net Loss
We incurred a net loss of $(908,095) for the nine months ended September 30,
1999 as compared to $(1.3) million for the comparable period in 1998. Net loss
for the nine months ended September 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.
18
<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.
Recent Developments
In December 1999, the Company raised $1.9 million through the private
placement of units consisting of promissory notes with a face value of $1.9
million and common stock purchase warrants. The notes bear interest at 8% per
annum and mature and become immediately due and payable upon the earlier of an
initial public offering or December 31, 2000. The fair value of the stock
purchase warrants of $1.5 million will be recognized as additional interest
expense over the term of the promissory notes.
In the fourth quarter of 1999, the Company will expense approximately
$300,000 of deferred costs associated with a previous public offering
registration statement which was withdrawn.
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 debt and cash generated from operations. As of September 30, 1999, we had
approximately $59,000 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. In
December 1999, we raised $1.9 million through the private placement of units
consisting of promissory notes and common stock purchase warrants. The $1.9
million owed pursuant to these notes will be repaid from the proceeds of this
offering.
Outstanding amounts owed to our principal stockholder as of September 30,
1999 were $1.9 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
19
<PAGE>
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 $780,000 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 $498,000 for the nine months ended
September 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.
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 $125,000
for the nine months ended September 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 September 30, 1999, $135,000 of such amount had been spent.
Net cash provided by financing activities was $664,000 for the nine months
ended September 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 September 30, 1999,
payments on capital leases totaled $126,000.
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," which
requires disclosure of total comprehensive income in interim and annual
financial statements. We adopted this standard during 1998. There were no items
of other comprehensive income for the nine months ended September 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," which requires disclosure by public
companies of information related to a company's operating segments, as defined.
We have adopted this standard 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." This statement provides guidance on
accounting for the costs of computer software developed or obtained for
internal use. This statement identifies the characteristics of internal use
software and provides guidance on new cost recognition principles. This
statement is effective for fiscal years beginning after December 15, 1998. This
statement is not expected to have a material impact on our results of
operations, financial position or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, which provides guidance on revenue recognition and
certain lease arrangements. This statement is effective for fiscal years 2000
and is not anticipated to have a material effect on our results of operations,
financial position or cash flows.
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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," which provides a
comprehensive and consistent standard for the recognition and measurement of
derivative and hedging activities. We will be required to adopt this standard
at the beginning of fiscal 2001. We have not yet assessed the impact this
standard 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 this standard.
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
recent 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 have reviewed 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. 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
review, we believe that our internally developed proprietary software is year
2000 compliant.
We have assessed 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 September 30,
1999. Such amounts have not been material. We completed this assessment process
during the fourth quarter of 1999. Based upon the results of this assessment,
we determined that a remediation plan with respect to third-party software,
third-party vendors and computer technology was not necessary. We completed any
required remediation during the fourth quarter of 1999. In spite of our review
and assessments, it is possible that something was omitted or missed during our
evaluation. 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 also contacted all of our credit card processing companies, Internet
service providers, local terminating parties and long distance carriers to
determine their year 2000 compliance. We requested evidence from each of these
companies regarding the level of their year 2000 readiness and compliance, and
we conducted 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
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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 carefully reviewed and attempted 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.
We made the transition through the change to the year 2000 without apparent
service interruption to our customers and with no apparent effects from the
year 2000 change. We will continue to monitor our systems and those of our
vendors and suppliers to attempt to identify latent problems and to correct
them before they interrupt service to our customers. Based upon our analysis to
date, we do not believe it is necessary to develop and write a formal
contingency plan to address situations that may result if our vendors or we are
unable to maintain 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.
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 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.
We incorporated in Texas in October 1996. We reincorporated in Delaware in
October 1999.
Industry Overview
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.
Emergence of Internet Telephony. 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 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
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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. 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. 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 1970s.
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.
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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.
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 as of December 1, 1999 had banner ads on 17 Web sites.
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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 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
September 30, 1999, we had sold virtual calling cards purchased with
approximately 47,430 separately identifiable credit cards. Of these separately
identifiable credit cards, 20,768 had made more than two repeat purchases,
5,075 had made more than 10, 1,209 had made more than 25, and 250 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 nine months ended September 30, 1999, on average, 53.7% of the minutes
purchased on our virtual calling cards were used within three days of purchase,
85.5% within 13 days and 94.9% within 31 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.
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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.
Phone Collect. Another service we have recently launched and intend to make
available in the second quarter of 2000 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 made 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 is maintained by us on our secure Web site. This service
is a membership club and is interactive so the customer can add and delete
names, numbers and events. The Intelligent Address Book and Calendar enables 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. We recently signed strategic alliance
agreements with three Internet portals, Mosaic Communications, a Phillipine
portal (www.mozcom.com), and India World (www.samachar.com) and Probity
Research & Services Pvt Ltd (www.indiainfoline.com), both Indian portals. These
agreements call for these portals to promote our Intelligent Address Book and
Calendar to their customers and for us to provide the long distance service and
the software. We pay a commission to the portals for the business they
generate.
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 nine months ended September 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.
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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.
Our Internet Gateway Network. We presently have international gateways
operational in Mexico, Indonesia and Sri Lanka, and expect to have gateways
operational in India in January. 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. We have also entered into
an agreement with another Internet telephony company that will enable us to use
their existing Internet gateway network in certain countries until we can place
our own gateways in those countries. This agreement allows us additional
Internet gateway terminations in 28 countries and traditional leased line
terminations in 205 countries.
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.
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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. 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.
Our Third Party Contracts. 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.
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 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, and have recently entered into
strategic alliances with three Internet portals. An Internet portal is a super
Web site with search engines and multiple services available to site
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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
52,730 prior purchasers and Internet customers of our local Internet service
providers in other countries. We currently send more than 25,000 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 operates on our enhanced services platform, problems can be
resolved immediately and usually 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 two or more 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.
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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 Server 7.0 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 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
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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.
Regulation of Leased Lines and Carriers. 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.
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 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.
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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 Destia Communications, Inc., RSL Communications, IDT Corp.,
Pacific Gateway Exchange, Inc., FaciliCom International, LLC and PRIMUS
Telecommunications Group, Incorporated. 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., iBasis, Inc. 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.
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, Nuera 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;
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. 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 was filed 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 September
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 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.
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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 October 31, 1999, we had 16 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 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 3,300 square feet under a lease at a monthly rental of
approximately $5,300. 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 December 15, 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....... 46 Director, President, Chief Operating Officer and Secretary
E. Denton Jones......... 48 Director
Hugh E. Humphrey, Jr. .. 74 Director
Nabil N. El-Hage........ 41 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 was the acting Chief
Financial Officer from December 1998 until 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.
Nabil N. El-Hage has been Chairman of the Board, President and Chief
Executive Officer of Jeepers! Inc., an owner and operator of 29 family-oriented
indoor amusement facilities throughout the United States, since January 1995.
From December 1993 to December 1994, Mr. El-Hage was associated with Advent
International Corporation, a private equity investment firm in Boston,
Massachusetts. He has been a director of WorldQuest Networks since December
1999.
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
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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.
Board of Directors
Our Board of Directors currently has five 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. Prior to commencement of this offering, we granted options
to purchase shares of common stock under our Stock Option Plan to four of our
directors, and the fifth director will be granted options to purchase shares of
common stock under the Stock Option Plan concurrently with this offering.
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 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 (1) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (2) for acts or
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omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (3) under Section 174 of the Delaware statutes
relating to unlawful dividends, stock purchases or redemptions or (4) for any
transaction from which the director derived an improper personal benefit.
Section 102(b)(7) of the Delaware statutes 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 Delaware law, 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 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 Delaware statutes 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.
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<PAGE>
Executive Compensation
Summary Compensation Table
The following table sets forth information concerning the annual and long-
term compensation earned by our Chief Executive Officer and each executive
officer who had an annual salary and bonus during fiscal 1999 exceeding
$100,000. We refer to these individuals collectively as the Named Executive
Officers.
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
------------------------- ------------
Securities
Other annual Underlying
Name and principal position Salary($) compensation($) Options
--------------------------- --------- --------------- ------------
<S> <C> <C> <C>
B. Michael Adler, Chairman of the Board
and Chief Executive Officer........... $35,166 $-- 5,000
Michael R. Lanham, President, Chief
Operating Officer and Secretary....... 125,430 -- 10,000
</TABLE>
Commencing November 1999 and continuing through December 2000, B. Michael
Adler will receive an annual salary of $175,000. 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.
Option Grants
The following table provides certain summary information concerning shares
of common stock represented by stock options granted to each of the Named
Executive Officers during fiscal year 1999.
<TABLE>
<CAPTION>
Percentage of Total
Number of Securities Options Granted to Exercise Expiration
Underlying Options Employees in Fiscal Year Price Date
-------------------- ------------------------ -------- ----------
<S> <C> <C> <C> <C>
B. Michael Adler........ 5,000 3.3 (1) 10/28/06
Michael R. Lanham....... 10,000 6.6 (1) 10/28/06
</TABLE>
- --------
(1) The exercise price is equal to the initial public offering price.
Fiscal Year-End Option Values
The following table provides information concerning the shares of stock
represented by outstanding stock options held by each of the Named Executive
Officers on December 31, 1999.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at in-the-Money Options at
December 31, 1999 December 31, 1999
------------------------- -------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
B. Michael Adler............ 5,000 5,000 $ 50,000 $--
Michael R. Lanham........... 167,867 10,000 1,287,540 --
</TABLE>
Options for 167,867 shares of common stock granted to Michael R. Lanham vest
on the closing of this offering.
39
<PAGE>
There was no public market for the common stock at December 31, 1999.
Accordingly, the values of unexercised in-the-money options have been
calculated by determining the difference between an assumed initial public
offering price of $11.00 per share and the per share exercise price of the
options.
No options were exercised by the Named Executive Officers during fiscal year
1999.
Stock Options
1997 Stock Option Plan
In January 1997, our Board of Directors and stockholders adopted our 1997
Stock Option 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.
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.
40
<PAGE>
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 $2.88 and additional options to acquire
145,000 shares are outstanding at an exercise price equal to the initial public
offering price. Of these amounts, options to acquire 140,000 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 intend to grant to Nabil N. El-Hage, one of our directors,
options to acquire 10,000 shares of common stock at a per share exercise price
equal to the initial public offering price, vesting 100% on the first
anniversary of the date of grant.
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 September 30, 1999 was $1.9 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 February 18, 2000, 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
$780,000 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, 300,000 shares of our common stock owned
by it to WorldQuest Communications in consideration of WorldQuest
Communications canceling approximately $100,000 owed by Eagle Venture to
WorldQuest Communications. As part of this transaction, E. Denton Jones also
cancelled $150,000 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".
41
<PAGE>
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 one Internet gateway in each of Sri Lanka, Mexico 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 three
gateways and BDC is entitled to 40%. As of September 30, 1999, no payments have
accrued to the benefit of, or been paid to, BDC.
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
nine months ended September 30, 1999, $61,500 during 1998 and $44,000 during
1997 for these consulting services.
42
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of December 15, 1999, and as adjusted to
reflect the sale of the 2,500,000 shares of common stock offered hereby, by:
(1) each of our directors; (2) each of our executive officers; (3) each person
known to us to be beneficial owner of more than 5% of the common stock; and (4)
all of our directors and executive officers as a group.
Eagle Venture Capital, LLC is the record and beneficial owner of 2,666,478
of the shares shown in the table below. 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 and an unvested
option to purchase 5,000 shares under each option. WorldQuest Communications,
Inc. is the record and beneficial owner of the shares reflected below, but
E. Denton Jones beneficially owns 99% of the outstanding capital stock of
WorldQuest Communications, Inc. and is also deemed to beneficially own these
shares. The ownership for Mr. Jones also reflects an unvested option to
purchase 10,000 shares. Michael R. Lanham beneficially owns options to purchase
167,867 shares, which vest on the closing of this offering, and an unvested
option to purchase 10,000 shares. Mark C. Levy beneficially owns 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. Hugh
E. Humphrey, Jr. owns a vested option and an unvested option to purchase 5,000
shares under each option.
<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........ 2,676,478 83.5% 46.9%
16990 Dallas Parkway,
Suite 220
Dallas, Texas 75248
E. Denton Jones......... 370,000 11.5 6.5
The Claridge, Suite 18D
3510 Turtle Creek Blvd.
Dallas, Texas 75219
Michael R. Lanham....... 177,867 5.3 3.0
16990 Dallas Parkway,
Suite 220
Dallas, Texas 75248
Mark C. Levy............ 100,000 3.0 1.7
16990 Dallas Parkway,
Suite 220
Dallas, Texas 75248
Hugh E. Humphrey, Jr. .. 10,000 * *
No. 1 Westbank
Expressway
New Orleans, Louisiana
70174
Nabil N. El-Hage........ -- -- --
60 Hickory Drive
Waltham, Massachusetts
02451
All directors and
executive officers
as a group (6
persons)............... 3,334,345 95.1 55.5
</TABLE>
- --------
*Less than 1%
43
<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.
Convertible Notes, Warrants and Options
In December 1999, we raised $1.9 million through the private placement of
units consisting of promissory notes and common stock purchase warrants. The
$1.9 million in notes are unsecured subordinated convertible promissory notes.
The notes will mature and become immediately due and payable upon the earlier
to occur of the closing of this offering or December 31, 2000. In the event
that the principal under the notes is not paid in full within five days of the
maturity date, an interest rate on the outstanding principal will be imposed
equivalent to the lesser of 15% or the maximum amount permitted by law. The
notes otherwise bear interest at a rate of 8% per annum. In the event that the
principal and accrued but unpaid interest are not repaid in full by June 30,
2001, the holder may exchange each $4.50 of principal and accrued but unpaid
interest outstanding under the notes at the date of conversion for one share of
common stock. At the date of such exchange, the notes will be canceled.
At November 30, 1999, we had outstanding warrants and options to purchase up
to 317,031 shares of common stock at an average weighted exercise price of
$3.12 per share and outstanding options to purchase 225,000 shares at an
exercise price equal to the initial public offering price. All of such options
and warrants
44
<PAGE>
are subject to 180 day lock-up agreements with the underwriters. All of such
warrants and options expire between 2003 and July 2006. During December 1999,
we granted warrants to purchase up to 323,000 shares of common stock, at an
exercise price of $6.00 per share, as part of the units which included the
notes referenced above; and we entered into a consulting agreement relating to
the development of strategic relationships with Internet portals pursuant to
which we agreed to grant an option to purchase 50,000 shares of common stock,
at an exercise price of $6.00 per share, for each relationship established, up
to a maximum of 250,000 shares. All of these warrants, and any such options
granted, expire five years from the date of grant. The 323,000 shares issuable
upon exercise of these warrants are subject to a one year lock-up agreement
with the underwriters. The fair value of the warrants of $1.5 million will be
recognized as additional interest expense over the term of the promissory
notes.
We will also grant the representatives of the underwriters a warrant to
purchase 250,000 shares of common stock for an exercise price per share equal
to 155% 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 have entered into a registration rights agreement with the purchasers of
units in the private placement closed in December 1999 granting to them,
effective following the closing of this offering and subject to a one year
lock-up agreement, unlimited rights to register shares of common stock held by
them in the event that we register any additional shares of our common stock,
subject to certain limitations and exceptions. This registration rights
agreement also provides that purchasers holding in excess of 50% of the shares
of common stock underlying the warrants issued in the private placement have
the right to demand registration twice at any time after the 12th calendar
month following the closing of this offering, subject to certain limitations
and exceptions. We have agreed to pay the registration expenses (except for
underwriting discounts and commissions) of any of these registrations, except
the second demand registration. None of the shares held by these purchasers are
being sold pursuant to this prospectus. In addition, 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
representatives of the underwriters in connection with this offering. See
"Underwriting" for a more complete description of the representatives' warrant.
Following the closing of this offering and subject to a 180 day lock-up
agreement, we have also agreed to allow a consultant to include up to 250,000
shares in any registered offering of our common stock, subject to certain
limitations and exceptions. No shares held by this consultant are being sold
pursuant to this prospectus.
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
45
<PAGE>
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 Delaware General Corporation Law 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
(1) 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, (2) 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 (3) 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
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 Delaware statutes.
Section 203 of the Delaware statutes 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.
46
<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 5,696,699 shares of common
stock. Of the outstanding shares, the 2,500,000 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
1997 Stock Option Plan and the option granted to our President.
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
(56,967 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 865,031 shares covered by
outstanding options and warrants have agreed that they will not, without the
prior written consent of Kaufman Bros., L.P., on behalf of the underwriters,
(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, except that holders of warrants exercisable for 323,000 shares
of common stock have agreed that this period shall be for one year after such
date; 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. Kaufman Bros., L.P., 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 180 days after
the date of this prospectus, we will not, without the consent of Kaufman Bros.,
L.P., make any offering, purchase, sale, or other disposition of any
47
<PAGE>
shares 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 1997 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 1997 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 293,164 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 $3.12 per share and 145,000 options have an
exercise price equal to the initial public offering price. After the expiration
of the 180 day 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 intend to grant options to
purchase 10,000 shares at the initial public offering price to Nabil N. El-
Hage, one of our 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 1997 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.
In the private placement of $1.9 million of notes and common stock purchase
warrants closed in December 1999, we granted warrants to purchase up to 323,000
shares of common stock. After expiration of the one year lock-up period, and
assuming that the underwriters do not release the holder from the lock-up
agreement, the holder will be permitted to sell, within any three month period,
a number of shares of common stock that does not exceed the greater of one
percent of the number of shares of our common stock then outstanding 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, pursuant to Rule 144.
If options to purchase up to 250,000 shares of common stock are granted to
the consultant we have retained to assist us in establishing strategic
relationships with Internet portals, after expiration of the 180 day lock-up
agreement, and assuming that the underwriters do not release the consultant
from the lock-up agreement, the consultant will be permitted to sell, within
any three month period, a number of shares of common stock that does not exceed
the greater of one percent of the number of shares of our common stock then
outstanding or the average weekly trading volume in our common stock during the
four calendar weeks preceding the date in which notice of the sale is filed
with the Commission, pursuant to Rule 144.
Registration Rights
We have entered into a registration rights agreement with the purchasers of
units in the private placement closed in December 1999 granting to them,
effective following the closing of this offering and subject to a one year
lock-up agreement, unlimited rights to register shares of common stock held by
them in the event that we register any additional shares of our common stock,
subject to certain limitations and exceptions. This registration rights
agreement also provides that purchasers holding in excess of 50% of the shares
of common
48
<PAGE>
stock underlying the warrants issued in the private placement have the right to
demand registration twice at any time after the 12th calendar month following
the closing of this offering, subject to certain limitations and exceptions. We
have agreed to pay the registration expenses (except for underwriting discounts
and commissions) of any of these registrations, except the second demand
registration. None of the shares held by these purchasers are being sold
pursuant to this prospectus. In addition, 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 representatives of the
underwriters in connection with this offering.
Following the closing of this offering and subject to a 180 day lock-up
agreement, we have also agreed to allow a consultant to include up to 250,000
shares in any registered offering of our common stock, subject to certain
limitations and exceptions. No shares held by this consultant are being sold
pursuant to this prospectus.
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 Kaufman Bros., L.P., John G. Kinnard
and Company Incorporated and WestPark Capital, Inc. are acting as
representatives, 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>
Kaufman Bros., L.P. ..........................................
John G. Kinnard and Company Incorporated.......................
WestPark Capital, Inc. ........................................
----
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 representatives of the underwriters. The
representatives have 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 Kaufman Bros., L.P. (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.
WorldQuest Networks has granted to the representatives an option, expiring
at the close of business on the 45th day after the date of this prospectus, to
purchase up to 375,000 additional shares at the initial public offering price,
less the underwriting discounts, all as set forth on the cover page of this
prospectus. The representatives 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
representatives for $1 a warrant to purchase 250,000 shares of common stock.
The representatives' warrant will become exercisable one year after the
effective date of this offering at a per share exercise price equal to 155% of
the initial public offering price and will expire five years from the effective
date of this offering. The representatives' warrant and underlying shares of
common stock will be restricted from sale, transfer, assignment or
hypothecation for a period of one year from the date of this prospectus, except
to the representatives, underwriters, selling group members and
50
<PAGE>
their officers or partners. During the exercise period, holders of the
representatives' warrants are entitled to certain demand and incidental rights
with respect to the shares of common stock issuable upon exercise of the
representatives' warrant. The common stock issuable on exercise of the
representatives' warrant is subject to adjustment in certain events to prevent
dilution.
WorldQuest Networks will pay the representatives a nonaccountable expense
allowance of 2% of the gross proceeds of the offering, which will include
proceeds from the over-allotment option, if exercised. In addition, the company
will pay up to $130,000 of the fees of legal counsel to the underwriters. The
representatives' expenses in excess of these legal fees and the nonaccountable
expense allowance will be borne by the representatives.
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.
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 representatives 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 representatives. 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 September 30, 1999 and for each
of the two years in the period ended December 31, 1998 and for the nine months
ended September 30, 1999, 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 September 30,
1999..................................................................... F-3
Consolidated Statements of Operations for the years ended December 31,
1997 and 1998 and the nine month periods ended September 30, 1998
(unaudited) and 1999..................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for
the years ended December 31, 1997 and 1998 and the nine month period
ended September 30, 1999................................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1997 and 1998 and the nine month periods ended September 30, 1998
(unaudited) and 1999..................................................... 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 sheets of WorldQuest
Networks, Inc., as of December 31, 1998 and September 30, 1999 and the related
consolidated statements of operations, consolidated changes in stockholders'
equity (deficit), and cash flows for the two years in the period ended December
31, 1998 and the nine months ended September 30, 1999. 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 September 30, 1999, and the
consolidated results of their operations and their cash flows for the two years
in the period ended December 31, 1998 and the nine months ended
September 30, 1999 in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
December 22, 1999
Dallas, Texas
F-2
<PAGE>
WORLDQUEST NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 18,833 $ 59,419
Accounts receivable............................... 235,244 140,685
----------- ----------
Total current assets................................ 254,077 200,104
Property and equipment, net......................... 252,485 591,592
Other assets........................................ 740,212 590,554
----------- ----------
Total assets........................................ $ 1,246,774 $1,382,250
=========== ==========
LIABILITIES
Current liabilities:
Accounts payable.................................. $ 1,234,726 $ 937,266
Accrued expenses.................................. 344,231 355,116
Deferred revenue.................................. 95,965 118,348
Note payable...................................... 100,000 294,814
Line of credit from principal stockholder......... 638,096 798,226
Current portion of capital lease obligation....... 107,728 139,224
----------- ----------
Total current liabilities........................... 2,520,746 2,642,994
Term loan........................................... 1,100,000 1,100,000
Accrued interest.................................... 111,814 177,392
Capital lease obligation............................ 29,004 54,186
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, par value $0.01 per share:
Authorized shares--10,000,000; none issued and
outstanding at December 31, 1998 and
September 30, 1999............................... -- --
Common stock, par value $.01 per share:
Authorized shares--50,000,000; issued and
outstanding shares--3,000,000 at December 31,
1998 and 3,196,699 at
September 30, 1999............................... 30,000 31,967
Additional capital................................ 1,265,253 2,093,849
Accumulated deficit............................... (3,810,043) (4,718,138)
----------- ----------
Total stockholders' equity (deficit)................ (2,514,790) (2,592,322)
----------- ----------
Total liabilities and stockholders' equity
(deficit).......................................... $ 1,246,774 $1,382,250
=========== ==========
</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 nine months ended
September 30, 1998 (unaudited) and 1999
<TABLE>
<CAPTION>
December 31, September 30,
------------------------ -----------------------
1997 1998 1998 1999
----------- ----------- ----------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Retail prepaid calling card
revenue................... $ -- $ 1,466,322 $ 618,882 $3,646,099
Wholesale traffic and
other..................... 51,963 375,117 166,049 363,137
----------- ----------- ----------- ----------
Total revenue............ 51,963 1,841,439 784,931 4,009,236
Cost of sales.............. 227,011 2,005,631 898,776 3,121,593
----------- ----------- ----------- ----------
Gross margin (deficit)..... (175,048) (164,192) (113,845) 887,643
Selling, general and
administrative............ 1,277,383 1,290,131 979,986 1,463,929
Research and development
costs..................... 438,860 186,638 135,627 158,469
----------- ----------- ----------- ----------
Operating loss............. (1,891,291) (1,640,961) (1,229,458) (734,755)
Interest expense........... (28,265) (162,466) (128,226) (173,340)
Other income............... 155,000 50,000 50,000 --
----------- ----------- ----------- ----------
Loss before income taxes... (1,764,556) (1,753,427) (1,307,684) (908,095)
Income tax benefit......... -- -- -- --
----------- ----------- ----------- ----------
Net loss................... $(1,764,556) $(1,753,427) $(1,307,684) $ (908,095)
=========== =========== =========== ==========
Weighted-average common
shares outstanding--basic
and diluted............... 3,000,000 3,000,000 3,000,000 3,108,638
=========== =========== =========== ==========
Net loss per share--basic
and diluted............... $ (0.59) $ (0.58) $ (0.44) $ (0.29)
=========== =========== =========== ==========
</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 nine months ended
September 30, 1999
<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 $ 100 $ 220,692 $ (292,060) $ (71,268)
Additional capital
contribution......... -- -- 316,208 -- 316,208
Stock dividend........ 2,990,000 29,900 (29,900) -- --
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 30,000 682,000 (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 30,000 1,265,253 (3,810,043) (2,514,790)
Fair value of services
provided by
shareholder.......... -- -- 131,250 -- 131,250
Compensation and other
expense on stock
options.............. -- -- 56,310 -- 56,310
Conversion of line of
credit from
shareholder.......... 60,061 601 199,399 -- 200,000
Sale of common stock.. 136,638 1,366 453,634 -- 455,000
Fair value of warrants
issued in connection
with capital lease
and note payable..... -- -- 396,256 -- 396,256
Cancellation of stock
purchase warrants.... -- -- (408,253) -- (408,253)
Net loss.............. -- -- -- (908,095) (908,095)
--------- -------- ----------- ------------ ------------
Balance at September 30,
1999 .................. 3,196,699 $ 31,967 $ 2,093,849 $ (4,718,138) $ (2,592,322)
========= ======== =========== ============ ============
</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 nine months ended
September 30, 1998 (unaudited) and 1999
<TABLE>
<CAPTION>
December 31, September 30,
-------------------------- ------------------------
1997 1998 1998 1999
------------ ------------ ------------ ----------
(unaudited)
<S> <C> <C> <C> <C>
Operating Activities
Net loss................ $ (1,764,556) $ (1,753,427) $ (1,307,684) $ (908,095)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation.......... 155,133 141,833 96,888 130,546
Amortization.......... -- 121,222 53,923 114,336
Goodwill write-off.... -- -- -- 139,747
Fair value of
shareholder
services............. 175,000 175,000 131,250 131,250
Compensation and other
expense on stock
options.............. -- -- -- 56,310
Changes in operating
assets and
liabilities:
Accounts
receivable......... (41,715) (193,529) (9,421) 94,559
Accrued interest.... 27,387 84,427 77,176 65,578
Accounts payable and
accrued expenses... 437,921 747,384 318,902 159,673
Deferred revenue.... -- 95,965 -- 22,383
Other assets........ (5,433) (79,594) (29,923) (504,589)
------------ ------------ ------------ ----------
Net cash used in
operating activities... (1,016,263) (660,719) (668,889) (498,302)
Investing Activities
Additions to property
and equipment.......... (111,056) (148,047) (82,947) (135,181)
Proceeds from sale of
equipment.............. -- -- -- 10,347
------------ ------------ ------------ ----------
Net cash used in
investing activities... (111,056) (148,047) (82,947) (124,834)
Financing Activities
Proceeds from line of
credit, net............ 788,137 919,294 823,389 360,130
Payments on capital
leases................. -- (53,519) (28,537) (126,408)
Payment on notes
payable................ -- (25,000) (25,000) (25,000)
Capital contribution.... 316,208 -- -- --
Sale of common stock.... -- -- -- 455,000
------------ ------------ ------------ ----------
Net cash provided by
financing activities... 1,104,345 840,775 769,852 663,722
Increase (decrease) in
cash and cash
equivalents............ (22,974) 32,009 18,016 40,586
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 $ 4,840 $ 59,419
============ ============ ============ ==========
Supplemental Disclosure
of Cash Flow
Information
Interest paid........... $ 878 $ 54,075 $ 9,815 $ 10,311
============ ============ ============ ==========
</TABLE>
See accompanying notes.
F-6
<PAGE>
WORLDQUEST NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997 and 1998 and the nine months ended September 30,
1998 (unaudited) 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. Effective October 28, 1999, the
Company reincorporated as a Delaware corporation. See Note 10.
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 nine months ended September 30, 1998 (unaudited) and 1999
wholesale traffic and other revenues include approximately $221,000, $166,000
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 September 30, 1999 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 for the nine months ended
September 30, 1998 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)
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 nine months
ended September 30, 1998 (unaudited) and 1999, was $3,745, $46,528, $28,983 and
$99,905, 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 497,031 shares of the Company's common stock for the years ended
December 31, 1997 and 1998 and the nine months ended September 30, 1998
(unaudited) and 1999, 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
card processing companies relating to prepaid phone card sales, and amounts
owed by telephone companies for
F-8
<PAGE>
WORLDQUEST NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Significant Accounting Policies (continued)
processed call traffic. A telephone company accounted for 0% and 59% of
accounts receivable as of September 30, 1999 and December 31, 1998,
respectively. At September 30, 1999 and December 31, 1998 a credit card
processing company accounted for 22% 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 nine months ended September 30, 1998
(unaudited) and 1999, 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 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. The Company
adopted SOP 98-1 in 1999.
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, September 30,
(Years) 1998 1999
--------- ------------ -------------
<S> <C> <C> <C>
Leasehold improvements.............. 5 $ 14,297 $ 17,442
Switch and other network equipment.. 2 to 3 596,902 1,046,009
Furniture and fixtures.............. 5 37,010 37,721
Capitalized software................ 5 22,915 125,524
--------- ---------
Total............................... 671,124 1,226,696
Less: accumulated depreciation and
amortization..................... (418,639) (635,104)
--------- ---------
$ 252,485 $ 591,592
========= =========
</TABLE>
Included in the above net totals for property and equipment in 1998 and 1999 is
approximately $84,556 and $429,077, respectively relating to capital leases.
4. Other Assets
Other Assets consists of the following as of:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Lease options (see Note 11)................... $ 514,500 $ --
Capitalized initial public offering costs..... -- 408,182
Goodwill (see Note 5)......................... 139,747 --
Deposits...................................... 84,933 122,202
Other......................................... 1,032 60,170
--------- ---------
$ 740,212 $ 590,554
========= =========
</TABLE>
In the fourth quarter of 1999, the Company will expense approximately
$300,000 of capitalized initial public offering costs associated with a
previous registration statement which was withdrawn.
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
F-10
<PAGE>
WORLDQUEST NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Costa Rican Operation (continued)
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 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 net 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, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Deposits received.............................. $182,463 $117,723
Other.......................................... 161,768 237,393
-------- --------
$344,231 $355,116
======== ========
</TABLE>
7. Credit Facility from Parent and Notes Payable to Vendors
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
September 30, 1999 totals $1,738,096 and $1,898,226, 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 $101,774 is available for future borrowings as of December 31,
1998 and September 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
$252,000 into an interest bearing promissory note. Principal and accrued
interest on the note is due, as amended, in November 1999. Telecommunication
equipment with an approximate carrying value of $141,000 as of
September 30, 1999, was pledged as collateral against the note. In December
1999, the Company further extended the note maturity date to February 15, 2000
by agreeing to pay the vendor approximately $60,000 on the outstanding note. In
conjunction with the amended promissory note, on September 16, 1999 the Company
granted the vendor a warrant to acquire 30,000 shares of its common stock,
which expires on December 31, 2000. The warrant vests immediately and is
exercisable at the initial public offering price. The fair value of the warrant
will be recognized as additional interest expense on the promissory note. The
Company paid an additional $25,000 on the note in September 1999.
In September 1999, the Company converted vendor accounts payable of $88,000
into an interest bearing promissory note due in December 1999. The outstanding
principal and accrued interest on the note was fully paid in December 1999.
F-11
<PAGE>
WORLDQUEST NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 September 30, 1999, 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 had elected to forego a cash salary until
November 1999, at which time he began receiving 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.
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 300,000 shares of WorldQuest common stock owned by
it to WorldQuest Communications in consideration of WorldQuest Communications
canceling approximately $100,000 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 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 nine months ended September 30, 1998
(unaudited) and September 30, 1999 a relative of the CEO was paid $44,000,
$61,500, $50,500 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 September 30
31, 1998 1998
----------- ------------
<S> <C> <C>
Deferred tax assets:
Deferred revenue.............................. $ 32,628 $ 40,238
Depreciation and amortization................. 70,937 79,566
Other......................................... 52,754 98,156
Net operating loss carryforwards.............. 993,360 1,149,888
----------- ----------
Total deferred tax assets................... 1,149,679 1,367,848
Valuation allowance............................. (1,149,679) (1,367,848)
----------- ----------
Net deferred tax assets......................... $ -- $ --
=========== ==========
</TABLE>
F-12
<PAGE>
WORLDQUEST NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Income Taxes (continued)
The Company has U.S. net operating loss carryforwards of approximately $2.9
million and $3.5 million as of December 31, 1998 and September 30, 1999,
respectively, which expire beginning in 2011. The Company's total deferred tax
assets have been fully reserved due to the uncertainty of future realization.
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.
On October 28, 1999 the Company reincorporated as a Delaware corporation,
with authorized share capital consisting of 50,000,000 shares of common stock
with par value of $0.01 per share, and 10,000,000 shares of preferred stock
with par value of $0.01 per share. The impact of the Company's reincorporation
has been retroactively reflected in the financial statements for all periods
presented.
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 $29,900
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. As more fully discussed in Note 11, these warrants
were canceled on August 31, 1999.
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.
F-13
<PAGE>
WORLDQUEST NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Stockholders' Equity (Deficit) (continued)
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 18 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.
In July 1999, the Company issued options under the Option Plan to its Chief
Financial Officer to purchase 100,000 shares with an exercise price equal to
its planned initial public offering price. Otherwise the grant price reverts to
the fair value on the date of grant.
The weighted average exercise price included in the table below only
includes the February 1999 grants noted above.
Employee stock option transactions under the Option Plan for the years ended
December 31, 1998 and 1997, and the nine months ended September 30, 1999 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........................................... 121,164 3.33 7 years
Exercised......................................... -- -- --
Canceled.......................................... (1,500) 1.0 --
-------
Outstanding at September 30, 1999................. 248,164 $3.06 6.8 years
=======
Available for granting in future periods.......... 251,836
=======
</TABLE>
At December 31, 1997 and 1998, and September 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
F-14
<PAGE>
WORLDQUEST NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Stockholders' Equity (Deficit) (continued)
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 as follows:
<TABLE>
<CAPTION>
December 31, September 30,
------------------------ ----------------------
1997 1998 1998 1999
----------- ----------- ----------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Net loss:
As reported............. $(1,764,556) $(1,753,427) $(1,307,684) $(908,095)
Pro forma............... (1,767,763) (1,754,955) (1,308,071) (938,710)
Net loss per share:
As reported -- basic and
diluted................ $ (0.59) $ (0.58) $ (0.44) $ (0.29)
Pro forma -- basic and
diluted................ $ (0.59) $ (0.58) $ (0.44) $ (0.30)
</TABLE>
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 1999, 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 nine months ended September 30, 1999 had a weighted average fair
value of $.18, $.60, and $.60 per share, respectively.
Reserved Capital Shares
The Company has reserved the following shares of common stock as of
September 30, 1999 (unaudited):
<TABLE>
<S> <C>
Stock Option Plan................................................. 500,000
Stock Purchase Warrants........................................... 60,000
Options issued outside of Stock Option Plan....................... 188,867
-------
Total............................................................. 748,867
=======
</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>
F-15
<PAGE>
WORLDQUEST NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Commitments (continued)
Rental expense under operating leases was approximately $111,316, $75,185,
$58,965 and $44,791 for fiscal years 1997 and 1998, and the nine months ended
September 30, 1998 (unaudited) and 1999, 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 $7,000 for 1997 and 1998 and the
nine months ended September 30, 1998 (unaudited) and 1999, 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 transaction was recorded in the third quarter of
1999 and effectively reversed the amounts previously recognized.
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 September 30, 1999, the Company had utilized $296,750
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 warrants to
purchase 30,000 shares of 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 the 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. At
September 30, 1999, warrants to purchase 29,675 shares of common stock had been
issued.
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
F-16
<PAGE>
WORLDQUEST NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Contingencies (continued)
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 a 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.
14. Subsequent Events (unaudited)
In December 1999, the Company raised $1.9 million before offering costs
through the private placement of units consisting of 8% unsecured subordinated
convertible promissory notes and common stock purchase warrants. The notes
mature and become immediately due and payable upon the earlier of an initial
public offering or December 31, 2000. The fair value of the stock purchase
warrants of $1.5 million will be recognized as additional interest expense over
the term of the subordinated convertible promissory notes. If the notes are
retired early as a result of an initial public offering, the remaining
unamortized amount of the fair value of the warrants will be recognized
immediately.
F-17
<PAGE>
[The back inside cover page contains a diagram composed of the following:]
[1. The background of the diagram consists of a picture of the globe with
clouds around it.]
[2. A sample of a page from WorldQuest's web site appears in the upper left
corner of the diagram showing sample virtual calling cards and rates for
calls from the U.S. to India and from the U.S. to Taiwan.]
[3. A sample of virtual calling cards and rates for calls from the U.S. to
India, the U.S. to China, the U.S. to U.S., the U.S. to Mexico and the U.S.
to Jamaica cascade from left to right down the center of the diagram.]
[4. A sample of a page from WorldQuest's web site depicting WorldQuest's Free
Internet Address Book appears in the lower left corner of the diagram.]
<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............................................................. 5
Forward Looking Statements............................................... 11
Use of Proceeds.......................................................... 11
Capitalization........................................................... 12
Dividend Policy.......................................................... 12
Dilution................................................................. 13
Selected Financial Data.................................................. 14
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 15
Business................................................................. 23
Management............................................................... 36
Certain Transactions..................................................... 41
Principal Stockholders................................................... 43
Description of Capital Stock............................................. 44
Shares Eligible for Future Sale.......................................... 47
Underwriting............................................................. 50
Legal Matters............................................................ 52
Independent Auditors..................................................... 52
Where You Can Get More Information....................................... 52
Index to Consolidated Financial Statements............................... F-1
</TABLE>
----------------
Until , 2000 (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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[Logo of WorldQuest Networks appears here]
2,500,000 Shares
Common Stock
----------------
PROSPECTUS
, 2000
----------------
Kaufman Bros., L.P.
John G. Kinnard and Company Incorporated
WestPark Capital, Inc.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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................ $ 10,337
NASD filing fee.................................................... 4,415
Nasdaq National Market listing fee................................. 66,875
Underwriters' nonaccountable expense allowance..................... 550,000
Printing and engraving expenses.................................... 100,000
Accounting fees and expenses....................................... 290,000
Legal fees and expenses............................................ 195,000
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.......................................................... $1,286,627
==========
</TABLE>
ITEM 26. Recent Sales of Unregistered Securities
Set forth in the table below are the dates, the number of securities sold
and the total offering price of such securities sold by the Registrant within
the past three years. Unless otherwise indicated, all securities were sold to
the purchasers directly by the Registrant, and therefore, no underwriting
discounts or commissions were involved.
<TABLE>
<CAPTION>
Total
Date of Number of offering
Title of securities sold purchase shares price($)
------------------------ ------------- -------------- ----------
<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/)
Convertible Promissory Notes, with
Warrants............................. December 1999 (/6/) 1,900,000
</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.
(6) During December 1999 we sold $1,900,000 of promissory notes, with common
stock purchase warrants attached, to 33 accredited investors. The warrants
entitle the holders to purchase an aggregate of 323,000 shares of common
stock at any time prior to December 2004 for an exercise price of $6.00
per share. The notes are convertible, at the election of the holder, on
June 30, 2001 at a conversion price of $4.50 per share if the notes are
not paid in full prior to this date.
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, filed as Exhibit 3.1
to Registrant's Form SB-2 Registration Statement, File No. 333-82721
(the "Prior Registration Statement"), and incorporated herein by this
reference.
3.2 Bylaws of the Registrant, filed as Exhibit 3.2 to the Prior
Registration Statement, and incorporated herein by this reference.
4.1 Specimen common stock certificate, filed as Exhibit 4.1 to the Prior
Registration Statement, and incorporated herein by this reference.
4.2 Amended and Restated Note dated May 5, 1999 payable to WorldQuest
Networks, LLC (now known as Eagle Venture Capital, LLC), filed as
Exhibit 4.2 to the Prior Registration Statement, and incorporated
herein by this reference.
4.3*** Form of Warrant Agreement between the Registrant and the
representatives of the underwriters, 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, filed as Exhibit 4.4 to the Prior Registration
Statement, and incorporated herein by this reference.
4.5* Form of Unsecured Subordinated Convertible Promissory Note issued in
the private placement closed in December 1999 (the "Private
Placement").
4.6* Form of Warrant issued in the Private Placement.
5.1** Opinion of Glast, Phillips & Murray, a Professional Corporation.
10.1 Joint Venture Agreement dated April 9, 1999 between the Registrant and
BDC, LLC, filed as Exhibit 10.1 to the Prior Registration Statement,
and incorporated herein by this reference.
10.2 Amended 1997 Stock Option Plan, filed as Exhibit 10.2 to the Prior
Registration Statement, and incorporated herein by this reference.
10.3 Stock Option Agreement dated December 7, 1998 granted to Michael R.
Lanham by the Registrant, filed as Exhibit 10.3 to the Prior
Registration Statement, and incorporated herein by this reference.
10.4 Stock Transfer Agreement dated December 7, 1998 between WorldQuest
Communications, Inc., WorldQuest Networks, LLC and the Registrant,
filed as Exhibit 10.4 to the Prior Registration Statement, and
incorporated herein by this reference.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.5 Amendment and Clarification Agreement dated September 27, 1999 between
WorldQuest Communications, Inc., WorldQuest Networks, Inc. and Eagle
Venture Capital, LLC amending and clarifying the Stock Transfer
Agreement filed as Exhibit 10.4, filed as Exhibit 10.7 to the Prior
Registration Statement, and incorporated herein by this reference.
10.6* Form of Registration Rights Agreement to be executed in connection
with the Private Placement.
21.1 List of Subsidiaries, filed as Exhibit 21.1 to the Prior Registration
Statement, and incorporated herein by this reference.
23.1** Consent of Ernst & Young LLP.
23.2 Consent of Glast, Phillips & Murray, P.C. (contained in Exhibit 5.1).
24.1 Power of Attorney (included on signature page of registration
statement).
27.1** Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
** Filed herewith.
*** To be filed by amendment.
II-3
<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-4
<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 January 6, 2000.
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
registration statement has been signed by the following persons in the capacity
indicated on January 6, 2000.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ B. Michael Adler Director and Chief Executive January 6, 2000
____________________________________ Officer (Principal
B. Michael Adler Executive Officer)
/s/ Michael R. Lanham Director and President January 6, 2000
____________________________________
Michael R. Lanham
/s/ Hugh E. Humphrey, Jr.* Director January 6, 2000
____________________________________
Hugh E. Humphrey, Jr.
/s/ E. Denton Jones* Director January 6, 2000
____________________________________
E. Denton Jones
/s/ Nabil N. El-Hage* Director January 6, 2000
____________________________________
Nabil N. El-Hage
/s/ Mark C. Levy Chief Financial Officer January 6, 2000
____________________________________ (Principal Financial and
Mark C. Levy Accounting Officer)
</TABLE>
/s/ Michael R. Lanham
*By: _____________________
Michael R. Lanham
Attorney-In-Fact
II-5
<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, filed as Exhibit 3.1
to Registrant's Form SB-2 Registration Statement, File No. 333-82721
(the "Prior Registration Statement"), and incorporated herein by this
reference.
3.2 Bylaws of the Registrant, filed as Exhibit 3.2 to the Prior
Registration Statement, and incorporated herein by this reference.
4.1 Specimen common stock certificate, filed as Exhibit 4.1 to the Prior
Registration Statement, and incorporated herein by this reference.
4.2 Amended and Restated Note dated May 5, 1999 payable to WorldQuest
Networks, LLC (now known as Eagle Venture Capital, LLC), filed as
Exhibit 4.2 to the Prior Registration Statement, and incorporated
herein by this reference.
4.3*** Form of Warrant Agreement between the Registrant and the
representatives of the underwriters, 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, filed as Exhibit 4.4 to the Prior Registration
Statement, and incorporated herein by this reference.
4.5* Form of Unsecured Subordinated Convertible Promissory Note issued in
the private placement closed in December 1999 (the "Private
Placement").
4.6* Form of Warrant issued in the Private Placement.
5.1** Opinion of Glast, Phillips & Murray, a Professional Corporation.
10.1 Joint Venture Agreement dated April 9, 1999 between the Registrant and
BDC, LLC, filed as Exhibit 10.1 to the Prior Registration Statement,
and incorporated herein by this reference.
10.2 Amended 1997 Stock Option Plan, filed as Exhibit 10.2 to the Prior
Registration Statement, and incorporated herein by this reference.
10.3 Stock Option Agreement dated December 7, 1998 granted to Michael R.
Lanham by the Registrant, filed as Exhibit 10.3 to the Prior
Registration Statement, and incorporated herein by this reference.
10.4 Stock Transfer Agreement dated December 7, 1998 between WorldQuest
Communications, Inc., WorldQuest Networks, LLC and the Registrant,
filed as Exhibit 10.4 to the Prior Registration Statement, and
incorporated herein by this reference.
10.5 Amendment and Clarification Agreement dated September 27, 1999 between
WorldQuest Communications, Inc., WorldQuest Networks, Inc. and Eagle
Venture Capital, LLC amending and clarifying the Stock Transfer
Agreement filed as Exhibit 10.4, filed as Exhibit 10.7 to the Prior
Registration Statement, and incorporated herein by this reference.
10.6* Form of Registration Rights Agreement to be executed in connection
with the Private Placement.
21.1 List of Subsidiaries, filed as Exhibit 21.1 to the Prior Registration
Statement, and incorporated herein by this reference.
23.1** Consent of Ernst & Young LLP.
23.2 Consent of Glast, Phillips & Murray, P.C. (contained in Exhibit 5.1).
24.1 Power of Attorney (included on signature page of registration
statement).
27.1** Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
** Filed herewith.
*** To be filed by amendment.
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF GLAST, PHILLIPS & MURRAY APPEARS HERE]
January 7, 2000
WorldQuest Networks, Inc.
16990 Dallas Parkway
Suite 220
Dallas, TX 75248
Re: Form SB-2 Registration Statement, Registration No. 333-93019 (the
"Registration Statement") of WorldQuest Networks, Inc.
Gentlemen:
We are acting as counsel for WorldQuest Networks, Inc., a Delaware
corporation (the "Company"), in connection with the filing under the Securities
Act of 1933, as amended, of the Registration Statement for the Company filed
with the Securities and Exchange Commission ("SEC"), covering an aggregate of up
to 2,875,000 shares (the "Shares") of common stock, par value $0.01 per share
(the "Common Stock"), of the Company (including up to 375,000 shares subject to
the underwriters' over-allotment option).
In that connection, we have examined the Registration Statement in the form
filed with the SEC as of the date hereof. We have also examined and are
familiar with the originals or authenticated copies of all corporate or other
documents, records and instruments that we have deemed necessary or appropriate
to enable us to render the opinion expressed below.
We have assumed that all signatures on all documents presented to us are
genuine, that all documents submitted to us as originals are accurate and
complete, that all documents submitted to us as copies are true and correct
copies of the originals thereof, that all information submitted to us was
accurate and complete and that all persons executing and delivering originals or
copies of documents examined by us were competent to execute and deliver such
documents. In addition, we have assumed that the Shares will not be issued for
consideration less than the par value thereof and that the form of consideration
to be received by the Company for the Shares will be lawful consideration under
the Delaware General Corporation Law.
Based on the foregoing and having due regard for the legal considerations
we deem relevant, we are of the opinion that the Shares, when issued as
described in the Registration Statement, will be validly issued by the Company,
fully paid and nonassessable.
<PAGE>
WorldQuest Networks, Inc.
January 7, 2000
Page 2
This opinion is limited in all respects to the laws of the United States of
America and the Delaware General Corporation Law.
We advise you that members of this firm own options to acquire 10,000
shares of Common Stock of the Company.
This opinion may be filed as an exhibit to the Registration Statement, and
we further consent to all references to us in the Registration Statement, the
prospectus constituting a part thereof and any amendments thereto.
Sincerely,
/s/ Glast, Phillips & Murray, P.C.
GLAST, PHILLIPS & MURRAY,
a Professional Corporation
MDP/jsk
<PAGE>
Exhibit 23.1
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated December 22, 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 January 7, 2000.
/s/ Ernst and Young LLP
Dallas, Texas
January 5, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1998 AND SEPTEMBER 30, 1999 AND THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE YEAR ENDED DECEMBER
31, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 SEP-30-1999
<CASH> 18,833 59,419
<SECURITIES> 0 0
<RECEIVABLES> 235,244 140,685
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 254,077 200,104
<PP&E> 671,124 1,201,696
<DEPRECIATION> 418,639 610,104
<TOTAL-ASSETS> 1,246,774 1,382,250
<CURRENT-LIABILITIES> 2,520,746 2,642,994
<BONDS> 1,240,818 1,331,578
0 0
0 0
<COMMON> 30,000 31,967
<OTHER-SE> (2,544,790) (2,624,289)
<TOTAL-LIABILITY-AND-EQUITY> 1,246,774 1,382,250
<SALES> 1,841,439 4,009,236
<TOTAL-REVENUES> 1,841,439 4,009,236
<CGS> 2,005,631 3,121,593
<TOTAL-COSTS> 2,005,631 3,121,593
<OTHER-EXPENSES> 1,476,769 1,622,398
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 162,466 173,340
<INCOME-PRETAX> (1,753,427) (908,095)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,753,427) (908,095)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,753,427) (908,095)
<EPS-BASIC> (0.58) (0.29)
<EPS-DILUTED> (0.58) (0.29)
</TABLE>
