<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 0-27751
WORLDQUEST NETWORKS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 75-2838415
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16990 Dallas Parkway, Suite 220, Dallas, Texas 75248
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (972) 818-0460
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
----- -----
At August 1, 2000, the registrant had outstanding 6,376,199 shares of par value
$.01 common stock.
Transitional Small Business Disclosure Format (check one):
Yes No X
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WORLDQUEST NETWORKS, INC.
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
-------------------------------
WORLDQUEST NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 30,231,655 $ 1,159,995
Accounts receivable 311,571 113,688
------------ ------------
Total current assets 30,543,226 1,273,683
Property & equipment, net 2,021,994 574,573
Other assets 2,769,085 1,144,777
------------ ------------
Total assets $ 35,334,305 $ 2,993,033
============ ============
Current liabilities
Accounts payable $ 656,753 $ 1,532,293
Accrued expenses 372,196 466,083
Deferred revenue 248,279 159,201
Notes payable - 266,814
Line of credit from principal stockholder - 888,725
Current portion of capital lease obligation - 98,815
Subordinate promissory notes - 494,568
------------ ------------
Total current liabilities 1,277,228 3,906,499
Term loan 1,100,000 1,100,000
Accrued interest 253,454 199,814
Capital lease obligation - 28,660
Commitments and contingencies
Minority interest in subsidiaries 666,628 -
Stockholders' equity (deficit):
Preferred stock, par value $0.01 per share;
Authorized shares--10,000,000; none issued
and outstanding at June 30, 2000
and December 31, 1999 - -
Common stock, par value $0.01 per share;
Authorized shares--50,000,000; issued and
outstanding shares--6,376,199 at
June 30, 2000 and 3,196,699
at December 31, 1999 63,762 31,967
Additional capital 41,784,794 3,571,622
Accumulated deficit (9,811,561) (5,845,529)
------------ ------------
Total stockholder equity (deficit) 32,036,995 (2,241,940)
------------ ------------
Total liabilities and stockholder equity $ 35,334,305 $ 2,993,033
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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WORLDQUEST NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Retail prepaid calling card revenue $ 1,914,960 $ 1,115,386 $ 3,893,452 $ 2,343,737
Wholesale traffic and other 247,978 102,786 249,906 306,314
------------- ------------- -------------- -------------
Total revenue 2,162,938 1,218,172 4,143,358 2,650,051
Cost of sales 1,991,938 988,457 3,608,034 2,222,426
------------- ------------- -------------- -------------
Gross margin 171,000 229,715 535,324 427,625
Selling, general and administrative 1,375,156 422,360 3,314,593 889,702
Research and development costs 37,218 40,925 46,054 103,776
------------- ------------- -------------- -------------
Operating loss (1,241,374) (233,570) (2,825,323) (565,853)
Interest expense (26,895) (36,943) (1,939,106) (75,868)
Interest income 485,791 - 759,044 -
------------- ------------- -------------- -------------
Net loss $ (782,478) $ (270,513) $ (4,005,385) $ (641,721)
------------- ------------- -------------- -------------
Weighted average common shares outstanding
- basic and diluted 6,375,031 3,103,786 5,660,253 3,064,607
============= ============= ============== =============
Net loss per share- basic and diluted $ (0.12) $ (0.09) $ (0.71) $ (0.21)
============= ============= ============== =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<PAGE>
WORLDQUEST NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER EQUITY (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Additional Accumulated
Shares Amount Capital Deficit Total
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1999 3,196,699 $ 31,967 $ 3,571,622 $(5,845,529) $(2,241,940)
Sale of common stock in connection
with initial public offering 3,162,500 31,625 36,204,942 -- 36,236,567
Exercise of warrants issued in
connection with subordinate
promissory notes 17,000 170 101,830 -- 102,000
Fair value of warrants issued for
services -- -- 1,906,400 -- 1,906,400
Net loss -- -- -- (3,966,032) (3,966,032)
--------------------------------------------------------------------------------------
Balance at June 30, 2000 6,376,199 $ 63,762 $41,784,794 $(9,811,561) $32,036,995
======================================================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<PAGE>
WORLDQUEST NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
June 30
----------------------------
2000 1999
------------ ------------
<S> <C> <C> <C>
Operating Activities
Net Loss $ (4,005,385) $ (641,721)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 469,713 133,304
Goodwill write-off 24,095 139,747
Write-off of deferred debt costs (1,406,932) --
Fair value of warrants issued for services 1,906,400 --
Fair value of shareholder services -- 87,500
Minority interest in joint ventures 666,628 12,658
Changes in operating assets and liabilities:
Accounts receivable (197,883) 106,811
Accrued interest 53,640 76,464
Accounts payable and accrued expenses (930,071) (56,149)
Deferred revenue 89,078 1,085
Other assets (508,718) (106,188)
------------ ------------
Net cash used in operating activities (3,839,435) (246,489)
Investing Activities
Net additions to property and equipment (1,649,890) (130,812)
------------ ------------
Net cash used in investing activities (1,649,890) (130,812)
Financing Activities
Changes in line of credit (888,725) 47,885
Payments on capital leases (127,475) (58,422)
Payments on notes payable (266,814) --
Payments on promissory notes (494,568) --
Proceeds from exercise of stock options 102,000 --
Sale of common stock 36,236,567 455,000
------------ ------------
Net cash provided by financing activities 34,560,985 444,463
Increase in cash and cash equivalents 29,071,660 67,162
Cash and cash equivalents at beginning of period 1,159,995 18,833
------------ ------------
Cash and cash equivalents at end of period $ 30,231,655 $ 85,995
============ ============
Supplemental Disclosure of Cash Flow Information
Interest paid $ 118,589 $ 6,983
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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WORLDQUEST NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
WorldQuest Networks, Inc. and Subsidiary (collectively "the Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for annual financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered necessary
for a fair presentation have been included. The results for the interim periods
presented are not necessarily indicative of the results that may be expected for
any future period. The balance sheet at December 31, 1999 has been derived from
the audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The financial statements in this Form 10-QSB
should be read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1999.
2. Net Loss Per Share
Net loss per share is presented in accordance with Statement of Financial
Accounting Standards No. 128, Earnings per Share, which requires companies to
present basic earnings per share calculated based upon the weighted average
common shares outstanding during the period and, if applicable, diluted earnings
per share calculated based upon the weighted average common shares outstanding
during the period plus any dilutive common equivalent shares outstanding. Stock
options and warrants convertible into 1,353,947 and 477,005 shares of the
Company's common stock at June 30, 2000 and 1999, respectively, are excluded
from the calculation of diluted net loss per share as their effect would be
antidilutive.
3. Initial Public Offering
In February 2000, the Company completed its initial public offering,
selling a total of 3,162,500 shares of common stock at a price of $13 per share.
The initial public offering resulted in net proceeds of approximately $36
million to the Company.
4. Warrants and Options
In March and April 2000, the Company granted a consulting company options
to acquire 50,000 shares of common stock upon the Company's execution of two
Internet portal agreements arranged by the consulting company. The fair value of
these options, approximately $1.3 million and $531,000, respectively, were
expensed in March and April.
In December 1999, the Company raised $1.9 million through the private
placement of promissory notes and common stock purchase warrants. These notes
were repaid in February and March 2000 from the proceeds of the Company's
initial public offering. The unamortized fair value of the common stock purchase
warrants of $1.4 million was recognized as additional interest expense in the
first quarter of 2000.
5. Related Party Transactions
In February 2000, the company repaid the outstanding principal of $889,000
on the line of credit with Eagle Venture Capital LLC (Eagle), a significant
stockholder of the Company, using proceeds from the initial public offering. As
of March 31, 2000, the Company owed Eagle $1.1 million under a term loan with
principal and interest payable May 5, 2002.
In April 1999, the Company formed a joint venture with BDC, LLC, a company
owned by a director of the Company. The Company owned 60% of the joint venture.
On April 17, 2000, the Company reached an
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<PAGE>
agreement to purchase the remaining 40% interest in the joint venture for
$600,000, which has been recorded as goodwill to be amortized over 5 years.
6. Joint Ventures
During June 2000, the Company entered into two joint venture arrangements
for the purpose of installation and operation of Internet gateways in foreign
locations. The Company owns a controlling interest in these joint ventures and
accordingly has consolidated the financial position and results of operations in
the accompanying financial statements, with the ownership applicable to the
joint venture partners recorded as a minority interest.
Item 2. Management's Discussion and Analysis or Plan of Operation.
--------------------------------------------------------------------
The following discussion of the financial condition and results of
operations of WorldQuest Networks, Inc. should be read in conjunction with the
Management's Discussion and Analysis or Plan of Operation (including Risk
Factors That May Effect Results of Operations and Financial Condition) and the
Consolidated Financial Statements and the Notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1999.
This quarterly report on Form 10-QSB contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). See "Forward Looking Statements", below.
Results of Operations
The following table sets forth statement of operations data as a percentage
of revenues for the periods indicated:
<TABLE>
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
<S> <C> <C> <C> <C>
1999 2000 1999 2000
------ ------ ------ ------
Retail prepaid calling card revenue 91.6% 88.5% 88.4% 94.0%
Wholesale traffic (1) 8.4 11.5 11.6 6.0
------ ------ ------ ------
Total revenue 100.0 100.0 100.0 100.0
Cost of sales 81.1 92.1 83.9 87.1
------ ------ ------ ------
Gross margin (deficit) 18.9 7.9 16.1 12.9
Selling, general and administrative 34.7 63.6 33.5 80.0
Research and development 3.4 1.7 3.9 1.1
------ ------ ------ ------
Operating loss (19.2) (57.4) (21.3) (68.2)
Interest expense (3.0) (1.2) (2.9) (46.8)
Other income -- 22.5 -- 18.3
------ ------ ------ ------
Net loss (22.2)% (36.2)% (24.2) (96.7)
====== ====== ====== ======
</TABLE>
------------------
(1) Wholesale traffic represents the sale of excess line capacity.
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<PAGE>
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Revenue
Revenue increased to $2.2 million for the three months ended June 30, 2000
from $1.2 million for the comparable period in 1999 as a result of the growth of
our customer base and an increase in repeat purchases from our existing
customers.
Cost of Sales
Cost of sales consists primarily of the costs of termination of long
distance traffic over our networks. Cost of sales increased to $2.0 million for
the three months ended June 30, 2000 from $1.0 million for the comparable period
in 1999. This $1.0 million increase was primarily attributable to our increased
sales volume and certain costs associated with the current implementation and
testing of new Internet gateway locations as part of our network expansion,
somewhat offset by improved margins on retail calling cards. We expect cost of
sales to increase in absolute dollars in future periods, but decrease as a
percentage of revenue as 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 $1.4
million, including the fair value of the warrants described below, for the 2000
quarter, from $0.4 million for the 1999 quarter. Selling, general and
administrative expenses for the 2000 quarter include a charge of $531,000
relating to the fair value of warrants granted to a consultant on completion of
a strategic portal relationship agreement, and increased spending from the prior
year quarter on advertising and marketing, travel, employee related expenses,
and shareholder related expenses. We expect selling, general and administrative
expenses to increase in absolute dollars, but decrease as a percentage of
revenue, 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.
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 decreased to $37,000 for the three
months ended June 30, 2000 from $41,000 for the comparable period in 1999. 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, Net
Interest expense consists of interest earned on cash and cash equivalents,
and includes interest expense charges attributable to capital leases for
equipment and borrowings under a credit facility with our principal stockholder.
For the three months ended June 30, 2000, interest expense totaled $27,000 and
interest income totaled $486,000. Interest expense totaled $37,000 in the 1999
quarter, with no interest income in that quarter.
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<PAGE>
Income Taxes
As of June 30, 2000, we had approximately $5.7 million of net operating
loss carryforwards for federal income tax purposes, which expire beginning in
2011. We have not recognized an income tax benefit for our losses, as we have
provided a full valuation allowance on our deferred tax assets, which consist
primarily of net operating loss carryforwards, because of uncertainty regarding
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.
Net Loss
We incurred a net loss of $782,000 for the three months ended June 30, 2000
as compared to a net loss of $271,000 for the same quarter in 1999. Included in
the 2000 net loss was a non-cash marketing expense of $531,000. Net loss,
adjusted to exclude this non-cash expense was $251,000. The adjusted net loss of
$251,000 in the 2000 quarter decreased from a net loss of $271,000 in the 1999
quarter due to increased sales volume and interest income.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Revenue
Revenue increased to $4.4 million for the six months ended June 30, 2000
from $2.7 million for the comparable period in 1999 as a result of the growth of
our customer base and an increase in repeat purchases from our existing
customers.
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 $3.6 million for
the six months ended June 30, 2000 from $2.2 million for the comparable period
in 1999. This $1.2 million increase was primarily attributable to our increased
sales volume and certain costs associated with the current implementation and
testing of new Internet gateway locations as part of our network expansion,
somewhat offset by improved margins on retail calling cards. We expect cost of
sales to increase in absolute dollars in future periods, but decrease as a
percentage of revenue as 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 $3.3 million
for the six months ended June 30, 2000, from $0.9 million for the 1999 period,
which included the write off of $140,000 of goodwill in connection with the
termination of our Costa Rican operations in June 1999. Selling, general and
administrative expenses for 2000 include a charge of $1.9 million relating to
the fair value of warrants granted to a consultant on completion of strategic
portal relationship agreements, and increased spending from the prior year
period on advertising and marketing, travel, employee related expenses, and
shareholder related expenses. We expect selling, general and administrative
expenses to increase in absolute dollars, but decrease as a percentage of
revenue, 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.
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 decreased to $46,000 for the six months
ended June 30, 2000 from $104,000 for the comparable period in 1999 due to
capitalization of product development costs in the 2000 period. While we will
continue to incur expenses for research
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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, Net
Interest expense consists of interest earned on cash and cash equivalents,
and includes interest expense charges attributable to capital leases for
equipment, borrowings under a credit facility with our principal stockholder and
to unsecured subordinated convertible promissory notes issued in a private
offering in December 1999. For the six months ended June 30, 2000, interest
expense totaled $1.9 million, which includes cash and non-cash charges of
$1,849,000 relating to the fair value of warrants and issuance costs relating to
our private placement of $1.9 million of promissory notes in December 1999 and
other financing activities prior to our initial public offering which were paid
off with proceeds from the offering. Interest income for the six months ended
June 30, 2000 was $759,000. This compares to interest expense of $76,000 in the
1999 period. There were no non-cash items or interest income in the 1999 period.
Income Taxes
As of June 30, 2000, we had approximately $5.7 million of net operating
loss carryforwards for federal income tax purposes, which expire beginning in
2011. We have not recognized an income tax benefit for our losses, as we have
provided a full valuation allowance on our deferred tax assets, which consist
primarily of net operating loss carryforwards, because of uncertainty regarding
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.
Net Loss
We incurred a net loss of $4.0 million for the six months ended June 30,
2000 as compared to a net loss of $642,000 for the same period in 1999. Included
in the 2000 net loss of $4.0 were non-cash marketing expense of $1.9 million and
cash and non-cash interest expenses of $1.8 million noted above. Net loss,
adjusted to exclude these cash and non-cash expenses was $288,000. The adjusted
net loss of $288,000 in the 2000 period decreased from a net loss of $642,000 in
the 1999 period, which included the write off of $140,000 of goodwill in
connection with the termination of our Costa Rican operations in June 1999, due
to increased sales volume, higher gross margins and interest income.
Liquidity and Capital Resources
As of June 30, 2000, we had approximately $30.2 million of cash and cash
equivalents. As of that date, our principal commitments consisted of contracts
for long distance transmissions and our credit facility with our principal
stockholder.
Outstanding amounts owed to our principal stockholder as of June 30, 2000
and 1999 were $1.1 million and $1.8 million, respectively. In May 1999, we
amended our credit facility with our principal stockholder to convert $1.1
million to a term loan bearing interest at 8% per annum with interest and
principal payable May 5, 2002. Our principal stockholder also agreed at such
time to convert $200,000 of the loan into 60,061 shares of our common stock, at
a conversion price of $3.33 per share. We also continue to have a line of credit
with our principal stockholder. The amount we are able to borrow under this line
of credit was increased to $1.4 million by an amendment to our credit facility
in August 1999, $468,000 of which was drawn and outstanding as of the date of
the amendment.
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<PAGE>
In December 1999, we 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. These notes were fully repaid during February
and March 2000 from the proceeds of our initial public offering.
Net cash used in operating activities was $3.8 million for the six months
ended June 30, 2000 and was $246,000 in the 1999 period. Net cash used in and
provided by operating activities for the 2000 and 1999 quarters primarily
consisted of net operating losses as well as increases in other assets, offset
by increases in accounts payable, accrued expenses and accrued interest.
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 $1.6 million
for the six months ended June 30, 2000 and $131,000 in the 1999 period. During
the remainder of the year 2000, we expect to spend approximately $1.1 million in
capital expenditures, of which $600,000 will be for gateway servers, $100,000
for data base servers, $200,000 for software and $200,000 in miscellaneous other
equipment.
Net cash provided by financing activities was $34.6 million for the six
months ended June 30, 2000 and $444,000 for the 1999 period. Net cash provided
by financing activities for the 2000 period was affected by proceeds from the
company's initial public offering of its common stock, and the 1999 period was
impacted by the proceeds from the company's line of credit and payment on
capital leases.
In April 1999, the Company formed a joint venture with BDC, LLC, a company
owned by a director of the Company. The Company owned 60% of the joint venture.
On April 17, 2000, the Company reached an agreement to purchase the remaining
40% interest in the joint venture for $600,000, which has been recorded as
goodwill to be amortized over 5 years.
We currently anticipate that the net proceeds of our initial public
offering, together with our other 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.
Forward Looking Statements
Certain statements in this report, including statements of WorldQuest's and
management's expectations, intentions, plans and beliefs, including those
contained in or implied by "Management's Discussion and Analysis or Plan of
Operation" and the Notes to Condensed Consolidated Financial Statements, are
"forward-looking statements", within the meaning of Section 21E of the Exchange
Act, that are subject to certain events, risk and uncertainties that may be
outside WorldQuest's control. These forward-looking statements include
statements of management's plans and objectives for WorldQuest's future
operations and statements of future economic performance, information regarding
our expansion and possible results from expansion, our expected growth, our
capital budget and future capital requirements, the availability of funds and
our ability to meet future capital needs, the realization of our deferred tax
assets, and the assumptions described in this report underlying such forward-
looking statements. Actual results and developments could differ materially from
those expressed in or implied by such statements due to a number of factors,
including, without limitation, those described in the context of such forward-
looking statements, our expansion and acquisition strategy, our ability to
achieve operating effieiencies, our dependence on network infrastructure,
capacity, telecommunications carriers and other suppliers, industry pricing and
technology trends, evolving industry standards, domestic and international
regulatory matters, general economic and business conditions, the strength and
financial resources of our competitors, our ability to find and retain skilled
personnel, the political and economic climate in which we conduct operations and
the risk factors described from time to time in our other documents and reports
filed with the Securities and Exchange Commission (the "Commission").
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<PAGE>
PART II-OTHER INFORMATION
Items 1,3 and 5 are omitted from this report as inapplicable.
-------------------------------------------------------------
Item 2. Changes in Securities.
--------------------------------
The effective date of our first registration statement, filed on Form SB-2
under the Securities Act of 1933 (no. 333-93019) relating to our initial public
offering of our Common Stock, was February 4, 2000. A total of 3,162,500 shares
of our Common Stock were sold at a price of $13.00 per share. Net proceeds to
WorldQuest were approximately $36 million. From the time of receipt through
June 30, 2000, the net proceeds were applied toward:
- Repayment of indebtedness, $2,946,195;
- Equipment purchases including additional back-up systems,
$1,906,850;
- Software development, $148,286; and
- General corporate purposes, including payment of outstanding
payables, payoffs of capital leases, liability insurance premiums,
development of strategic relationships and research and development
of new products, $2,334,018.
The remaining proceeds are being used as working capital or are being held in
high quality, short-term investment instruments such as short-term corporate
investment grade or United States Government interest-bearing securities.
Of the $2,946,195 paid for repayment of indebtedness, $867,647 was paid to Eagle
Venture Capital, LLC, which owns approximately 42% of our Common Stock and is
controlled by B. Michael Adler, our Chairman of the Board and Chief Executive
Officer.
WorldQuest issued 4,250 shares of common stock on April 26, 2000 upon exercise
of warrants by the holders of such warrants and payments of the exercise price
of $6.00 per share. WorldQuest also granted a warrant to purchase 50,000 shares
of common stock, at an exercise price of $6.00 per share, to a consulting
company on April 26, 2000, which were earned by such consultant under an
existing agreement. WorldQuest issued these securities in reliance on the non-
public offering exemption afforded by Section 4(2) of the Securities Act of
1933, as amended.
Item 4. Submission Of Matters To a Vote of Security Holders.
-------------------------------------------------------------
The annual meeting of WorldQuest's stockholders was held on May 8, 2000. At
the meeting, the directors named below were elected to hold office until the
2001 annual meeting of stockholders or until their successors are elected and
qualified.
Following is a tabulation of the votes relating to the election of
directors:
<TABLE>
<S> <C> <C> <C> <C>
Abstention or
Shares voted Shares voted Shares broker non-vote
Name "for" "against" withheld shares
----------------------- ------------ ------------ ------------ ---------------
B. Michael Adler 5,438,852 - - -
Michael R. Lanham 5,438,852 - - -
E. Denton Jones 5,438,852 - - -
Hugh E. Humphrey, Jr. 5,438,852 - - -
Nabil N. El-Hage 5,438,852 - - -
</TABLE>
-12-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
------------------------------------------
(a) The following exhibits are filed as part of this Quarterly Report on
Form 10-QSB pursuant to Item 601 of Regulation S-B:
Exhibit
Number Description of Exhibits
------ -----------------------
3.1 Certificate of Incorporation of WorldQuest, filed as Exhibit 3.1 to
WorldQuests' Form SB-2 Registration Statement, File No. 333-82721 (the
"Prior Registration Statement"), and incorporated herein by reference.
3.2 Bylaws of WorldQuest, 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.
4.3.1 Representatives' Warrant dated February 4, 2000 granted to John G.
Kinnard and Company Incorporated for 68,750 shares of common stock,
filed as Exhibit 4.3.1 to WorldQuest's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1999, and incorporated herein
by reference.
4.3.2 Representatives' Warrant dated February 4, 2000 granted to Kaufman
Bros., L.P. for 178,750 shares of common stock, filed as Exhibit 4.3.2
to WorldQuest's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1999, and incorporated herein by reference.
4.3.3 Representatives' Warrant dated February 4, 2000 granted to WestPark
Capital, Inc. for 27,500 shares of common stock, filed as Exhibit
4.3.3 to WorldQuest's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1999, and incorporated herein by reference.
4.4 Amended and Restated Note date 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"), filed as Exhibit 4.5 to WorldQuest's Form SB-2
Registration Statement, file no. 333-93019 (the "Second Registration
Statement"), and incorporated herein by this reference.
4.6 Form of Warrant issued in the Private Placement, filed as Exhibit 4.6
to the Second Registration Statement, and incorporated herein by this
reference.
10.1 Purchase Agreement dated April 17, 2000 between WorldQuest and BDC,
LLC, filed as Exhibit 10.1 to WorldQuest's Quarterly Report on Form
10-QSB for the fiscal quarter ended March 31, 2000, and incorporated
herein by this reference.
*27.1 Financial Data Schedule.
------------------
* Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the second quarter of 2000.
-13-
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WORLDQUEST NETWORKS, INC.
August 14, 2000 By: /s/ Mark C. Levy
-----------------
Mark C. Levy, Chief Financial Officer
(Principal Financial and Accounting Officer)
-14-
