<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended: September 30, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the transition period from to
--------- ---------------
2000
Commission file number :000-24447
QUEST NET CORP.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
1250 E. HALLANDALE BEACH BLVD. SUITE 502
PEMBROKE PARK, FLORIDA 33009
----------------------------------------
(Address of principal executive offices)
(954) 457-0900
-------------------------------
(Registrant's telephone number)
PARPUTT ENTERPRISES, INC.
12835 E. ARAPAHOE ROAD
TOWER I, PENTHOUSE
ENGLEWOOD, COLORADO 80112
(Former name and former address)
Florida [4813] 84-1331134
(State of Incorporation) Primary Standard Industrial IRS Employer
(Classification Code Number I.D. Number)
Securities registered under Section 12(b) of
the Exchange Act:
None
Securities registered under Section 12(g) of
the Exchange Act:
Common Stock, no par value
(Title of class)
Indicate by check mark whether the Registrant:(1) has 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 registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
The number of shares outstanding of each of the issuer's classes of equity
as of November 15, 2000, 2000: 23,474,309 shares of Common Stock, no par value;
and, 30,000 shares of Preferred Convertible Stock, no par value.
<PAGE>
QUEST NET CORP.
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheet - September 30, 2000 ................................ 3
Consolidated Statements of Operations - Three months ended
September 30, 2000 and 1999 .............................................. 4
Consolidated Statements of Cash Flows - Three months ended
September 30, 2000 and 1999 .............................................. 5
Notes to Consolidated Financial Statements ... ................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Plan of Operations............................................... 7-14
Part II - Other Information
Item 1. Legal Proceedings.................................................... 15
Item 2. Changes in Securities................................................ 15
Item 3. Defaults Upon Senior Securities...................................... 15
Item 4. Submission of Matters To a Vote of
Security Holders .................................................... 16
Item 5. Other Information.................................................... 16
Item 6. Exhibits and Reports on Form 8-K..................................... 16
Signature ...................................................................... 17
</TABLE>
2
<PAGE>
QUEST NET CORP
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2000
UNAUDITED
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 3,046
Accounts receivable net of $10,185 allowance 23,425
Prepaid expenses 1,779
-------------------
TOTAL CURRENT ASSETS 28,250
PROPERTY AND EQUIPMENT, net of
accumulated depreciation of $132,608 278,404
PROPERTY NOT IN SERVICE 689,615
OTHER ASSETS 6,753
-------------------
$ 1,003,022
===================
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,864,308
Notes payable 103,533
Due to shareholder 658,764
Obligations under capital lease - current 28,674
-------------------
TOTAL CURRENT LIABILITIES 2,655,279
-------------------
MINORITY INTEREST 80,000
-------------------
OBLIGATIONS UNDER CAPITAL LEASE 21,129
-------------------
SHAREHOLDERS' DEFICIT
Preferred stock, no par value; 5,000,000 shares authorized;
30,000 shares issued and outstanding
Common stock, no par value; 50,000,000 shares aurthorized;
23,474,309 shares issued and outstanding 16,390,721
Stock warrants, 47,000 issued and outstanding 7,191
Stock options, 10,000 issued and outstanding 25,800
Additional paid-in capital 353,285
Accumulated deficit (18,530,383)
-------------------
TOTAL SHAREHOLDERS' DEFICIT (1,753,386)
-------------------
$ 1,003,022
===================
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
QUEST NET CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
For the three months ended
September 30,
------------------------------------
2000 1999
---------------- ----------------
<S> <C> <C>
REVENUES
Internet and other related services $ 114,090 $ 47,745
---------------- ----------------
COSTS AND EXPENSES
Cost of internet-related services 72,500 5,792
Stock based compensation - 257,000
Bad debt expense 3,052 -
Salaries and bonuses 71,268 169,252
General and administrative 214,074 275,657
Depreciation and amortization 20,010 204,392
---------------- ----------------
TOTAL OPERATING EXPENSES 380,904 912,093
---------------- ----------------
OPERATING LOSS (266,814) (864,348)
NON-OPERATING INCOME (EXPENSE)
Interest expense 2,642 33,872
Interest income - 35,368
Realized loss on marketable securities - 6,280
---------------- ----------------
NET LOSS $(269,456) $(869,132)
================ ================
NET LOSS PER SHARE:
Basic and diluted $ (0.01) $ (0.04)
================ ================
SHARES USED FOR COMPUTING NET LOSS PER SHARE:
Basic and diluted 23,474,309 22,045,837
================ ================
</TABLE>
See accompanying notes to the consolidated financial statements
4
<PAGE>
QUEST NET CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months Ended
September 30,
2000 1999
Unaudited Unaudited
----------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (269,456) $ (869,132)
----------------- -------------------
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization 20,008 205,981
Stock based compensation - 250,000
Stock issued for services and settlements - 7,000
Unrealized loss from marketable securities - 6,280
Changes in current assets and current liabilities:
Accounts receivable 12,287 (6,471)
Other receivable - 2,276
Increase in prepaid expenses 19,654 (3,753)
Other assets 26,627 (23,375)
Accounts payable and accrued expenses 130,520 488,924
----------------- -------------------
209,096 926,862
----------------- -------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (60,360) 57,730
----------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (5,430) (767,084)
Purchase of marketable securities - (100,032)
----------------- -------------------
CASH FLOWS USED IN INVESTING ACTIVITIES (5,430) (867,116)
----------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of preferred stock - (1,000,000)
Funds provided by shareholder 21,432 -
Procceds from notes payable 21,548 -
Repayments of capital lease (2,835) -
----------------- -------------------
CASH FLOWS USED IN (PROVIDED BY) FINANCING ACTIVITIES 40,145 (1,000,000)
----------------- -------------------
NET DECREASE IN CASH (25,645) (1,809,386)
Cash, at beginning of period 28,691 4,298,289
----------------- -------------------
Cash, at end of period $ 3,046 $ 2,488,903
================= ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 2,642 $ 33,872
================= ===================
Cash paid for income taxes $ - $ -
================= ===================
NON-CASH INVESTING AND FINANCING ACTIVITIES
Common stock issued for services previously accrued $ - $ 877,640
================= ===================
Equipment placed in service $ - $ 89,144
================= ===================
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
QUEST NET CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-QSB and Regulation S-B.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements
and should be read in conjunction with the Company's June 30, 2000 audited
financial statements as filed on Form 10-KSB in November 2000. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been included. The results of
operations for the three months ended September 30, 2000 are not necessarily
indicative of the results that will be realized for the full year.
PRINCIPLES OF CONSOLIDATION
The Company's consolidated financial statements include the accounts of the
Company's and its 80% owned subsidiary Globalbot Corp. The Company formed
four other wholly owned subsidiaries, IPQuest Corp., Quest Wireless Corp.,
Globalbot Corp., QuesTel Corp. and Quest Fiber Corp, and CWTel, Inc. as of March
1, 2000. All material intercompany accounts and transactions have been
eliminated in consolidation.
SUBSEQUENT EVENTS
On October 16, 2000, Quest Net Corp. issued to James LLC 25,900,000 shares of
its common stock. The shares were issued as partial settlement of a lawsuit that
was filed against Quest on May 5, 2000 in the United States District Court,
Southern District of New York, by James LLC (Case No. 00 Civ. 3467). The lawsuit
stemmed from the sale of common stock to James LLC for $5,000,000. The lawsuit
alleged that the Company breached its contract of sale to James LLC by, among
other things, failing to register the common stock, and failing to pay
liquidated damages for the non-effectiveness of the registration statement.
James LLC demanded damages in excess of $5,000,000. Quest also issued a
Promissory Note in the principal sum of $3,500,000, maturing December 31, 2001,
and bearing interest at the rate eight percent per annum.
In October 2000, the Company returned $391,818 of communication equipment not in
service to the vendor from whom it was purchased and the vendor has provided
additional communication equipment valued at $75,000 in full settlement of the
amount owed the vendor.
In December 2000, the Company returned $159,573 of communication equipment not
in service to the another vendor from whom it was purchased.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
GENERAL
Quest Net Corp., since inception, has been primarily engaged in providing
Internet connectivity and the development of Internet tools for individuals and
companies.
The Company has incurred net losses applicable to common shareholders
since inception through September 30, 2000, of approximately $18,530,400 after
discounts and dividends on preferred stock. The Company anticipates that losses
from operations will continue due to the lack of working capital and the capital
necessary to fund its operations.
The Company's costs and expenses primarily fall into the following
categories:
o Telecommunications and operations;
o Employee stock compensation plans;
o Employees' salaries
o General and administrative;
o Amortization and depreciation.
Telecommunications and operating expenses consist of
telecommunications, including the cost of local telephone lines and costs of
leased lines connecting the Internet and operations centers.
Operating expenses also include employee salaries and benefits,
equipment costs, office rent and utilities and customer service and technical
support costs.
Employee stock compensation plans consist of restricted common stock
awards and options. The Company has utilized its restricted stock as an
incentive to attract and keep qualified experienced key personnel.
General and administrative expenses consist primarily of administrative
staff and related benefits.
Amortization expense primarily relates to the amortization of goodwill
and a non-compete agreement acquired in a purchase of an e-commerce provider and
certain equipment and licenses related to proposed plans to offer Internet
kiosks. Amortization expense is based on the Company's best estimate of the
useful lives of the intangible assets.
7
<PAGE>
Depreciation expense primarily relates to equipment and is based on the
estimated useful lives of the assets ranging from three to five years using the
straight-line method for the equipment.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
REVENUE
Revenue for the three ended September 30, 2000 was $114,090 as compared to
$47,745 for the same period in 1999. The increase was primarily a result of the
inclusion of the telephone operations and associated revenues of CW Tel, Inc.,
which was acquired in March 2000, in the amount of $82,523.
COSTS AND EXPENSES
Cost of revenue, was substantially comprised of leased and telephone lines
for the quarter ended September 30, 2000 was $72,500 as compared to $5,792 for
the same period in 1999. The increase was a result of a the increase of leased
lines expense of $61,781 associated with the telephone operations of CW Tel,
Inc..
Stock based compensation decreased by $257,000 during the quarter ended
Septmeber 30, 2000 as compared $257,000 to the quarter ended September 30, 1999
due to the scaled down operations of the Company, the corresponding decline in
manpower and the non-issuance of shares of common stock of the Company during
the quarter ended September 30, 2000.
Salaries and bonuses decreased by $97,984 during the quarter ended
September 30, 2000 to $71,268, as compared to $169,252 during the quarter ended
September 30, 1999, due to a reduction in manpower as a result of scaled down
operations.
General and administrative costs decreased to $214,074 the quarter ended
September 30, 2000 as compared to $275,657 for the same period in 1999. The
decrease was attributable to cost cutting efforts during the quarter ended
September 30, 2000.
Depreciation and amortization decreased by $184,382 during the quarter
ended September 30,2000 as compared to the quarter ended September 30, 1999. The
decrease was due a review conducted by the Company at June 30, 2000 of the net
book value of its fixed assets, covenant not to compete associated with its
acquisition of Wings Online, Inc. and goodwill associated with acquisitions of
CWTel, Inc. and AVX Communications. The review indicated that based on the
Company's level of operations, the Company's estimate of the recoverability of
such net book values was significantly impaired. Accordingly, the Company
recognized a loss on impairment of $2,467,749 comprised of $714,851 attributable
to fixed assets, $179,633 attributable to the covenant not to compete and
$1,573,265 attributable to goodwill.
Interest expense decreased by $31,230 during the quarter ended September
30, 2000 as compared to the quarter ended September 30, 1999. During the quarter
ended September 30, 1999, as a result of Company not redeeming its preferred
stock outstanding on a timely basis due to a lack funds at the time, the Company
incurred $33,872 of interest expense.
Interest income decreased by $35,368 during the quarter ended September
30, 2000 as compared to the quarter ended September 30, 1999 due to a decrease
in money market investment interest earned on the proceeds of a $5,000,00
private placement which were totally expended to fund the Company's operating
and investing activities.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
From inception, the Company's revenues have been insufficient to support
its operations and as a result its continued existence is dependent upon its
ability to resolve its liquidity problems, principally by obtaining additional
debt and/or equity financing. The Company currently has a working capital
deficiency of $2,627,029 as compared to working capital of $1,419,135 at
September 30, 1999 and a Shareholders' deficit of $1,753,386 including an
accumulated deficit of $18,530,383 at September 30, 2000. Additionally, the cash
used in operations for the quarter ended September 30, 2000 totaled $60,360.
These and other factors raise a substantial doubt as to the ability of the
Company to continue as a going concern. In order to continue its current
operations and effectuate its operational plan the Company will need to obtain
additional debt or equity financing. In the event that the Company is unable to
obtain debt or equity financing or are unable to obtain such financing on terms
and conditions that are acceptable, the Company may have to cease or severely
curtail operations.
The Company has financed its operations through several Regulation D
private placement transactions.
The Company anticipates that the balance of its capital needs for the
fiscal year ending June 30, 2001 will be approximately $ 250,000.
In June 1999, the Company finalized a Private Placement ( REG D 506) with
James LLC in the amount of $5,000,000, of which the company received a net
amount of $4,650.000. On May 5, 2000, a lawsuit was filed against Quest by James
LLC. The lawsuit was settled On October 5, 2000, the lawsuit was settled. As
part of the settlement, the Company issued James LLC, 25,900,000 shares of its
common stock, thereby giving James LLC a majority interest in the shares of the
Company's common stock then outstanding and a note in the principal sum of
$3,500,000 maturing on December 31, 2001 with interest at 8% per annum.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-QSB under the caption
"Management's Discussion and Analysis or Plan of Operations," as well as in the
Company's press releases or oral statements that may be made by the Company or
by officers, directors or employees of the Company acting on the Company's
behalf, that are not historical fact constitute "forward-looking statements".
Such forward-looking statements involve known and unknown risks, uncertainties,
and other factors that could cause the actual results of the Company to be
materially different from the historical results or from any results expressed
or implied by such forward-looking statements. Factors that might cause such a
difference include, without limitation, the information set forth below. In
addition to statements which explicitly describe such risks and uncertainties,
statements labeled with the terms "believes", "belief" "expects", "plans" or
"anticipates" should be considered uncertain and forward-looking. All cautionary
statements made in this Report should be read as being applicable to all related
forward-looking statements wherever they appear.
Limited Operating History; Continuing Operating Losses
------------------------------------------------------
From inception to September 30, 2000, we generated revenues of
approximately $1,478,800 and incurred operating expenses of approximately
$18,381,000. At September 30, 2000, we had a net loss of approximately $269,500.
The Company is Unable to Meet Capital Needs
-------------------------------------------
At present, we are not generating enough cash flow to meet our
operating needs. We have downsized our employees to three full-time and one
part-time employee, including our sole officer, Charles Wainer. The Company has
cut back on all but the necessary expenses, however we still cannot fund our
operations.
We have been seeking additional capital to fund our operations, and we
are seeking to obtain additional capital through debt or equity financing or
conventional loans. However, we have been unsuccessful to date due to our credit
rating and low stock price. If we cannot obtain additional funds or a candidate
that wishes to take over the Company and infuse additional capital within the
next few months, the Company will be forced to cease operations or seek
protection by filing for Bankruptcy.
9
<PAGE>
Our lack of working capital has necessitated the sale of 20% of our
subsidiary GlobalBot. In addition, our Board of Directors has approved the
spin-off of GlobalBot in order to give GlobalBot the financial and operational
flexibility to take advantage of significant growth opportunities in the
E-commerce business. We believe that separating the two companies will give
GlobalBot a better access to capital, and allow the investment community to
measure GlobalBot's performance as a stand alone company.
In November 2000, we were forced to sell our dial-up customers to an
unaffiliated third party because be could no longer afford to maintain our dial
up lines.
If we are unable to continue our operations, your entire investment in
us will be lost. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" for a
discussion of our working capital and capital expenditures.
We Have Had History Of A Limited Customer Base And This May Continue To Be The
Case.
At present, our customer base is limited. Our ability to operate
profitably depends on increasing our customer base and achieving sufficient
gross profit margins. We cannot assure you that we will be able to increase our
customer base or to operate profitably.
We Are Subject To All Of The Substantial Risks Inherent In An Internet Business,
Which May Harm Our Ability To Operate Successfully.
We are subject to all of the substantial risks inherent in an Internet
related business, any one of which may harm our ability to operate successfully.
These include, but are not limited to:
Our inability to develop, maintain and/or increase levels of traffic on our
Internet sites.
Our inability to attract or retain customers.
Our inability to generate significant Web-based revenue from our customers.
Our failure to anticipate and adapt to a developing market and the level of
use of the Internet and online services for the purchase of consumer
products and in general.
Our inability to upgrade and develop competitive systems and infrastructures.
The failure of our servers and networking systems to efficiently handle our
Web traffic.
Technical difficulties and system downtime or Internet brownouts.
If We Raise Addition Capital Through The Issuance Of Equity Or Convertible Debt,
Your Proportionate Interest Will Be Diluted.
We will need more working capital to continue our operations. If we
raise additional capital by issuing equity or convertible debt securities, the
percentage ownership of our then-current stockholders will be reduced, and such
securities may have senior rights, preferences, or privileges.
Our Data Centers And The Networks On Which We Rely Are Sensitive To Harm From
Human Factions And Natural Disasters. Any Resulting Disruption Could
Significantly Damage Our Business And Reputation.
Our reputation for providing reliable service largely depends on the
performance and security of our data centers equipment and the network
infrastructure on which we rely. Our customers often maintain confidential
information on our servers.
10
<PAGE>
Our data centers, equipment and networks, and our customers'
information are subject to damage and unauthorized access from:
Human error and tampering.
Breaches of security.
Natural disasters.
Power loss.
Capacity limitations.
Software defects.
Telecommunications failures.
Intentional acts of vandalism, including computer viruses.
All of which, will cause interruptions in service or reduced capacity
for our customers. These events could potentially jeopardize the security of our
customers' confidential information such as credit card and bank account
numbers.
Despite precautions we have taken and plan to take, the occurrence of
any one of the events listed above or other unanticipated problems could
seriously damage our business and reputation and cause us to lose customers.
The time and expense required to eliminate computer viruses and
alleviate other security problems could be significant and could impair our
service quality.
We Could Not Provide Adequate Service To Our Customers If We Were Unable To
Secure Or Maintain Sufficient Network Capacity To Meet Our Future Needs On
Reasonable Terms Or At All.
Our failure to achieve or maintain high capacity data transmission
could negatively impact service levels to our existing customers and limit our
ability to attract new customers, which would harm our business.
We Are Dependent On Internet Network Access Services We Receive From Others, Any
Disruption Of These Services Could Harm Our Business
We rely on third-party networks, local telephone companies, and other
companies to provide data communications capacity. Any disruption of these
services could cause our customers to find other providers and prohibit us from
obtaining new customers.
Our Business Depends In Part On Our Network Service Provider's Numerous Peering
Relationships. Their Inability To Maintain Their Peering Relationships Could Be
Costly And Harmful To Our Business.
The Internet is composed of many Internet service providers that
operate their own networks and interconnect with other Internet Service
Providers at various peering points.
If our network service provider's network or infrastructure fails to
continue to meet industry requirements for peering or it loses its peering
relationships for any reason, our transmission rates could be reduced, resulting
in a decrease in the quality of service we provide to our customers.
Potential Lack Of Liquidity Of Our Common Stock
Our common stock trades on the OTC Electronic Bulletin Board. Stocks
trading on the OTC Electronic Bulletin Board generally attract a smaller number
of market makers and a less active public market.
11
<PAGE>
Moreover, since our common stock is traded on the OTC Electronic
Bulletin Board, investors may find it difficult to dispose of or obtain accurate
quotations as to the value of our common stock.
We Are Subject To Penny Stock Regulations And Restrictions
Our stock is designated as a Penny Stock. Such a designation requires
any broker or dealer selling such securities to disclose certain information
concerning the transaction, obtain a written agreement from the purchaser, and
determine that the purchaser is reasonably suitable to purchase such securities.
These rules will restrict the ability of Broker / Dealers to sell our common
stock and may affect the ability of Investors to sell their shares.
You May Not Be Able To Resell Shares Of Our Stock At Or For More Than The Price
You Paid.
The price of our common stock and Internet and telecommunication stock
in general, have recently experienced extreme volatility that often has been
unrelated to the operating performance of any specific public companies. During
the period from July 10, 1998 to November 13, 2000 the bid and ask price of our
common stock has ranged from a high of $30.71 to a low of $.02. If continued,
these broad market and industry fluctuations may adversely affect the trading
price of our common stock, regardless of our actual operating performance. This
volatility may negatively impact the liquidity and value of your shares.
Our Articles of Incorporation Allow Authorization and Discretionary Issuance of
Preferred Stock
Our Articles of Incorporation authorize the issuance of "blank check",
preferred stock. The Board of Directors is empowered, without stockholder
approval, to designate and issue additional series of preferred stock with
dividend, liquidation, conversion, voting, or other rights, including the right
to issue convertible securities with no limitations on conversion. Any such
designations and issuances, could:
Adversely affect the voting power or other rights of the holders of our
common stock.
Substantially dilute the common shareholder's interest. Depress the price
of our common stock.
Our Certificate Of Incorporation Gives The Board Of Directors The Sole
Authority To Issue "Blank Check" Preferred Stock. The Issuance Of "Blank Check"
Preferred Stock Could Have The Effect Of Delaying, Deterring, Or Preventing A
Merger, Take Over Or Change In Control Without Any Action By The Shareholders.
The Board of Directors, by the issuance of preferred stock, could make
it more difficult for a third party to acquire us, even if the acquisition would
be beneficial to you. You may not realize the premium return that stockholders
may realize in conjunction with corporate takeovers.
The issuance of "blank check" Preferred stock could delay, deter, or
prevent a take over, merger or change of control and May Prevent You From
Realizing A Premium Return.
We May Be Unable To Protect Our Intellectual Property Rights Or To Continue
Using Intellectual Property That We License From Others.
We rely and will rely on a combination of copyright, trademark, service
mark, and trade secret laws and contractual restrictions to establish and
protect certain of our proprietary rights. We have no patented technology that
would bar competitors from our market. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy or otherwise obtain
and use our data or technology.
12
<PAGE>
The Uncertainty Associated With Unproven Business Models
Since Quest Net's business model is relatively new and unproven, we may
not be able to anticipate and adapt to a developing market, or may be unable to
manage its network infrastructure (including server, hardware, and software, to
handle our Internet traffic, or to effectively manage our rapidly expanding
operations.
We Lack Unique Services Or Market Niche In An Industry Characterized By
Significant Overcapacity For Current Demand
The market for Internet access is highly competitive and fragmented
with over 4,800 Internet service providers, primarily in local markets and
averaging less than 5,000 customers each. Multiple Internet access providers
serve every local market we have entered, or intend to enter. We offer the same
type of services as other Internet service providers. Due to our lack of working
capital in the past, we have not obtained any significant market share.
We Cannot Be Certain That We Will Be Able To Compete With Significant Pricing
Pressure By Our Competitors.
As a result of increased competition in our industry, we expect to
encounter significant pricing pressure. We cannot be certain that we will be
able to offset the effects of any required price reductions through an increase
in the number of our subscribers, higher revenues from our business services,
cost reductions or otherwise, or that we will have the resources to continue to
compete successfully.
We May Not Be Able To Compete In The Internet Service Market
We operate in the Internet services market, which is extremely
competitive. Our current and prospective competitors include many large
companies that have substantially greater market presence, financial, technical,
marketing, and other resources than we have. We compete directly or indirectly
with the following categories of companies:
>> Established online services, such as America Online, the Microsoft
Network, CompuServe, and Prodigy.
>> Local, regional, and national Internet service providers, such as
MindSpring, Earthlink, Network, Inc., Internet America, and PSINet.
>> National telecommunications companies, such as AT&T Corp., MCI
WorldCom, Inc., Sprint, and GTE.
>> Regional Bell operating companies, such as BellSouth and SBC
Communications.
Our competition is likely to increase. We believe this will probably
happen as large diversified telecommunications and media companies acquire
Internet service providers and as Internet service providers consolidate into
larger, more competitive companies.
Diversified competitors may bundle other services and products with
Internet connectivity services, potentially placing us at a significant
competitive disadvantage. As a result, our business may suffer.
We May Not Be Able To Compete In The Long-Distance Telephone Market
Quest, through its wholly owned subsidiary CWTel, is a reseller of long
distance telephone service. We compete with long distance carriers and other
long distance resellers and providers, including large carriers such as AT&T,
MCI WorldCom and Sprint and new entrants to the long distance market. Many of
our competitors are significantly larger and have substantially greater market
presence and financial, technical, operational, marketing and other resources.
We will face stiff price competition and may not be able to compete.
13
<PAGE>
Quest Has Limited Marketing And Sales Capability.
Because of our lack of working capital we have not had the resources to
develop a marketing and sales force.
Dependence On Qualified Personnel.
Due to the specialized nature of our business, we are highly dependent
upon our ability to attract and retain qualified technical and managerial
personnel. Our failure to recruit key technical and managerial personnel in a
timely manner has been detrimental to our plan of operations and has had an
adverse impact upon our business affairs and finances. Due to our lack of
operating capital, we have had to downsize our technical personnel to two, which
includes Charles Wainer, our sole officer.
The "Going Concern" emphasis On The Report Of Our Independent Accountants May
Reduce Our Ability To Raise Additional Financing.
The report of our independent accountants on our June 30, 2000
Consolidated Financial Statements contains an explanatory paragraph regarding
our ability to continue as a going concern. Our independent accountants cited
our history of operating losses, limited operating history, and negative cash
flow from operations, which raised substantial doubt as to our ability to
continue as a going concern. This "going concern", emphasis will reduce our
ability to raise additional financing.
Control By James LLC/Possible Change Of Control
James LLC beneficially owns 54.3% of the outstanding Common Stock of
the Company. Due to it stock ownership, James LLC is in a position to elect all
of the Company's directors and control policies and operations of the Company.
This could effectuate a change in control of the Company. See, "Principal
Shareholders".
No Payment Of Dividends
Although we declared a three-for-one stock dividend in December 1998,
it is not anticipated that we will pay any cash dividends on our common stock in
the future. The Board of Directors intends to follow a policy of retaining
earnings, if any, for use in our business operations. As a result, the return on
your investment in us will depend upon any appreciation in the market price of
the common stock.
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GENERAL
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
SECURE TRANSACTION INTERNATIONAL CORP. ET AL.
In April 1999, Quest filed a lawsuit in the Circuit Court of the 17th
Judicial Circuit in and for Broward County, Florida against Secure Transaction
International Corp., its subsidiaries and principals, the accounting firm of
Margolis, Fink & Wichrowski, Barry A Fink, C.P.A., P.A., Mark V. Wichrowski,
C.P.A. and Barry A. Fink and Mark Wichrowski, individually, alleging violation
of the Florida securities laws, negligent misrepresentations, breach of contract
payment of accounts, and conversion.
The lawsuit stems from several contracts entered into with Secure
Transaction and its subsidiaries for bandwidth, consulting services and
software. As payment for the services, Secure Transaction and its subsidiaries
issued redeemable preferred stock that was convertible into Secure Transaction
common stock.
Quest provided the services as required and the appropriate amount of
convertible stock was not redeemed or converted.The amount due the Company under
these various agreements is approximately $867,842.
Quest has also alleged that the Financial Statements provided, negligently
misrepresented the financial condition of Secure Transaction and its
subsidiaries. Quest has asked the court for rescission, compensatory damages,
attorneys' fees, costs, and expenses.
The defendants filed a motion to dismiss, which was denied. The defendants
have filed an answer to our complaint. The lawsuit is in the discovery stage. At
present, we are unable to predict the outcome this lawsuit.
JAMES LLC
On May 5, 2000, a lawsuit was filed against the Quest in the United States
District Court, Southern District of New York, by James LLC (Case No. 00 Civ.
3467). The lawsuit stems from the sale of common stock to James LLC for
$5,000,000 The lawsuit alleges that the Company breached its contract of sale to
James LLC by, among other things, failing to register the common stock, and
failing to pay liquidated damages for the non-effectiveness of the registration
statement. James LLC have demanded damages in excess of $5,000,000 to be
determined at trial, liquidated damages and a mandatory injunction requiring
Quest register the shares, together with interest costs and legal fees. The
Company intends to defend this suit and has obtained litigation counsel, who is
in the processes of reviewing the case and filing an answer. If the lawsuit is
tried and a judgment is entered against the Company, the Company estimates that
the damages could be in excess of $5 million, which is the minimum amount
invested by James LLC. In the event that the lawsuit cannot be settled and the
Company is adjudged libel, the Company does not have the funds available to
redeem any or all of common shares. Any judgment to this effect would force the
Company to cease operations.
SECURITIES AND EXCHANGE COMMISSION
Quest has been advised by the Securities and Commission (the "Commission")
that they have issued an order directing a private investigation of possible
violations of Sections 17(a) of the Securities Act and Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated there under by
certain unnamed persons. The Commission has also advised Quest that the
investigation should not be construed as an indication by the Commission or its
staff that any violation of law has occurred, nor as a reflection upon any
person, entity, or security.
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company has not submitted any matters to a vote of Security Holders.
ITEM 5. OTHER INFORMATION.
On February 25, 2000, Quest entered into a Stock Purchase Agreement, effective
March 1, 2000 to purchase CWTel, Inc. from Charles Wainer for the sum of
$1,200,000. Of the purchase price $200,000 was paid at closing, $700,000 was
paid by the issuance of 360,000 share of the Company's restricted common stock
and $300,000 was to be paid in three equal payments at 90 days, 180 days, and
270 days from closing. These payments were represented by promissory note and
guaranteed by the issuance, at closing, of 300,000 shares of preferred stock,
with a face value of $10.00 per share. The Company is presently in default for
all payments under the purchase agreement. CWTel, Inc. provides communication
services to commercial and residential customers. The company is a switch-based
carrier for local and long distance voice calls utilizing conventional
transmission methods and Voice over IP protocols. CWTel, Inc. also provides
high-speed Internet service, dial-up Internet access, and web hosting. CWTel,
Inc. offers local dial tone, long distance calling, and high speed Internet
access to tenants located in commercial buildings.
During the quarter ended June 30, 2000, the Company found that there were
severe technological problems with the equipment of Wireless, Inc., which was
returned to the manufacturer in October 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Filed November 16, 2000
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, who is duly
authorized to sign as an officer and as the principal financial officer of the
registrant.
Dated: December 11, 2000 QUEST NET CORP.
By: /s/ Charles Wainer
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Charles Wainer, President
Acting Chief Financial Officer
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