FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 000-28863
QUEST NET CORP.
(Exact Name of Registrant as Specified in its Charter)
1250 East Hallandale Beach Blvd. Suite 502
Pembroke Park, Florida 33009
(Address of principal executive offices)
(954) 457-0900
(Issuers 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_____ .
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $294,502
Based on the average closing bid and asked prices of the common stock on the
latest practicable date, November 13, 2000, the aggregate market value of the
voting stock held by non-affiliates of the registrant was $564,108 with
49,374,309 shares outstanding. (See note E to the financial statements)
Documents Incorporated By Reference
[None]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Overview
Quest Net Corp. is a company based in Hallandale Beach, Florida.
We were incorporated in the State of Colorado in November 1995, under the name
A.P. Sales Inc., "AP Sales" proposed business was to engage in the purchasing,
reconditioning, selling, moving, and repairing of office equipment and
furniture, including, primarily, filing and storage cabinets, and workstations.
Until July of 1998, its operations were primarily organizational in nature or
related to raising capital.
In July 1998, AP Sales acquired certain of the assets of Pact
Communication Group, Inc., a privately held Florida corporation. Pact was a
provider of Internet system and network management solutions. Pact's solutions
included server hosting, Internet connectivity, collaborative management, and
Internet
In December 1999, Quest began to enter a new phase of reorganizing its
operations and focusing specifically on projects such as Wireless Operations,
Dial-up and Hosting. It also started to pursue an acquisition of a telephone
company in order to benefit from its recently granted CLEC License and 214
International Telecommunication License.
Quest also decided to move their offices to a new location in order to
house all of its operations in one place, have room for expansion, and to
generate facilities that would provide a better back up to its network. A new
facility was chosen in, Pembroke Park, Florida. In September 2000, we combined
our corporate offices with those of CWTel and moved to their offices in
Hallendale Beach , Florida, due to our inability to timely pay the rent on the
former corporate offices.
In February 2000, due to management conflict as to the direction of
Quest, it was mutually decided between Quest and its President at the time,
Rebecca Del Medico, that Quest would be in a better situation if someone with
more of an Operational/Technological background filled that position. As part of
the termination agreement, Ms. Del Medico received $50,000 and the right to
50,000 shares of Quest's common stock, which Quest had accrued over the three
month, ended December 31, 1999. Mr. Pereira, the Chief Executive Officer at the
time, replaced Ms. Del Medico as President. Mr. Pereira, initially felt that
Quest should have started a professional search for a mature seasoned
Telecommunications Executive. Due to the cost of such a search and the
compensation package required for such an executive, the Board of Directors did
not approve the request. Instead, it was decided to continue with negotiation
for an acquisition candidate that would bring in a management team with
qualities that management felt would be the right fit for Quest.
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 310,000 shares of Quest'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 guaranteed by the issuance, at closing,
of 30,000 shares of preferred stock, with a face value of $10.00 per share.
Quest is presently in default for the first and second payments under the
purchase agreement. Mr. Wainer has presented Quest's Board of Directors with a
notice of default. CWTel, Inc. provides communication services to commercial and
residential customers. CWTel 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. Agreements are previously signed with the landlord or the
management of such buildings, and then tenants are offered discounted services.
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As part of the transaction, Mr. Wainer was given a five-year employment
agreement as President of Quest, at an annual base salary of $100,000 during the
Term, with a 20% cost of living increase per annum and 50,000 shares of Quest's
common stock. Mr. Wainer also received options to purchase 1,000,000 shares of
Quest's common stock. These options vest at the rate if 50,000 shares every six
months and options for an additional 50,000 shares can be exercised every time
Quest has increased its revenue by one million dollars and has retained that
revenue for a period of not less than two months. These options are exercisable
at $2.68 per share (110% of the fair market value of Quest's common stock on the
date of the Employment Agreement). Once vested, the options will remain
exercisable for one year from the date of vesting. After one year from the
vesting date, the options will become null and void. Mr. Wainer was also
appointed as interim CEO and a Director. At the same time, Victor Coppola
resigned from the Board of Directors.
Mr. Camilo Pereira had already expressed to the Board his desire, for
health and personal reasons to resign as CEO/Chairman of the Board. The Board of
Directors requested that Mr. Pereira remain in management of Quest until at
least August 2000. Originally, Mr. Pereira had agreed in principal to remain,but
in March 2000, he resigned from all managerial and directorship responsibility.
In February 2000, Quest had also decided to cancel its purchase of
shares of Africa Internet Corp. Quest had paid $200,000 of the purchase price.
Pursuant to the cancellation agreement, Quest received back the shares issued
for the acquisition and paid a cancellation penalty of $100,000 and the balance
was agreed would be paid back in one year with an interest bearing note as a
guarantee for that amount.
In March 2000, Quest entered into a two-year Consulting Agreement with
Internet Strategy Group Ltd. for a consulting fee of $20,000 per month during
the first year and $24,000 during the second year plus 60,000 shares of Quest
Net common stock annually, to be issued every quarter in advance. Mr. Pereira is
an employee of Internet Strategy Group Ltd. Internet Strategy Group Ltd. was to
perform consulting and advisory services on behalf of Quest on an as-needed
basis, not to exceed 60 hours per months. Its duties consisted of providing
advice and consultation with respect to all matters relating to or affecting the
telecommunications business. The agreement was terminated in July 2000 due to
our inability to pay the consulting fees. No shares were issued pursuant to the
agreement.
During the third quarter, there was a substantial scale back in Quest's
Sales Department as Quest found that there were severe technological problems
with the equipment of Wireless, Inc. Mr. Paul Zeller, Quest's former Executive
Vice President, was transferred to Sales/Marketing but eventually his service
was terminated.
Quest also terminated the services of its Vice President Thomas Magill. In
addition, Quest also terminated the services of George Elia, Director of the
Investor Relations Department when he refused to cooperate with the SEC
inquiry-see item 3-legal proceedings-securities and exchange commission. John
Scafidi, Quest's Chief Financial Officer resigned in May 2000. In June 2000,
Julian Cantillo resigned from the Board of Directors. In September 2000, Richard
Zaden resigned from the Board of Directors. In November 2000, David Block
resigned from the Board of Directors. Mr. Wainer is now the sole Officer and
Director of Quest.
Since Mr. Wainer became President and interim CEO, staff and management
have been scaled down. Quest also moved to its new facility. During the move,
it was discovered that two Mux's were lost or stolen from our warehouse. This
equipment is valued at approximately $655,000. After several meetings and an
investigation by the Board, it was decided that Quest should proceed with a
claim under its insurance policy. No claim was ever filed and subsequently the
insurance was cancelled for non-payment. Quest has written off those assets on
their balance sheet.
We saw the need to start the deployment of more sites under its GlobalBot
subsidiary and the commission of the development on Carsonline, Boatsonline, and
Motorbikesonline was initiated. Due to technological problems, the WINGS Online,
Inc. revenue was not collected for several months. Some of that revenue has been
collected, some written off and GlobalBot has correct the problem.
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Since Quest does not have the resources available to operate, fund, and
grow GlobalBot to its full potential, Quest's Board of Directors has approved
the "spin off" of GlobalBot, under certain conditions including but not limited
to a successful private sale of 20% of GlobalBot's common stock owned by Quest,
and additional funding for GlobalBot. In addition, the Board believes that the
"spin off" would allow management of Quest to concentrate on its core business,
and enhance GlobaBot's access to financing. See Item 1. "Description of
Business-GlobalBot".
We spent approximately $ 200,000 for advertising for our new $9.95
unlimited Internet dial-up but did not manage to attract a substantial number of
clients. Although we experienced a growth on its customer base, that growth was
far less then originally projected by management. In November 2000, we sold our
dial-up internet access business to an unaffiliated third party for $25,000
because we could no longer afford to maintain our dial up lines.
Merger
Pursuant to an Agreement and Plan of Merger (the "Merger Agreement") dated
as of March 13, 2000 between Parputt Enterprises, Inc. ("PEI"), a Nevada
corporation, and Quest Net Corp., all the outstanding shares of common stock of
PEI were exchanged for 275,000 shares of common stock of Quest in a transaction
in which Quest was the surviving company.
The Merger Agreement was adopted by the unanimous consent of the Board of
Directors of PEI and approved by the unanimous consent of the shareholders of
PEI on March 13, 2000. The Merger Agreement was adopted by the unanimous consent
of the Board of Directors of Quest on March 13, 2000. Pursuant to Florida, law
the consent of the shareholders of Quest was not required.
Prior to the merger, PEI had 500,000 shares of common stock
outstanding, which shares were exchanged for 275,000 shares of common stock of
Quest. By virtue of the merger, Quest acquired 100% of the issued and
outstanding common stock of PEI.
Prior to the effectiveness of the merger, Quest had an aggregate of
22,786,022 shares of common stock issued and outstanding, and 30,000 shares of
preferred stock outstanding. The preferred stock has a preference on dividends,
liquidation, and merger at $10.00 per share. The preferred stock has no voting
or conversion rights.
Upon effectiveness of the merger, Quest had an aggregate of 23,061,022
shares of common stock outstanding.
The officers, directors, and by-laws of Quest continued without change as
the officers, directors, and by-laws of the successor issuer.
A copy of the Merger Agreement and the Articles of Merger and Plan of
Merger are filed as an exhibit to Quest's Form 8-K filed on March 23, 2000.
The consideration exchanged pursuant to the Merger Agreement was
negotiated between PEI and Quest.
In evaluating Quest as a candidate for the proposed merger, PEI used
criteria such as the value of the assets of Quest, its business operations, plan
of operation, the demand for wireless Internet service Quest's current business
operations and anticipated operations, and Quest's business name and reputation.
PEI determined that the consideration for the merger was reasonable.
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Until September 1,2000, we had four working subsidiaries, each with its
own market and customer base. We sold dial-up and dedicated Internet access
services through IPQuest Corp. and wireless Internet services through Quest
Wireless Corp. In addition, we provided Internet content, e-commerce and search
engine development through GlobalBot Corp., and provided international long
distance phone services through CWTel, Inc. In June 2000, due to our lack of
working capital, we sold 20% of our interest in GlobalBot Corp. to InfoDotcoza,
Ltd., an unaffiliated third party. In addition, our Board of Directors has
approved the spin-off of GlobalBot to our shareholders 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. We anticipate that the spin-off will be completed before February
2001.
In November 2000, we were forced to sell our dial-up internet access
business to an unaffiliated third party because be could no longer afford to
maintain our dial up lines. In addition, we have consolidated the IP Quest and
Quest Wireless operations with the CWTel operations in order to conserve our
cash and other resources.
Of the four subsidiaries, CWTel, Inc., is the only subsidiary being
operated by Quest. IPQuest and Quest Wireless are inactive. GlobalBot, although
still 80% owned by Quest until the completion of the spin-off, is being operated
as a stand-alone company by separate management.
CWTel
CWTel, Inc. offers the following services: Local Dial Tone also known
as Basic Telephone Service, Long Distance Calling and High Speed Internet, the
latest both dedicated and shared, marketed as WDSL.
CWTel, Inc. transports the service to the end user through a digital
wireless connection; these wireless systems are placed in the rooftops of
commercial buildings utilizing fixed wireless point to point transmitters. This
technology allows CWTel to avoid using the services of the local incumbent
telephone company to complete the last mile connection, thus yielding great
savings to CWTel and in turn passed thru to the customer.
Current CWTel's technology uses a two-foot rooftop dish that is easily
concealed within the roof of the building, a 5.8GHz transceiver that is capable
of transmitting up to 24Mb of bandwidth and up to 48 conventional voice calls
simultaneously for a distance of up to 45 miles. Other transceivers allow for
more bandwidth to shorter distances, the 45Mb unit will transmit up to 15 miles
and the 100Mb unit up to 5 miles.
Due to the nature of the Local Dial Tone service and the high
availability needed to provide such services, CWTel uses conventional
uncompressed T-1's on their transceivers instead of compressed Voice Over IP
protocol. This technology is also known as wireless fiber.
All voice services are provided through a 2000 port Class 5 Harris
telecom switch, all IP services use Cisco equipment.
CWTel, Inc. markets these services to commercial buildings in the
tri-county area of South Florida; the rates offered to the end users are
approximately 50% lower than BellSouth, the local telephone provider. Long
Distance prices are very competitive compared to other carriers and the
available casual dial providers (1010XXX).
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High Speed Internet is marketed under different plans, the WDSL option
priced at $ 45.00; a shared T-1 priced at $189.00 and dedicated T-1 priced at $
699.00.
CWTel installs the rooftop equipment and necessary indoor and battery
backup equipment within a week. The marketing team, who work on a commission
basis, utilize posters and brochures to advertise the "Smart Building" to the
tenants, thereafter a door-to-door sales is performed.
Quest, through CWTel, has installed and maintained seven "Smart
Buildings" (two other buildings were installed but have since cancelled their
services). In addition, CWTel has pending contracts for eleven new buildings.
Due to the changes to a better technology and our lack of funds to purchase
equipment, we have not been able to complete these installations.
The customer base of CWTel is as follows:
Seven commercial buildings providing Local Dial Tone, Long Distance
Service and High Speed Internet.
Total number of customers: 54
Total number of Local Lines: 229
Total number of toll free service customers: 38
Total number of dedicated Internet Customers: 17
Total number of Internet Hosting Accounts: 160
Total number of collocation customers: 6
GlobalBot
Until June 2000, GlobalBot was a wholly owned subsidiary of Quest. In
June 2000, due to our lack of working capital, we sold 20% of our interest in
GlobalBot Corp. to InfoDotcoza, Ltd., an unaffiliated third party. In addition,
our Board of Directors has approved the spin-off of GlobalBot to our
shareholders 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. We anticipate that the
spin-off will be completed before February 2001. GlobalBot, although still 80%
owned by Quest until the completion of the spin-off, is being operated as a
stand-alone company by separate management at a separate location.
GlobalBot is currently operating with three full-time employees and is
in the process of conducting executive searches for two additional positions for
Marketing and Management Information Systems (MIS). GlobalBot is an E-commerce
website that sells advertising space on its websites to individuals and dealers
who are looking to sell their aircrafts, boats, cars & motorbikes. At present,
boatsonline.com, carsonline.com and motorbikeonline.com are under construction
and will follow the same format as Wingsonline.com, which is now GlobalBot's
only source of revenue.
Wingsonline is one of the leading Internet sites in the aircraft market
today. Wings is used as a market place to purchase airplanes, parts,
accessories, locate aviation services, financing, or insurance and employment
forum for those seeking employment.
Wings Online offers five different payment options for advertising space:
A basic 50-word advertisement w/o photos for $12.00.
Full specifications of the aircraft without photos for $16.00.
Full specifications of the aircraft plus one photo for $25.00
Full specification sheet that includes up to 3 photos for $32.50
Full specifications and up to five photos for $39.00.
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In addition, Wings also offers its customers an option to have their
own company banner or link ad created free of charge that can link to external
sites or internal pages. Currently, the monthly cost of a banner ad is $100.00
per month and a link ad is $50.00 per month.
Wings provides its customers with the ability to search its website for
aircraft's and other aviation services for free, it also offers the user the
option to sign up on its "Hotlist" which will send the user the latest
aircrafts that have been posted at no charge. The Wingsonline customer database
consists of approximately 225 customers.
The GlobalBot Spin-off
----------------------
Company Doing the Spin-off: Quest Net Corp., a Florida
corporation.
Company Resulting from the Spin-off. GlobalBot, Corp, a Florida
corporation.
Conditions to the Spin-off: None
Spin-off Ratio: One share of our common
stock for every four shares
of Quest Net Corp. common
stock held of record on the
spin-off record date.
Spin-off Record Date: May 1,2000(5:00 p.m.Florida
time).
Spin-off Effective Date: Upon effectiveness of the
GlobalBot Form 10
Registration Statement.
.
Dividend Agent: The dividend agent is
Florida Atlantic Stock
Transfer, Inc. The address
and telephone number of the
dividend agent is 7130 Nob
Hill Road, Tamarac, Florida
33321, (954) 726-6305.
Material Federal Income Tax
Consequences to GlobalBot
Shareholders: Alberni & Alberni, P.A. has
issued an opinion to
GlobalBot to the effect
that, for federal income
tax purposes, the spin-off
should qualify as a
tax-free distribution to
the shareholders of Quest
Net Corp. under Section 355
of the Internal Revenue
Code. Therefore,
shareholders should not
incur federal income tax
upon the receipt of our
common stock in the spin-
off.
Trading Market and Symbol for
our Common Stock: At present there is no
public trading market for
GlobalBot common stock.
GlobalBot will apply to
have its common stock
approved for quotation on
the Nasdaq OTCBB. We cannot
be certain that a trading
market will develop.
Transfer Agent and Registrar
for our Common Stock: Florida Atlantic Stock
Transfer, Inc., 7130 Nob
Hill Road Tamarac, Florida
33321, (954) 726-6305.
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Relationship between Quest Net
Corp. and GlobalBot after the
Spin-off: After the spin-off, Quest
Net Corp.and GlobalBot will
operate independently of
each other as separate
public companies.
ITEM 2. DESCRIPTION OF PROPERTY
We have combined our offices with the offices of CWTel. These offices
are located at 1250 East Hallandale Beach Blvd.Suite 502, Pembroke Park, Florida
33009. CWTel leases approximately 800 square feet of office space from
unaffiliated third parties for $1,838 per month. This lease expires in May 2002.
We believe that this facility is adequate for our current and reasonably
foreseeable future needs.
ITEM 3. 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 us 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.
Herman Henin
------------
In January 1999, Herman Henin, a shareholder of Pact Communications
Group, Inc., filed a lawsuit against Quest in the Circuit Court of the 17th
Judicial Circuit in and for Broward County, Florida. Mr. Henin alleged that he
did not receive a proper distribution of Quest shares from Pact after Quest's
acquisition of certain of the assets of Pact, and that, somehow, Quest was
responsible.
Due to the cost of litigation, Quest settled the case for the issuance
of mutual releases and the issuance of 12,500 shares of common stock to Mr.
Henin's attorney.
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Autonomy, Inc.
--------------
In September 1999, Autonomy, Inc, filed suite against Pact
Communication Group, Inc. and Quest Net Corp. in the Circuit Court of the 17th
Judicial Circuit in and for Broward County, Florida. The lawsuit stemmed from an
alleged contract with Pact for a non-transferable, non-sublicenseable, and
non-exclusive license for the use of Autonomy's software and other related
services. In June 2000, the case was dismissed by mutual agreement of the
parties without any payment.
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 stemmed from the sale of common stock to James LLC for
$5,000,000. The lawsuit alleged that we breached our 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. This lawsuit was settled in
October 2000.
The terms of the settlement were submitted to the Court for a fairness
hearing pursuant to 15 U.S.C. Section 77 (a)(10) and the Court approved the
Settlement. Pursuant to the terms of the Settlement, Quest issued 25,900,000
shares of its unrestricted Common Stock to James LLC and a Promissory Note in
the principal sum of $3,500,000, maturing December 31, 20001, and bearing
interest at the rate of eight percent per annum.
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.
Florida Department of Revenue
-----------------------------
During the month of January, we were notified of an impending
investigation by the Florida Department of Revenue concerning the payment of
Florida Use Taxes in regard to the purchase of our Fixed Assets. We contracted a
Certified Public Accountant to respond to the Florida Department of Revenue. As
a result of this limited investigation, it came to light that we had failed to
pay Use Taxes on certain of our purchases. The total liability that was paid by
Quest and Quest Wireless was approximately $6,083.
Qwest Communications International, Inc.
----------------------------------------
On October 24, 2000, we were served with a lawsuit filed by Qwest
Communications International, Inc. in the United States District Court for the
District of Colorado. The complaint alleges trademark infringement, unfair
competition, false designation of origin and false description, and trademark
dilution. Qwest has requested the Court to, among other things, to:
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Preliminarily and permanently enjoin Quest from using the name Quest.
>> Award damages to Qwest for actual damages sustained by Qwest
resulting from the use of the name Quest by us.
>> Award Qwest treble the profits resulting from the dilution and
infringement of the rights of Qwest by our use of the name Quest.
>> Require Quest to cancel all trade names,trademark registrations and
domain names using the name Quest
>> Award punitive damages
Due to its financial condition, Quest is unsure at present what action
will be taken with regard to this lawsuit.
Threatened Litigation
---------------------
Due to our lack of working capital, we have been late on payments to
creditors and vendors, many of which have threatened legal action. If lawsuits
are instituted, Quest may be forced into Bankruptcy.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the NASDAQ over-the-counter bulletin
board market under the symbol QNET. There has been trading in our common stock
since July 10, 1998.
The following table sets forth, for each of the fiscal periods
indicated, the high and low bid prices for the common stock, as reported on the
OTC Bulletin Board. These per share quotations reflect inter-dealer prices in
the over-the-counter market without real mark-up, markdown, or commissions and
may not necessarily represent actual transactions.
QUARTER ENDING High/BID Low/BID
FISCAL YEAR 1998
September 1998 $ 3.0625 $ .8128
December 1998 $ 9.75 $ .51
March 1999 $ 15.00 $ 5.00
June 1999 $ 10.1255 $ 4.56
FISCAL YEAR 1999
September 1999 $ 9.250 $ 2.875
December 1999 $ 3.44 $ 1.25
March 2000 $ 3.69 $ 1.62
June 2000 $ 1.750 $ 0.08
FISCAL YEAR 2000
September 2000 $ 0.125 $ 0.0625
On November 13, 2000, the closing trade price of the common stock as
reported on the OTC Bulletin Board was $.025 As of such date, there were
approximately 300 holders of record of our common stock.
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ITEM 6. 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 June 30, 2000, of approximately $18,160,900 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.
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
YEAR ENDED JUNE 30, 2000 AND JUNE 30, 1999
REVENUE
Revenue for the year ended June 30, 2000 was $294,502 as compared to
$1,070,198 for the same period in 1999. The decrease was primarily a result of
the loss of a major customer, severe competition from large companies, the
saturation of the Internet market and a reduction of marketing and technical
personnel, due to a lack of working capital, to maintain the previous year's
level of operations.
COSTS AND EXPENSES
Cost of revenue, was substantially comprised of leased and telephone lines
for the year ended June 30, 2000 was $518,324 as compared to $695,088 for the
same period in 1999. The decrease was a result of a reduction in software and
source code purchased for resale due to a reduction in software sales.
Stock based compensation decreased by $5,579,027 during the year ended June
30, 2000 as compared to the year ended June 30, 1999 due to a decline in our
stock price. During the year ended June 30, 1999 the Company's stock was trading
at substantially higher prices and, as result, we incurred higher expenses in
order to fulfill our commitment to issue shares to employees and consultants.
Additionally, certain employment contracts were canceled as result of a
reduction in the workforce due to a decrease in revenues, thereby decreasing the
number of shares issued as issuance was predicated on Company performance.
11
<PAGE>
Bad debt expense decreased by $865,939 during the year ended June 30, 2000
as compared to the year ended June 30, 1999 as result of less vulnerability due
to the loss of a major client and a decrease in the level of operations.
Salaries and bonuses increased by $398,954 during the year ended June 30,
2000, as compared to the year ended June 30, 1999, due to the hiring of
additional staff, the increase in our sales force and the hiring of a Chief
Financial Officer and a new President, and the eventual termination of those
contracts.
General and administrative costs increased to $2,504,166 for the year
ended June 30, 2000 as compared to $599,861 for the same period in 1999. The
$1,904,305 increase was a largely due to the $9.99 dial up advertising campaign,
rent for larger office space, additional consulting contracts in order to
generate new business or to retain existing business, legal fees incurred due to
the SEC investigation and other lawsuits. Additionally included in the increase
is $706,000 representing balance of the rent due on a lease for property vacated
in August 2000 with a remaining term of 54 months.
Depreciation and amortization increased by $715,538 during the year ended
June 30, 2000 as compared to the year ended June 30, 1999. The increase was due
to purchasing and placing in service equipment acquired during the year and
intangible assets acquired in the purchase of Wings Online, Inc., AVX
Communications and CWTel, Inc.
The Company experienced an unauthorized loss on property and equipment of
$655,000 during the three months ended March 31, 2000. At the time of the move
to its new office, the Company noticed that certain equipment that was in
storage was missing. The Company began to investigate this loss and has reported
the matter to the proper authorities. Several individuals had access to the
storage facility and equipment, which makes it very difficult to recover the
equipment or to identify the person or persons involved.
At June 30, 2000, the Company reviewed 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 increased by $27,937 during the year ended June 30, 2000
as compared to the year ended June 30, 2000 as a result of Company not redeeming
its preferred stock outstanding on a timely basis due to a lack funds at the
time.
Interest income increased by $68,328 during the year ended June 30, 2000
as compared to the year ended June 30, 1999 due to the investment interest
earned on the proceeds of a $5,000,00 private placement.
The Company recorded a charge of $100,000 as a penalty for an
unconsummated acquisition. The penalty was incurred because the Company canceled
its acquisition of 49% of AfricaInternet, Corp. a related party company.
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 $2,429,645 as compared to working capital of $4,340,804 at June
30, 1999 and a Shareholders' deficit of $1,483, 940 including an accumulated
deficit of $18,260,927 at June 30, 2000. Additionally, the cash used in
operations for the year ended June 30, 2000 totaled $2,196,502. 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, we 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 anum.
12
<PAGE>
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-QSB under the caption
"Management's Discussion and Analysis of Financial Condition and Results 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 June 30, 2000, we generated revenues of approximately
$1,364,700 and incurred operating expenses of approximately $18,000,000. At June
30, 2000, we had a net loss of approximately $9,220,669.
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.
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.
13
<PAGE>
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.
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.
14
<PAGE>
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.
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.
15
<PAGE>
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.
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.
16
<PAGE>
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.
17
<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.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
Independent Auditor's Report F-2-F-3
Financial Statements
Balance Sheet F-4
Statements of Operations F-5
Statements of Shareholders' Equity (Deficit) F-6-F-7
Statements of Cash Flows F-8
Notes to Financial Statement F-9-F-22
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Quest Net Corp. and Subsidiaries
Pembroke Park, Florida
We have audited the accompanying consolidated balance sheet of Quest Net Corp.
and subsidiaries as of June 30, 2000 and the related consolidated statements of
operations, changes in shareholder's equity (deficit) and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit 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 consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Quest Net Corp. and
subsidiaries as of June 30, 2000, and the results of its operations changes in
shareholders' equity (deficit)and cash flows for the year then ended in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has no
significant revenue from operations. It is utilizing technology which may
require substantial expenditures to successfully market. The Company must
successfully complete its marketing efforts. As a result the Company may need
additional funds. These factors raise substantial doubt about the ability of the
Company to continue as a going concern. Management's plans in regard to these
matters are described in Note A. The financial statements do not include any
adjustments that might result from the outcome of the foregoing uncertainties.
/s/ Feldman Sherb & Co., P.C.
Certified Public Accountants
New York, New York
November 10, 2000
F-2
<PAGE>
To the Board of Directors and Shareholders
Quest Net Corp. and Subsidiaries
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Quest Net Corp.
and subsidiaries (a Florida corporation in the development stage) as of June 30,
1999 and the related consolidated statements of operations, shareholders' equity
and cash flows for the years ended June 30, 1999 and 1998 and for the period
November 28, 1995 (inception) through June 30, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Quest Net Corp. and
subsidiaries, as of June 30, 1999 and 1998 and the results of their operations
and cash flows for the years ended June 30, 1999 and 1998 and for the period
November 28, 1995 (inception) through June 30, 1999, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As shown in the accompanying
consolidated financial statements, the Company incurred a net loss of $9,032,794
for the year ended June 30, 1999, negative cash flows from operations and has a
limited operating history. These and other factors discussed in Note A to the
consolidated financial statements raise a substantial doubt about the ability of
the Company to continue as a going concern. Management's plans in regard to
those matters are also described in Note A. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
s/Cordovano and Harvey, P.C.
Cordovano and Harvey, P.C.
Denver, Colorado
July 10, 1999
F-3
<PAGE>
QUEST NET CORP.
CONSOLIDATED BALANCE SHEET
JUNE 30, 2000
ASSETS
CURRENT ASSETS
Cash........................................................ $ 28,691
Accounts receivable, net of $10,185 allowance. ............. 35,712
Prepaid expenses............................................ 21,433
----------
TOTAL CURRENT ASSETS.................................. 85,836
PROPERTY AND EQUIPMENT, net of
accumulated depreciation of $112,600........................ 292,982
PROPERTY NOT IN SERVICE ..................................... 689,615
OTHER ASSETS................................................. 33,380
----------
$ 1,101,813
==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses....................... $ 1,733,788
Notes payable............................................... 81,985
Due to shareholder.......................................... 637,332
Obligations under capital lease - current................... 12,252
-----------
TOTAL CURRENT LIABILITIES............................. 2,465,357
MINORITY INTEREST............................................ 80,000
OBLIGATIONS UNDER CAPITAL LEASE.............................. 40,386
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 authorized;
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......................................... (18,260,927)
----------
TOTAL SHAREHOLDERS' DEFICIT........................... (1,483,930)
----------
$ 1,101,813
==========
See accompanying notes to the consolidated financial statements
F-4
<PAGE>
<TABLE>
QUEST NET CORP.
---------------
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
For the Years Ended
June 30,
----------------------
2000 1999
----------- ---------
REVENUES
Internet related and other services......$ 294,502 $ 136,361
OTHER:
Bandwidth sales .......................... - 396,000
Software sales and development ........... - 537,837
----------- ----------
TOTAL REVENUES 294,502 1,070,198
----------- ---------
COSTS AND EXPENSES
Cost of internet related services......... 518,324 95,088
Cost of revenues - software sales
and development.......................... - 600,000
Stock based compensation.................. 1,450,458 7,029,485
Bad debt expense.......................... 27,156 893,095
Salaries and bonuses...................... 782,114 383,160
Consulting fees, related party............ - 135,000
General and administrative................ 2,504,166 599,861
Depreciation and amortization............. 1,028,905 313,367
Unauthorized loss on property
and equipment............................ 655,000 -
Loss on impairment of long lived assets... 2,467,749 -
Loss on disposal of assets................ 7,810 56,559
Penalty for unconsummated acquisition..... 100,000 -
----------- ----------
TOTAL OPERATING EXPENSES 9,541,682 10,105,615
----------- ---------
OPERATING LOSS (9,247,180) (9,035,417)
NON-OPERATING INCOME (EXPENSE)
Interest expense.......................... (33,880) (5,943)
Interest income........................... 76,894 8,566
Realized loss on marketable securities.... (16,503) -
----------- ---------
NET LOSS $(9,220,669) $(9,032,794)
=========== ==========
NET LOSS PER SHARE:
Basic and diluted........................$ (0.41) $ (0.68)
=========== ==========
SHARES USED FOR COMPUTING NET LOSS PER SHARE:
Basic and diluted....................... 22,639,802 13,322,111
============ ===========
See accompanying notes to the consolidated financial statements
F-5
<PAGE>
QUEST NET CORP.
---------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the years ended June 30, 2000 and 1999
<CAPTION>
Additional Total
Preferred Stock Common Stock Paid In AccumulatedShareholders'
Shares Amount Shares Amount Warrants Capital Deficit Deficit
--------- ----------- ---------- ---------- -------- -------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, July 1, 1998 ....................... - $ - 440,007 $ 129,544 $ - $ - $(7,464) $ 122,080
July 27, 1998 shares issued for software
purchase ................................. 60,000 600,000 - - - - - 600,000
September 21, 1998, conversion of
preferred shares.......................... (60,000) (600,000) 300,000 258,300 - 341,700 - -
November 2, 1998, shares issued for services,
valued at market value of stock........... - - 200,000 600,000 - - - 600,000
November 2, 1998, shares issued for services
at market value of stock ................. - - 101,333 303,999 - - - 303,999
November 23, 1998, shares issued for cash,
net of $2,950 offering costs.............. - - 50,000 97,050 - - - 97,050
December 1, 1998, shares issued for
officers' compensation ................... - - 1,310,693 4,013,997 - - - 4,013,997
December 11, 1998, shares issued pursuant
to employment agreements.................. - - 175,000 514,063 - - - 514,063
December 22, 1998, shares issued in
exchange for equipment ................... 100,000 1,000,000 2,607,660 724,520 - - - 1,724,520
December, 1998, shares issued for cash....... - - 50,000 50,000 - - - 50,000
See accompanying notes to the consolidated financial statements
F-6
<PAGE>
QUEST NET CORP.
---------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the years ended June 30, 2000 and 1999
<CAPTION>
Deficit
Accumulated
Warrants Additional During Total
Preferred Stock Common Stock and Paid In Development Shareholders'
Shares Amount Shares Amount Options Capital Stage Deficit
--------- ----------- ---------- ----------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 5, 1999, shares issued for
compensation at market value of stock. - - 17,667 178,878 - - - 178,878
January 5, 1999, shares issued for payment
of offering costs of $15,000.......... - - 24,000 - - - - -
Shares issued in three for one common stock
dividend ............................. - - 15,525,081 - - - - -
January 7, 1999, shares issued for cash.. - - 25,000 75,000 - - - 75,000
January 8, 1999, shares issued for services
at market value of stock.............. - - 677 8,801 - - - 8,801
January 1999, shares issued for purchase of
domain names.......................... - - 1,500 7,000 - - - 7,000
January 25, 1999, shares issued for cash. - - 132,915 692,809 - - - 692,809
January 25, 1999, 47,000 warrants
issued for cash....................... - - - - 7,191 - - 7,191
February 15, 1999, shares issued in
acquistion of Wings Online, Inc. - - 29,326 200,000 - - - 200,000
February 12, 1999, shares issued
pursuant to employment agreement...... - - 100,000 154,675 - - - 154,675
March 2, 1999, shares issued for services,
valued at market value of stock....... - - 4,000 29,375 - - - 29,375
May 3, 1999, shares issued in exchange for
property.............................. - - 39,894 300,000 - - - 300,000
May 17, 1999, 10,000 options granted at
fair value ........................... - - - - 25,800 - - 25,800
May 27, 1999, shares issued for cash, net
of $350,000 offering costs............ - - 910,747 4,650,000 - - - 4,650,000
Net loss for the year ended
June 30, 1999......................... - - - - - - (9,032,794) (9,032,794)
--------- ----------- ---------- ----------- -------- -------- ----------- -----------
BALANCE, JUNE 30, 1999 100,000 1,000,000 22,045,500 12,988,011 32,991 341,700 (9,040,258) 5,322,444
Redemption of preferred stock............ (100,000) (1,000,000) - - - - - (1,000,000)
Issuance of common stock for compensation - - 543,372 2,063,869 - - - 2,063,869
Issuance of options for employee
compensation.......................... - - - - - 11,585 - 11,585
Issuance of common stock for services.... - - 267,650 518,088 - - - 518,088
Issuance of common stock for leasehold
improvements.......................... - - 32,787 120,753 - - - 120,753
Issuance of common stock for Parputt
acquisition........................... - - 275,000 - - - - -
Issuance of common and preferred stock
for acquisition of CWTel, Inc......... 30,000 - 310,000 700,000 - - - 700,000
Net loss for year ended June 30, 2000.... - - - - - - (9,220,669) (9,220,669)
--------- ----------- ---------- ----------- -------- -------- ----------- -----------
BALANCE, JUNE 30, 2000 30,000 $ - 23,474,309 $16,390,721 $ 32,991 $353,285$(18,260,927) $(1,483,930)
========= =========== ========== =========== ======== ======== =========== ============
See accompanying notes to the consolidated financial statements
</TABLE>
F-7
<PAGE>
QUEST NET CORP.
---------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
-----------------------------
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................ $ (9,220,669) $ (9,032,794)
---------- ----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 1,028,905 313,367
Loss on impairment of long-lived assets........ 2,467,749 -
Unauthorized loss on equipment................. 655,000 -
Loss on disposal of assets..................... - 56,559
Common stock issued for services............... 518,088 600,000
Common stock issued for leasehold.............. 120,753 -
Common stock issued for compensation........... 2,075,454 7,029,485
Changes in assets and liabilities:
Accounts receivable............................. 18,252 (42,515)
Other receivable................................ 2,276 -
Prepaid expenses................................ 9,501 -
Other assets.................................... 36,420 (69,250)
Accounts payable and accrued expenses........... 1,510,034 123,000
Accrued compensation............................ (1,418,265) -
----------- -----------
7,024,167 8,010,646
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES ........... (2,196,502) (1,022,148)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............................ (1,249,826) (118,756)
Proceeds from sale of equipment................. - 2,100
Investment in subsidiary........................ - (135,000)
----------- -----------
NET CASH FLOWS USED IN INVESTING ACTIVITIES ..... (1,249,826) (251,656)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from note payable...................... 81,985 -
Repayments of capital lease..................... (5,255) -
Sale of common stock and warrants............... - 5,925,000
Debt issue costs................................ - (352,950)
Proceeds from related party debt................ 20,000 -
Proceeds from sale of 20% interest in subsidiary 80,000 -
Redemption of preferred stock................... (1,000,000) -
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (823,270) 5,572,050
----------- -----------
NET INCREASE (DECREASE) IN CASH ................ (4,269,598) 4,298,246
Cash, beginning of period....................... 4,298,289 43
----------- -----------
Cash, end of period............................. $ 28,691 $ 4,298,289
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest........................... $ - $ 5,943
=========== ===========
Cash paid for income taxes....................... $ - $ -
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for property................ $ 120,753 $ 1,031,520
=========== ===========
Preferred stock issued for property............. $ - $ 1,600,000
=========== ===========
Common stock issued for acquisitions............ $ 700,000 $ 200,000
=========== ===========
Common stock issued for offering costs.......... $ - $ 15,000
=========== ===========
See accompanying notes to the consolidated financial statements
F-8
<PAGE>
QUEST NET CORP.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A: Organization, business, liquidity and summary of significant accounting
--------------------------------------------------------------------------------
policies
--------
Organization and business
-------------------------
Quest Net Corp. (the "Company" or "Quest") was incorporated in the state of
Colorado on November 28, 1995 under the name of A. P. Sales, Inc. The Company
was formed for the purpose of entering the office furniture repair and
reconditioning market. In June of 1998, the Company acquired certain assets
related to the internet services industry and became a provider of Internet
system and network management solutions for enterprises with mission-critical
Internet operations, including server hosting, Internet connectivity, and
Internet technology services. At that time, the Company changed its name to
Quest Net Corp. The Company redomiciled in Florida in December 1998.
Merger
------
Pursuant to an Agreement and Plan of Merger (the "Merger Agreement") dated as of
March 13, 2000 between Parputt Enterprises, Inc. ("PEI"), a Nevada corporation,
and Quest Net Corp., all the outstanding shares of common stock of PEI were
exchanged for 275,000 shares of common stock of Quest in a transaction in which
Quest was the surviving company. The merger was accounted for as a
recapitalization of Quest.
Basis of presentation
-----------------------
As shown in the accompanying financial statements, the Company incurred a net
loss of $9,220,669 for the year ended June 30, 2000, and has a limited operating
history. Those factors, as well as the uncertain condition that the Company
faces as a new business with an unproven business model entering the new and
rapidly evolving market of online commerce and the Internet, create an
uncertainty about the Company's ability to continue as a going concern.
Management is actively pursuing new debt and/or equity financing and continually
evaluating the Company's profitability, however any results of their plans and
actions cannot be assured. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Summary of significant accounting policies:
Principles of consolidation
-----------------------------
The Company's consolidated financial statements include the accounts of the
Company's and its 80% owned subsidiary Wings Online, Inc. The Company formed
five 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.
Use of estimates
-----------------
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and cash equivalents
-------------------------
The Company considers all short-term, highly liquid investments with an original
maturity date of three months or less to be cash equivalents. Cash and cash
equivalents are stated at cost, which approximates fair value.
F-9
<PAGE>
QUEST NET CORP.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of significant accounting policies continued:
Property and equipment
-----------------------
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets, which is estimated to be three to five years.
Expenditures for repairs and maintenance are charged to expense when incurred.
Expenditures for major renewals and betterments, which extend the useful lives
of existing equipment, are capitalized and depreciated. Upon retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the consolidated statements of operations.
Leasehold improvements are amortized over the life of the existing lease of
twenty two months.
Intangible assets
-----------------
Intangible assets are stated net of accumulated amortization. Amortization is
provided using the straight-line method over three years. The Company evaluates
on a regular basis whether events and circumstances have occurred that indicate
that the carrying amount of intangible assets may warrant revision.
Long-lived assets
-----------------
The Company periodically reviews the values assigned to long-lived assets, such
as property and equipment and intangibles, to determine whether any impairments
are other than temporary. During the year ended June 30, 2000, the Company wrote
off $2,467,749 due to impairment. Management believes that the balance of
long-lived assets in the accompanying balance sheets are appropriately valued.
Sources of supplies
-------------------
The Company relies on third-party networks, local telephone companies and other
companies to provide data communications capacity. Although management feels
alternative telecommunications facilities could be found in a timely manner, any
disruption of these services could have an adverse effect on operating results.
Income taxes
------------
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the recorded book basis and tax basis
of assets and liabilities for financial and income tax reporting. The deferred
tax assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred taxes are also recognized for
operating losses that are available to offset future taxable income and tax
credits that are available to offset future federal income taxes.
Revenue recognition
-------------------
The Company recognizes revenue when internet-related services and bandwidth are
provided. Revenue from the sale of software is recognized when the software is
delivered to the customer. Revenue related to the maintenance and further
modification of software previously sold is recognized as the work is performed.
F-10
<PAGE>
QUEST NET CORP.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of significant accounting policies continued:
Stock-based compensation
------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation" permits the use of
either a fair value based method or the method defined in Accounting Principles
Board Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25") to
account for stock-based compensation arrangements. Companies that elect to use
the method provided in APB 25 are required to disclose pro forma net income and
earnings per share that would have resulted from the use of the fair value based
method. The Company has elected to continue to determine the value of
stock-based compensation arrangements under the provisions of APB 25 and,
accordingly, has included pro forma disclosures under SFAS No. 123.
Fair value of financial instruments
-----------------------------------
SFAS 107, "Disclosure About Fair Value of Financial Instruments," requires
certain disclosures regarding the fair value of financial instruments. The
Company has determined, based on available market information and appropriate
valuation methodologies, the fair value of its financial instruments
approximates carrying value. The carrying amounts of cash, accounts receivable,
prepaid expenses, accounts payable, accrued expenses, and other accrued
liabilities approximate fair value due to the short-term maturity of the
instruments.
Loss per share
--------------
The Company has adopted SFAS, No. 128, Earnings per Share. Under SFAS 128, net
loss per share-basic excludes dilution and is determined by dividing loss
available to common shareholders by the weighted average number of common shares
outstanding during the period. Net loss per share-diluted reflects the potential
dilution that could occur if securities and other contracts to issue common
stock were exercised or converted into common stock. As of June 30, 2000 and
1999, there were 74,549 and 87,999 stock options respectively, and 47,000 common
stock purchase warrants outstanding which were not included in the calculation
of net loss per share-diluted because they were antidilutive.
Recently issued accounting pronouncements
-----------------------------------------
The Company has adopted Statement of Financial Accounting Standard No. 133
("SFAS No. 133"),"Accounting for Derivative Instruments and Hedging Activities"
for the year ended June 2000. SFAS No. 133 establishes a new model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing standards. The application of the new pronouncement did not
have a material impact on the Company's financial statements.
Note B: Related party transactions
-----------------------------------
During the year ended June 30, 1999 the former President of the Company and
another entity owned by the former President of the Company, paid on behalf of
the Company certain expenses totaling $103,976. The former President also
advanced $35,648 to the Company for working capital purposes. The Company repaid
$29,725 to the former President and issued a seven and half percent note payable
to the former President for the remaining $109,899. As of June 30, 1999, the
Company repaid the note and accrued interest of $3,241 for a total of $113,140.
The former President advanced the Company an additional $105,000 in exchange for
a note payable to the former President. The Company repaid the $105,000 within
sixty days of issuance of the note, and did not accrue any interest.
F-11
<PAGE>
QUEST NET CORP.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note B: Related party transactions continued
---------------------------------------------
The Company entered into an agreement to pay $135,000 to an affiliate for
consulting fees related to the Company's acquisition of equipment. The equipment
purchase is discussed in Note D. The Company paid the affiliate $35,000 and has
recorded a due to related party in the amount of $100,000, which was repaid
during the year ended June 30, 2000. The affiliate also performed consulting
services during the year ended June 30, 1999 for the Company valued at $7,600.
For payment of those services the Company issued 101,333 shares of the Company's
common stock to the affiliate and recorded the charge for the services at the
market value of the stock issued, $303,999.
From time to time during the year ended June 30, 1999, the Company paid certain
expenses related to ventures the former President is associated with, but have
no relative business purpose to the Company. The amounts totaled $97,360 and
have been deducted from amounts accrued and payable to the President pursuant to
his employment agreement.
In connection with the acquisition of CWTel, Inc., the Company owes its
President $637,332 consisting of $337,332 of liabilities assumed in the
transaction and $300,000 as part of the consideration of the purchase price. The
amount due of $337,332 is non-interest bearing and due on demand.
In February 2000, due to management conflict as to the direction of Quest, it
was mutually decided between Quest and its President at the time, Rebecca Del
Medico, that Quest would be in a better situation if someone with more of an
Operational/Technological background filled that position. As part of the
termination agreement, Ms. Del Medico received $50,000 and the right to 50,000
shares of Quest's common stock, which Quest had accrued over the three month,
ended December 31, 1999.
Note C: Property and equipment
- -------------------------------
Furniture and equipment consisted of the following at June 30:
2000
----------
Office equipment ............ $ 3,500
Computer equipment .......... 285,507
Software .................... 116,575
----------
405,582
Less accumulated depreciation (112,600)
----------
$ 292,982
==========
Property not in service includes $392,000, which represents items returned to a
vendor subsequent to June 30, 2000 as payment for amounts due. The Company is
currently negotiating to return an additional $160,000 of equipment to another
vendor.
Note D: Shareholders' equity
-----------------------------
Preferred stock
---------------
The Company is authorized to issue five million shares of no par value preferred
stock which may be issued in series with such designations, preferences, stated
values, rights, qualifications or limitations as determined by the Board of
Directors.
During the year ended June 30, 1999, the Company issued 60,000 shares of its
redeemable convertible preferred stock with a stated value of $10 per share in
exchange for certain software used in transacting credit card business over the
internet. The preferred stock was convertible into the Company's common stock
based on the average five day bid price for the Company's common stock as of the
date of conversion. The Company received notice of conversion on September 21,
1998. The five day average bid price prior to conversion was $.8610 per share.
The preferred stock was converted into 300,000 common shares. The conversion
rate in accordance with the preferred stock agreement was 696,864 common shares.
The Company has recorded additional paid in capital in the amount of $341,700 to
reflect the value of the excess of the conversion over the fair value of the
common stock.
F-12
<PAGE>
QUEST NET CORP.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note D: Shareholders' equity continued
---------------------------------------
Preferred stock continued
-------------------------
During the year ended June 30, 1999, the Company issued 100,000 shares of its
convertible redeemable preferred stock with a stated value of $10 per share,
along with 2,607,660 shares of its common stock in exchange for computer
equipment at a cost of $1,724,520. The preferred stock was redeemable six months
from date of issuance. In the event of non-redemption, the holder had the right
to convert the preferred shares into common stock of the Company at a conversion
price equal to the average bid and asked price of the common stock for the three
trading days prior to conversion. The preferred stock was valued at $1,000,000
based on the stated and redemption value of the preferred stock of $10.00 per
share. The remaining purchase price of $724,520 was allocated to the common
stock. Based on a third party independent appraisal of the equipment, the
Company recorded the transaction at the fair value of the equipment of
$1,724,520. The preferred stock was redeemed for $1,000,000 during the year
ended June 30, 2000.
Common Stock
------------
On October 16, 1998 the Company reversed its 4,400,000 outstanding common shares
to 440,000 to give effect to a one for ten reverse split approved by the
shareholders.
On December 31, 1998, the Board of Directors approved a three for one common
stock dividend to shareholders of record as of January 6, 1999. The number of
shares issued in the dividend of 15,525,081 was greater than twenty five percent
of the outstanding shares prior to the dividend, therefore the Company has
accounted for the transaction as if it were a forward three-for-one stock split.
Earnings per share calculations have been retroactively restated for all periods
presented to give effect to the dividend.
During the year ended June 30, 1999 the Company sold 1,039,248 of its no par
value common stock in exchange for $925,000 in cash, $42,400 of equipment (see
discussion of equipment acquired for $1,724,520 above) and $32,600 in services
valued at the market value of the stock issued, $903,999. The offerings were
conducted on behalf of the Company through its executive officers and directors.
The shares offered were not registered and were offered pursuant to an exemption
from registration claimed under Section 3(b) of the Securities Act of 1933, as
amended, and Rule 504 of Regulation D promulgated thereunder. The Company
incurred $17,950 in legal costs related to the offerings. The offering costs
were paid with $2,950 cash and the issuance of 24,000 shares of the Company's
restricted stock valued at the cost of the services of $15,000. The costs have
been deducted from the offering proceeds and are recorded as such in the
accompanying consolidated financial statements.
Shares sold to one shareholder in conjunction with the above-mentioned offering
also included 47,000 warrants to purchase additional shares of the Company's no
par value common stock for $9.40 per share. The warrants may be exercised
anytime beginning January 25, 2000 and prior to January 25, 2001. The Company
valued the warrants at $7,191 using pricing methods similar to those used in
valuing options under SFAS 123. No warrants have been exercised to date.
In January 1999 the Company acquired from two different individuals the rights
to the domain names Boats Online and Cars Online for $10,000 and $4,000,
respectively. The purchase price was paid in 1,000 and 500 shares of the
Company's restricted stock, respectively valued at $5,000 and $2,000 along with
$5,000 and $2,000 in cash, respectively.
On February 12, 1999 the Company issued 29,326 shares of its restricted common
stock valued at the market price of the Company's free-trading common shares, or
$200,000, and $135,000 in cash, in exchange for all of the outstanding shares of
Wings Online, Inc.
On May 3, 1999 the Company entered into an agreement with AVX Communications
whereby the Company would receive certain assets valued at $300,000 in exchange
for the issuance of 39,894 shares of the Company's restricted common stock.
F-13
<PAGE>
QUEST NET CORP.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note D: Shareholders' equity continued
--------------------------------------
Common Stock continued
----------------------
On May 27, 1999, pursuant to an exemption from registration claimed under
Section 3(b) of the Securities Act of 1933, as amended, and Rule 506 of
Regulation D promulgated thereunder, the Company sold 910,747 shares of its
common stock for $5,000,000 to one shareholder. The costs of the offering were
legal and finders' fees of $350,000, which have been deducted from the proceeds
of the offering in the accompanying consolidated financial statements.
In March 2000, the Company issued 275,000 shares of its common stock for all of
the shares of common stock issued and outstanding of Parputt Enterprises, Inc.
The exchange has been accounted for as a recapitalization of the Company.
In March 2000, the Company acquired all of the shares of common stock of CWTel,
Inc. in consideration of $200,000, 310,000 shares of its common stock valued at
$700,000 and $300,000 in notes guaranteed by the issuance of 30,000 shares of
preferred stock. Additionally, the sole shareholder of CWTel became President of
the Company and was issued 50,000 restricted shares of common stock valued at
$100,000 under terms of his employment agreement as president.
In April 2000, the Company issued 32,787 shares of its common stock valued at
$121,000 for leasehold improvements.
During the year ended June 30, 2000 the Company's former transfer agent reissued
530,000 shares to an existing shareholder without cancelling or taking
possession of the original certificate. The Company is currently attempting to
have the shares returned and cancelled. If the shares are not returned the
Company will record the issuance of such shares in the subsequent period with
the related compensation expense.
Note E: Stock based compensation
---------------------------------
On December 11, 1998, pursuant to employment contracts with key management and
officers, the Company issued 175,000 shares of the Company's common stock as
compensation to three employees. The Company has recorded stock compensation
expense of $514,063 based on the market price of the Company's free-trading
common stock as of the date of the grant, which was December 1, 1998.
On January 5, 1999 the Company issued 10,000 shares of its restricted common
stock to a former officer of the Company as payment for services. The stock was
valued at the market price of the Company's free-trading common stock as of
January 5, 1999 and accordingly the Company has recorded $101,250 in stock
compensation expense.
On January 5, 1999 the Company issued 7,667 shares of its restricted common
stock, valued at the market price of the Company's free-trading common stock as
of January 5, 1999, to its board of directors and accordingly recorded a $77,628
charge to operations as directors' fees.
On February 12, 1999, the Company issued to an officer of the Company 100,000
shares of the Company's restricted common stock as payment pursuant to the
officer's employment agreement. The employment agreement dated July 1, 1998
states that the officer is to receive 50,000 shares per year, 25,000 of which
are to be issued each six months beginning January 1. The Company failed to
issue the officer the 25,000 shares prior to the three for one dividend
effective January 6, 1999. Therefore to make the officer whole, the Company
issued 100,000 shares, valuing them at the total value of 25,000 shares at the
market price of the Company's free-trading stock which was $6.187 on January 1,
1999, resulting in stock compensation expense of $154,675.
F-13A
<PAGE>
QUEST NET CORP.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note E: Stock based compensation continued
-------------------------------------------
On March 2, 1999 as payment for $5,000 in consulting services, the Company
issued 4,000 shares of its restricted common stock, valued at the market value
of the stock issued, $29,375.
On March 10, 1999 as payment for $10,000 in consulting services, the Company
issued 677 shares of its restricted common stock, valued at the market value of
the stock issued, $8,801.
During the year ended June 30, 2000, the Company issued 423,522 restricted
shares of its common stock to the former President of the Company in accordance
with the terms of his employment contract. The shares were valued based on
market at the respective dates of grant at $1,734,000 of which $1,037,000 had
been accrued as of June 30, 1999. The Company issued an additional 237,500
shares of its common stock to employees, directors and professionals valued at
$534,000, the market value on the respective date of grants, for services
rendered of which $81,000 had been accrued as of June 30, 1999.
In March 2000, the Company entered into an agreement with a consultant for
services. In consideration of such services the Company paid the consultant
$150,000 and issued 100,000 shares of its common stock valued at $214,000 in
accordance with the agreement.
F-14
<PAGE>
QUEST NET CORP.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note E: Stock based compensation continued
- -------------------------------------------
Common Stock options
--------------------
On September 9, 1998 the Board of Directors approved a performance bonus plan in
the form of common stock options with an exercise price of $.012 to the
President and CEO of the Company. The President would receive one share of
restricted common stock for every $100.00 of earning assets (increase in total
assets) generated prior to and after September 9, 1998. The number of shares to
be received as options are to be calculated at the end of each quarter and
expire five years from the date of grant which is considered to be the date both
the strike price and number of shares are determined. On December 1, 1998, based
on unaudited quarterly financial information, the Board of Directors granted to
the President options to purchase 1,310,693 shares of the Company's restricted
common stock for $.012 per share. The Company recorded stock compensation
expense in accordance with APB 25 of $3,998,269 which was the difference between
the exercise price of $.012 and the market value of the Company's common stock
on December 1, 1998 of $3.05. The President exercised the options in December of
1998. No other options have been granted pursuant to the performance bonus plan.
On March 26, 1999, the Company granted options to its three outside directors to
purchase 5,000 shares of the Company's common stock for $6.00 per share, which
was the market value of the Company's common stock on that date. The options
vest in two equal increments of 2,500 shares six months and twelve months from
the date of grant, as long as the option holders are members of the board at
time of vesting. The options expire two years from date of vesting.
On March 30, 1999 the Company granted options for 9,999 shares of its common
stock, to an employee, exercisable for $6.00 per share. The options vest on
March 30, 2000 and expire on March 30, 2002. The options were granted at the
market value of the Company's common stock as of March 30, 1999. In accordance
with APB 25, no compensation expense was recorded.
On April 5, 1999 the Company granted options for 25,000 shares of its common
stock, exercisable for $4.00 per share to an officer, who resigned subsequent to
the granting of the options. The options were vested on the date of grant and
expire April 5, 2000. The options were granted at the market value of the
Company's common stock as of April 5, 1999. In accordance with APB 25, no
compensation expense was recorded.
On May 17, 1999 the Company granted options for 10,000 shares of its common
stock, exercisable for $7.25 per share to certain consultants. The options were
granted at the market value of the Company's common stock as of May 17, 1999.
They are fully vested and expire on May 17, 2001. The fair value of the options
as determined in accordance with SFAS No. 123 is $25,800 and has been charged to
operations.
On May 17, 1999 the Company granted options for 28,000 shares of its common
stock, exercisable for $7.25 per share to certain employees. The options were
granted at the market value of the Company's common stock as of May 17, 1999.
The options vest in six months from the date of grant. In accordance with APB
25, no compensation expense was recorded.
On November 1, 1999, the Company granted options for 11,550 shares of its common
stock exercisable for $1.06 per share, to one employee. The options vest one
year from the date of grant and expire on November 1, 2004. The exercise price
was below market value and accordingly compensation expense of $11,585 was
recorded.
F-15
<PAGE>
QUEST NET CORP.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note E: Stock based compensation continued
-------------------------------------------
Summary
-------
A summary of the status of the Company's stock option awards as of June 30, 2000
and 1999, and the changes during the periods then ended are presented below:
Stock Options
---------------------------------------------------------
Weighted
average
Shares exercise price Exercisable
----------- ---------------- -------------------
Outstanding at
June 30, 1998: - - -
Granted 1,398,692 $0.45 1,388,692
Exercised (1,310,693) $0.12 (1,310,693)
Canceled - - -
------------ ---------------- -------------------
Outstanding at
June 30, 1999: 87 999 $5.97 87,999
Granted 11,550 $1.06 11,550
Exercised - - -
Canceled/Expired (25,000) $4.00 (25,000)
------------ ---------------- -------------------
Outstanding at June
30, 2000 74,549 5.87 74,549
The following table summarizes information about exercisable stock options
at June 30, 2000:
<TABLE>
<CAPTION>
Outstanding Exercisable
---------------------------------------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
---------------- ----------------- ------------------ ------------- ----------------- -------------
Options: $1.06 to 74,549 1 year to $5.87 74,549 $5.87
$7.25 4.4 years
</TABLE>
SFAS 123
--------
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation". SFAS 123 encourages the use of a fair value based method of
accounting for compensation expense associated with stock option awards and
similar plans. SFAS 123 permits the continued use of the intrinsic value based
method prescribed by APB 25, but requires additional disclosures, including pro
forma calculations of net earnings and earnings per share, as if the fair value
method of accounting prescribed by SFAS 123 had been applied for the applicable
periods.
F-16
<PAGE>
QUEST NET CORP.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note E: Stock based compensation continued
-------------------------------------------
SFAS 123 continued
------------------
The fair value of each option granted has been estimated as of the grant date
using the Black-Scholes option-pricing model with the following weighted-average
assumptions: risk-free interest rate of 5.63 percent, expected volatility of 80
percent, expected life of two to five years, and no expected dividends.
Had compensation expense been determined based on the fair value at the grant
date, and charged to expense over vesting periods, consistent with the
provisions of SFAS 123, the Company's net loss and net loss per share would have
decreased to the pro forma amounts indicated below:
June 30,
------------------------------
2000 1999
------------ -------------
As reported:
Net loss ................................. $ (9,220,669) $ (9,032,794)
Net loss per share - basic and diluted ... $ (0.41) $ (0.68)
Pro Forma:
Net loss ................................. $ (9,234,183) $ (9,121,219)
Net loss per share - basic and diluted ... $ (0.41) $ (0.68)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. Option valuation models also require the input of highly
subjective assumptions such as expected option life and expected stock price
volatility. Because the Company's stock-based awards have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, the
Company believes that the existing option valuation models do not necessarily
provide a reliable single measure of the fair value of its stock-based awards.
Note F: Income taxes
--------------------
A reconciliation of the U.S. statutory federal income tax rate to the effective
tax rate follows for the years ended June 30, 2000 and 1999:
June 30,
---------------------------------
2000 1999
-------------- --------------
U.S. statutory federal rate.......... 34.00% 34.00%
State income tax rate,
net of federal benefit............ - -
Permanent differences:
Deferred offering costs.............. - 1.42%
Stock based compensation............. (5.00%) (15.20%)
Other................................ - (.02%)
Temporary differences:
Depreciation expense................. - .20%
Allowance for bad debt............... - (3.35%)
Net operating loss for which no tax
benefit is currently available..... (29.00%) (17.05%)
-------------- --------------
-% -%
============== ==============
F-17
<PAGE>
QUEST NET CORP.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note F: Income taxes continued
------------------------------
At June 30, 2000, deferred taxes consisted of the following:
Deferred tax assets,
Net operating loss.................. $ 4,000,000
Valuation allowance................. (4,000,000)
-------------
Net deferred taxes............ $ -
=============
The valuation allowance offsets the net deferred tax asset for which there is no
assurance of recovery. The net operating loss carryforward expires through the
year 2020.
The valuation allowance will be evaluated at the end of each year, considering
positive and negative evidence about whether the deferred tax asset will be
realized. At that time, the allowance will either be increased or reduced;
reduction could result in the complete elimination of the allowance if positive
evidence indicates that the value of the deferred tax assets is no longer
impaired and the allowance is no longer required.
Should the Company undergo an ownership change as defined in Section 382 of the
Internal Revenue Code, the Company's tax net operating loss carryforwards
generated prior to the ownership change will be subject to an annual limitation
which could reduce or defer the utilization of these losses.
Note G: Acquisitions
---------------------
On June 24, 1998, the Company entered into an agreement with PACT Communication
Group, Inc. ("Pactcom") to acquire certain assets of Pactcom in exchange for
2,000,000 shares of the Company's restricted common stock. Subsequent to the
transaction with Pactcom, a former shareholder and officer of Pactcom became and
officer and director of the Company, therefore the transaction was recorded as a
transfer of assets between entities under common control and has been recorded
at the historical cost basis of Pactcom as determined under generally accepted
accounting principles.
The assets acquired include equipment, software, furniture and an office lease
deposit, which have been recorded on the Company's books at $125,274. The
Company also acquired Pactcom's contracts with BellSouth Telecommunications,
Inc. ("BellSouth") and WorldPass Communications Corporation ("WorldPass"),
office leases and certain employment agreements. There was no value assigned to
any of the above contracts in conjunction with the acquisition. Based on the
total value assigned to the assets received, the Company has valued the 200,000
(restated from 2,000,000) shares issued, as consideration for the assets, at
$125,274.
During the year ended June 30, 1999, the Company discovered that Pactcom could
not assign the BellSouth contract to the Company and Pactcom has subsequently
terminated the contract. Amounts due under the contract for any termination
costs have not been accrued on the Company's records as management believes that
the costs should accrue to Pactcom.
The WorldPass contract was terminated during the year ended June 30, 1999.
On February 15, 1999 the Company purchased all of the outstanding common stock
of Wings Online, Inc. ("Wings") in exchange for $135,000 cash and 29,326 of the
Company's common stock valued at $200,000. The common stock was valued at the
average bid and asked price for the three trading days prior to closing which
was $6.82. Wings was acquired from an independent and unaffiliated third party.
Net assets of Wings as of the date of the acquisition totaled $3,372, which
approximated fair value. As part of the acquisition, the previous shareholders
of Wings entered into an agreement to not compete with the Company for
thirty-six months. The Company has recorded the transaction as a purchase in
accordance with Accounting Principles Board Opinion No. 16. The excess of the
purchase price over the fair value of the net assets, in the amount of $331,628
has been allocated to the non-compete agreement and is being amortized over the
life of the agreement. The balance of the non-compete was written off during the
year ended June 30, 2000. The accompanying consolidated financial statements
include the results of operations of Wings from the date of the acquisition,
February 15, 1999.
F-18
<PAGE>
QUEST NET CORP.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following pro forma condensed consolidated statement of operations gives
effect to the acquisition of Wings as if it had occurred at the beginning of the
period presented. The pro forma financial information should be read in
conjunction with the separate audited financial statements and notes thereto of
each of the companies included in the pro forma. The pro forma financial
statements do not include the results of operations of CWTel, as such amounts
were immaterial.
The pro forma condensed consolidated statement of operations are not necessarily
indicative of results of operations had the acquisition occurred at the
beginning of the periods presented nor of results to be expected in the future.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the years ended June 30, 1999
1999
----------
Revenues .......................................$ 1,271,312
Operating expenses ............................. (10,695,916)
(Loss) income from operations .................. (9,424,604)
Interest expense ............................... (5,493)
Interest income ................................ 8,566
Net (loss) income .............................. (9,421,981)
Net (loss) income per share-basic and diluted ..$ (0.69)
Basic and diluted shares outstanding ........... 13,683,111
On May 3, 1999, the Company purchased certain assets, including computers,
software licenses, video editing and studio equipment, office equipment,
inventory, contracts for software development and interactive kiosk systems and
related software for $300,000 from AVX Communications. The purchase price was
paid in 39,894 shares of the Company's restricted common stock, valued at the
average bid and asked price for the three trading days prior to closing. The
fair value of the assets received is $89,144. The excess of the purchase price
over the fair value of the assets received is $210,856 and has been recorded as
goodwill in the accompanying consolidated financial statements. During the year
ended June 30, 2000, the balance of goodwill was written off.
In February 2000, Quest had decided to cancel its purchase of shares of Africa
Internet Corp. Quest had paid $200,000 and issued $2,433,778 restricted shares
of its common stock as the purchase price. Pursuant to the cancellation
agreement, the Company received back the shares issued for the acquisition and
paid a cancellation penalty of $100,000 and the balance was agreed would be paid
back in one year with an interest bearing note, at 7% per annum, as a guarantee
for that amount.
On February 25, 2000, Quest entered into a Stock Purchase Agreement, effective
March 1, 2000 to purchase CWTel, Inc. ("CWTel") from Charles Wainer for the sum
of $1,200,000; $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 notes and guaranteed by the
issuance, at closing, of 30,000 shares of preferred stock, with a face value of
$10.00 per share. The Company is presently in default on the first and second
payments under the purchase agreement. CWTel 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 also provides high-speed Internet service,
dial-up Internet access, and web hosting. CWTel offers local dial tone, long
distance calling, and high speed Internet access to tenants located in
commercial buildings.The Company has recorded the transaction as a purchase in
accordance with Accounting Principles Board Opinion No. 16. The excess of the
purchase price over the fair value of the net liabilities, in the amount of $
1,433,693 has been recorded as goodwill. The balance of the goodwill was written
off during the year ended June 30, 2000. The accompanying consolidated financial
statements include the results of operations of CWTel from the date of
acquisition, March 1, 2000 through June 30, 2000.
F-19
<PAGE>
QUEST NET CORP.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note G: Acquisitions continued
-------------------------------
Note H: Commitments and contingencies
--------------------------------------
Litigation
----------
The Company is involved in various legal proceedings that have arisen in the
ordinary course of business. While it is not possible to predict the outcome of
such proceedings with certainty, in the opinion of the Company's management, all
such proceedings should not materially result in any liability, which would have
a material adverse effect on the financial position, liquidity or results of
operations of the Company.
The Company has written off accounts receivable totaling $867,842 of which
substantially all is due from one customer. The receivables resulted from the
Company's sale of bandwidth and certain software and revenue generated from the
installation and modifications to the software. The Company has filed lawsuit
against the customer. The lawsuit is in the discovery stage and management is
unable to determine at June 30, 2000 the outcome of the lawsuit.
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.
F-20
<PAGE>
QUEST NET CORP.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note H: Commitments and contingencies continued
------------------------------------------------
Employment contracts
--------------------
The Company had employment agreements and arrangements with its executive
officers. The agreements are dated March 20, 1998 and July 1, 1998. The
contracts provide for an annual issuance of 300,000 and 50,000 shares of the
Company's common stock, respectively, with fifty percent of the annual awards
payable every six months. During the year ended June 30, 2000 and 1999 the
Company incurred compensation expense related to the contracts of $697,000 and
$1,729,675, respectively resulting from the issuance of common shares valued at
the market price of the Company's common stock on the anniversary date of the
awards.
The Company had employment agreements with certain key management during the
year June 30, 1999. The agreements were terminated during the year. Amounts paid
as stock compensation pursuant to the agreements were 25,000 shares valued at
$73,438, which is recorded in the accompanying consolidated financial statements
as stock compensation expense for the year ended June 30, 1999.
In February 2000 as part of the CWTel acquisition, Charles Wainer was given a
five-year employment agreement as President of Quest, at an annual base salary
of $100,000 during the term, with a 20% cost of living increase per annum and
50,000 shares of the Company's common stock. Mr. Wainer also received options to
purchase 1,000,000 shares of the Company's common stock. These options vest at
the rate if 50,000 shares every six months and Options for an additional 50,000
shares can be exercised every time the Company has increased its revenue by one
million dollars and has retained that revenue for a period of not less than two
months. These options are exercisable at $2.68 per share (110% of the fair
market value of the Company's common stock on the date of the Employment
Agreement). Once vested, the options will remain exercisable for one year from
the date of vesting. After one year from the vesting date, the options will
become null and void. Mr. Wainer was also appointed as interim CEO and a
Director. At the same time, Victor Coppola resigned from the Board of Directors.
Consulting agreements
---------------------
In March 2000, the Company entered into a two-year Consulting Agreement with
Internet Strategy Group Ltd.("Internet") for a consulting fee of $20,000 per
month during the first year and $24,000 during the second year plus 60,000
shares of the Company's common stock to be issued every quarter in advance. The
Company and Internet mutually agreed to rescind the consulting agreement.
Internet will continue to render consulting services to Quest until August 1,
2000 on an "as needed basis" for no additional compensation. As consideration
for the rescission of the agreement, Quest paid to Internet the sum of $10,000
as reimbursement of non-accountable expenses as payment to Internet for accrued
consulting fees, Quest assigned to Internet the African Internet promissory
note, in the amount of $100,000. Accordingly, the note from African Internet and
the amount due Internet have been offset in the financial statements.
F-21
<PAGE>
QUEST NET CORP.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note H: Commitments and contingencies continued
------------------------------------------------
Non-cancelable leases
---------------------
The Company leases office space and communications equipment under five separate
non-cancelable operating leases that expire in June 2002. Total office rent
expense incurred under these leases for the years ended June 30, 2000 and 1999
was $191,849 and $25,565, respectively. Future minimum lease payments for the
leases with initial terms in excess of one year as of June 30, 2000 are as
follows:
June 30, 2001 ......... $ 206,000
June 30, 2002 ......... $ 139,000
The lease commitments do not include office space vacated and sub-leased of
which the Company remains contingently liable in the event of nonpayment by
sublesee. Such amount totaled $321,000.
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.
Note J: Unauthorized Loss on Property and Equipment
----------------------------------------------------
During the three months ended March 31, 2000 the Company scaled down its staff
and management team. The Company also moved to its new facility. During the
move, it was discovered that two Mux's were lost or stolen from each warehouse.
This equipment is valued at approximately $ $655,000. After several meetings and
an investigation by the Board, it was decided that the Company should proceed
with a claim under its insurance policy. The Company has written off those
assets on their balance sheet.
Note K: Accounts Payable and Accrued Expenses
----------------------------------------------
Accounts payable and accrued expenses at June 30, 2000 consisted of the
following:
Accounts payable - trade $ 499,707
Accrued consulting fees 10,000
Amount due to:
Equipment vendor (a) 391,818
Accrued rent (b) 706,309
Other accruals 125,954
----------
$ 1,733,788
==========
(a) The amount due to the equipment vendor was settled subsequent to June 30,
2000 by returning equipment to the vendor.
(b) Accrued rent represents the remaining lease payments on premises vacated by
the Company subsequent to June 30, 2000.
Note L: Fourth Quarter Adjustments (Unaudited)
-----------------------------------------------
During the fourth quarter of Fiscal 2000, the Company made the following
adjustments:
Write-off of Long Lived Assets $ 2,467,749
F-22
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
On November 2, 2000, the Board of Directors of Quest Net Corp.
terminated the accounting firm of Cordovano & Harvey P.C., as Quest Net Corp.'s
Independent Certified Public Accountants. Quest's lack of working capital has
prevented it from retaining Cordovano & Harvey to complete the June 2000 audit.
Quest Net Corp. now has a new majority shareholder, James LLC, who has agreed to
provide the auditing firm of Feldman Sherb & Co., P.C. to complete the audit.
During the Quest's two most recent fiscal years, and the interim period
preceding the date of termination, there were no disagreements with Cordovano &
Harvey P.C. on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure which disagreement(s), if
not resolved to the satisfaction of Cordovano & Harvey P.C., would have caused
it to make reference to the subject matter of the disagreement(s) in connection
with its report.
During Quest's two most recent fiscal years and the interim period
preceding Cordovano & Harvey P.C's termination, Cordovano & Harvey P.C. did not:
>> Advise Quest that the internal controls necessary for the registrant
to develop reliable financial statements did not exist;
>> Advise Quest that information has come to the accountant's attention
that has led it to no longer be able to rely on management's
representations, or that has made it unwilling to be associated with
the financial statements prepared by management;
>> Advise Quest of the need to expand significantly the scope of its
audit, or that information has come to the accountant's attention, that
if further investigated may:
>> Materially impact the fairness or reliability of either:a previously
issued audit report or the underlying financial statements; or the
financial statements issued or to be issued covering the fiscal
period(s) subsequent to the date of the most recent financial
statements covered by an audit report (including information that may
prevent it from rendering an unqualified audit report on those
financial statements), or
>> Cause it to be unwilling to rely on management's representations or
be associated with the registrant's financial statements, and
>> Require Cordovano & Harvey P.C. to expand the scope of its audit or
conduct such further investigation;
During Quest's two most recent fiscal years, and the interim period
preceding Cordovano & Harvey P.C.'s termination, Cordovano & Harvey P.C. did not
advise Quest that information has come its attention that it has concluded
materially impacts the fairness or reliability of either (i) a previously issued
audit report or the underlying financial statements, or (ii) the financial
statements issued or to be issued covering the fiscal period(s) subsequent to
the date of the most recent financial statements covered by an audit report
(including information that, unless resolved to Cordovano & Harvey P.C.'s
satisfaction, would prevent it from rendering an unqualified audit report on
those financial statements).
19
<PAGE>
During Quest's two most recent fiscal years, Cordovano & Harvey P.C.'s
report on the financial statements did not contain an adverse opinion or a
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principle other than a going concern qualification.
On November 2, 2000, Quest engaged the accounting firm of Feldman Sherb
& Co., P.C. as its Independent Certified Public Accountants. During Quest's two
most recent fiscal years and the interim period preceding the engagement of
Feldman Sherb & Co., P.C. , the Company did not consult with Feldman Sherb &
Co., P.C. on any matters.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; AND
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
-----------------------------------------------------------------------
The following table sets forth certain information concerning our sole
director and executive officer:
Name Age Term Position
---- --- ---- --------
Charles Wainer 38 2000 President, Interim
Chief Executive Officer
Chief Financial Officer
Director
Our Directors hold office until the next annual meeting of shareholders
and the election and qualification of their successors. Officers serve at the
discretion of the Board. Until we encountered cash flow problems, Outside
Directors were compensated $150 for every Board of Director Meeting they
attended.
In June 2000, Julian Cantillo resigned from the Board of Directors. In
September 2000, Richard Zaden resigned from the Board of Directors due to
personal and Quest related circumstances; none of which were addressed in his
resignation. In November 2000, David Block resigned from the Board of Directors.
In his resignation, he stated that such resignation was due to lack of
communication between Mr. Block and the President, cancellation of the Officer
and Director Liability Insurance, and the Company's non-action to resolve these
matters. Mr. Wainer is now the sole officer and Director of Quest.
Charles Wainer, Sole Officer and Director
-----------------------------------------
Mr. Wainer was appointed President/Interim Chief Executive Officer
and a Director of Quest in February 2000. From February 1998 to present, Mr.
Wainer was Chief Executive Officer of CWTel, Inc., a telecommunications company
located in Hallandale, Florida. Quest purchased CWTel, Inc. in February 2000.
From December 1992 to February 1998, Mr. Wainer was Chief Executive Officer of
World Pass Communication Corp., a telecommunication company located in Aventura,
Florida.
Mr. Wainer received a Bachelor of Science Degree in Electronics
Engineering from Tel-Aviv University in 1982.
Limited Liability of Directors
------------------------------
Provisions included in our certificate of incorporation, as amended,
protect our directors against personal liability for monetary damages from
breaches of their duty of care. As a result, our directors will not be liable
for monetary damages from negligence and gross negligence in the performance of
their duties. They remain liable for monetary damages for any breach of their
duty of loyalty to us, and our stockholders, as well as acts or omissions not
made in good faith or which involve intentional misconduct or a knowing
violation of law and for transactions from which a director derives improper
personal benefit. The liability of our directors under federal or applicable
state securities laws is also unaffected.
20
<PAGE>
While our directors have protection from awards of monetary damages for
breaches of the duty of care, that does not eliminate their duty of care.
Equitable remedies, such as an injunction or rescission based upon a director's
breach of the duty of care, are still available.
Compliance With Section 16(a) of the Securities Act of 1934
Section 16(a) Beneficial Ownership Reporting Compliance Based upon the
Company's review of forms filed by directors, officers and certain beneficial
owners of the Company's common stock (the "Section 16 Reporting Persons")
pursuant to Section 16 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the Company has identified the following Form 3 filings that
were filed late by the Section 16 Reporting Persons during fiscal 2000:
>> Charles Wainer
>> Richard Zadin
>> David Block
>> Julian Cantillo
>> Thomas Magill
>> Paul Zeller
To the best of the Company's knowledge, no Form 5 exit filing have been filed
by:
>> Richard Zadin
>> Julian Cantillo
>> Thomas Magill
>> Paul Zeller
ITEM 10. EXECUTIVE COMPENSATION
No officer received compensation in excess of $100,000 during the
fiscal year. Quest has a five-year employment agreement with Charles Wainer, our
president, which expired in March 2005. The agreement provides for at an annual
base salary of $100,000 during the Term, with a 20% cost of living increase per
annum and 50,000 shares of Quest's common stock. Mr. Wainer also received
options to purchase 1,000,000 shares of Quest's common stock. These options vest
at the rate of 50,000 shares every six months and options for an additional
50,000 shares can be exercised every time Quest has increased its revenue by one
million dollars and has retained that revenue for a period of not less than two
months. These options are exercisable at $2.68 per share (110% of the fair
market value of Quest's common stock on the date of the Employment Agreement).
Once vested, the options will remain exercisable for one year from the date of
vesting. After one year from the vesting date, the options will become null and
void. Mr. Wainer also received a stock grant of 50,000 shares of the Company's
common stock and a car allowance of $500 per month.
The following table shows the compensation received by our current and
past chief executive officers for during the past fiscal year.
21
<PAGE>
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Name & Principal Year Salary Other Annual Restricted Securities/Underlying
Position Ended Compensation(3) Stock Awards Option/SARs (1)
------------------------- --------- -------------- -------------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
Charles Wainer, 6/30/00 $33,333.33 $1,500 $100,000 $100,000
President,
Acting CEO and Director
Camilo Pereira, former 6/30/00 $57,728.95 $8,000 $1,411,000 NA
CEO and Director
</TABLE>
1. Does not include options to purchase 50,000 shares, which vest in March 2001.
The value of these options on the date for grant was $100,000.
Equity Incentive Plan
---------------------
On October 29, 1999, the Board of Directors approved an Equity Incentive
Plan. The Plan was to be approved by the Shareholders within one year. No
Shareholder meeting was held to approve the Plan and the Plan is now void.
At June 30, 2000, we had options to purchase 74,000 shares of common
stock outstanding. These options were granted to employees and consultants. The
exercise price of these options range from $1.06 to $7.25 per share.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Quest common
stock as of November 13, 2000 as to (a) each person known to us who beneficially
owns more than 5% of the outstanding shares of our common stock; (b) each
current director and executive officer; and (c) all of our executive officers
and directors as a group.
Name and Address Number of Shares Owned % of Outstanding
of Beneficial Owner Beneficially Shares of Common Stock
------------------- ---------------------- ----------------------
James LLC. 26,810,000 54.3%
C/o Citco Trustees (Cayman) LTD.
Corporate Centre, West
Bay Road, Po Box 31106 SMB
Grand Cayman, Cayman Islands, BWI.
Charles Wainer, Officer & Director 410,000 *
2999 NE 191st Street, PH-8
Aventura, Florida 33180
All officers and directors 410,000 *
as a group (1) person
*Represents less than 1% of the outstanding shares of common stock.
Mr. Wainer's holdings include options to purchase 50,000 shares of common stock
at $2.68 per share.
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Except as indicated above, based on information provided by such persons,the
persons named in the table above have sole voting power and investment power
with respect to all shares of common stock shown beneficially owned by them.
Percentage of ownership is based on 49,374,309 shares of common stock
outstanding as of November 13, 2000, plus each person's options that are
exercisable within 60 days. Shares of common stock subject to stock options that
are exercisable within 60 days of November 13, 2000 are deemed outstanding for
computing the percentage of that person and the group. Mr. Wainer's holdings
include options to purchase 50,000 shares of common stock at $2.68 per share.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1999, we issued a total of 101,333 shares of our common
stock to David Plant, the father of Maxine Pereira and father-in-law of Camilo
Pereira, for consulting services rendered. The consulting services were valued
at $7,600. At the time of issuance these shares were valued at $303,999. In
addition, in Mr. Plant was paid a consulting fee of $135,000.
In December 1998, we acquired certain assets of Grupo Internet
Latinoamericano valued at $1,724,520 in exchange for an aggregate of 100,000
shares of our redeemable preferred stock and 2,607,660 shares of our common
stock. At the time of the transaction, Grupo Internet Latinoamericano was an
unaffiliated third party. Quest redeemed the redeemable convertible preferred
shares in July 1999, at a redemption price of $10.00 per share. At the time of
the redemption, Grupo Internet Latinoamericano owned 49.2% of our outstanding
common stock.
From time to time during the year ended June 30, 2000, Quest paid
certain expenses related to ventures Mr. Pereira is associated with, but have no
relative business purpose to Quest. The amounts totaled $97,360 and have been
deducted from amounts accrued and payable to Mr. Pereira pursuant to his
employment agreement by decreasing the shares to be issued to Mr. Pereira in
connection with his employment agreement by 14,978 shares valued at $97,360. In
November 1999, Quest instituted a policy that prohibits payment of any new
expenses unrelated to its business. In addition, the Policy provides that Quest
will not enter into any transaction or loan with a related party unless the
transaction or loan is on terms that are no less favorable to us than we could
obtain from unrelated third parties. A majority of the disinterested,
"independent" members of our board of directors must review and approve or
ratify any transaction involving related parties or conflicts of interest.
In February 2000, due to management conflict as to the direction of
Quest, it was mutually decided between Quest and its President at the time,
Rebecca Del Medico, that Quest would be in a better situation if someone with
more of an Operational/Technological background filled that position. As part of
the termination agreement, Ms. Del Medico received $50,000 and the right to
50,000 shares of Quest's common stock, which Quest had accrued over the three
month, ended December 31, 1999.
In February 2000, Quest had also decided to cancel its purchase of
shares of Africa Internet Corp. Quest had paid $200,000 of the purchase price.
Pursuant to the cancellation agreement, Quest received back the shares issued
for the acquisition, paid a cancellation penalty of $100,000 and the balance
was to be paid back in one year with an interest-bearing note as a guarantee for
that amount. The note was subsequently transferred to Internet Strategy Group
Ltd. as payment for past due consulting fees.
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 310,000 share of Quest'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 30,000 shares of preferred stock,
with a face value of $10.00 per share. Quest is presently in default for the
second payment under the purchase agreement. Mr. Wainer has presented Quest's
Board of Directors with a notice of default.
In March 2000, Quest entered into a two-year Consulting Agreement with
Internet Strategy Group Ltd. for a consulting fee of $20,000 per month during
the first and $24,000 per month during the second year plus 60,000 shares of
Quest Net common stock annually, to be issued every quarter in advance. Mr.
Pereira is an employee of Internet Strategy Group Ltd. Internet Strategy Group
Ltd. was to perform consulting and advisory services on behalf of Quest on an
as-needed basis, not to exceed 60 hours per months. Its duties consisted of
providing advice and consultation with respect to all matters relating to or
affecting the telecommunications business. The agreement was terminated in July
2000 due to our inability to pay the consulting fees. No shares were issued
pursuant to the agreement.
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From time to time Charles Wainer, our President, has accrued salary and
loaned money to Quest. All accrued salary has been paid, however Quest owes Mr.
Wainer $62,000 for loans advanced to it. The loans are evidenced by non-interest
bearing promissory notes and are due upon demand.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A) Exhibits included herein:
------------------------
B) Reports on Form 8-K
NONE
(a) Exhibits
Exhibit Description
1.1 Agreement and Plan of Merger between Parputt Enterprises, Inc.
and Quest Net Corp.
1.2 Articles of Merger
1.3 Certificate of Incorporation of Quest Net Corp.
1.4 Bylaws of Quest Net Corp.
2. Asset Purchase Agreement (Pact)**
3.1(a) Articles of Incorporation (Colorado)**
3.1(b) Amended Articles of Incorporation(Colorado)**
3.1(c) Articles of Incorporation (Florida)**
3.2 Bylaws**
3.2(a) Amended and Restated Bylaws**
4. Warrant (Zubeir Kazi)**
4.1 Warrant (Scott Goldstein)**
4.2 Warrant (DSF Capital)**
4.4 Warrant (Jeffery Stein)**
4.3 Warrant (Sheldon Goldstein)**
4.5 Equity Incentive Plan
10. Lease (709)**
10.1 Lease (1008)**
10.2 Lease (901)**
10.3 Employment Agreement (Camilo Pereira)**
104 Employment Agreement (Maxine Pereira)**
10.5 Qwest Agreement*
10.6 Bell South Agreement*
10.7 E.spire Agreement*
10.8 Subscription Agreement (James LLC.)**
10.9 Registration Rights Agreement (James LLC.)**
10.10 Wireless Agreement*
10.11 Software Purchase Agreement (Secure Transaction International
Corp.)**
10.12 Asset Purchase Agreement (Grupo Internet Latinoamericano)**
10.13 Software Purchase Agreement (Simplex)**
10.14 Asset Purchase Agreement (AVX, Inc.)**
10.15 Stock Purchase Agreement (Wings Online)**
10.16 Network Sales and Service Agreement (Real Time Cash, Inc.)**
10.17 Network Sales and Service Agreement (Real Time Encryption,
Inc.)**
10.18 Network Sales and Service Agreement (Real Time Wireless,
Inc.)**
10.19 Professional Consulting Agreement (Real Time Wireless, Inc.)**
10.20 Professional Consulting Agreement (Real Time Encryption,
Inc.)**
10.21 Professional Consulting Agreement (Real Time Phone Services,
Inc.)**
10.22 Employment Agreement (Rebecca J. Del Medico) ***
10.23 Form of Africainternet, Corp Stock Purchase Agreement***
10.24 Wainer Employment Agreement
10.25 CWTel Purchase Agreement
10.26 Internet Strategy Group Ltd. Consulting Agreement
20 Long Distance Public Notice**
20.1 License (Cuba Travel)**
21 Subsidiaries of Quest*
----------------------
* Filed on August 11, 1999, as an Exhibit to the Registration Statement
on Form SB-2.
** Filed on August 11, 1999, as an Exhibit to Amendment No. 1 to the
Registration Statement on Form SB-2.
*** Filed on December, as an Exhibit to the Amendment No. 4, to the
Registration Statement on Form SB-2
**** Filed on June 16, 2000 as an Exhibit to the Company's Form 10-QSB.
***** Filed on March 30, 2000 as an Exhibit to the Company's Form 8-K
24
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, Quest Net Corp. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized,
Quest Net Corp.
November 10, 2000 By:/s/ Charles Wainer, President
25
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Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
/s/Charles Wainer President November 10, 2000
--------------------- (Principal Accounting
and Financial Officer)
and sole Director
26
