UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-KA
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: March 22, 2000
QUEST NET CORP.
(Exact Name of Registrant as Specified in its Charter)
2999 NE 191ST STREET, PH-8
AVENTURA, FLORIDA 33180
(Address of principal executive offices)
(305) 935-1080
Registrant's telephone number
PARPUTT ENTERPRISES, INC.
12835 E. ARAPAHOE ROAD
TOWER I, PENTHOUSE
ENGLEWOOD, COLORADO 80112
(Former name and former address)
Florida 000-24447 84-1331134
------- --------- ----------
(State of Incorporation) (Commission File Number) (IRS Employer
I.D. Number)
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The audited consolidated financial statements of Quest Net Corp. for the
year ended June 30, 1999 and the related consolidated statements of operation ,
shareholders equity and cash flows for the years ended June 30, 1999 and 1998;
the unaudited consolidated financial statements for the six month period ended
December 31, 1999 and the audited balance sheet of Wings Online, Inc.,
subsidiary of the Company, for the years ended June 30, 1999 and 1998 and the
related consolidated statements of operation , shareholders equity and cash
flows for the years ended June 30, 1999 and 1998 are attached hereto.
The audited financial statements of Parputt Enterprises, Inc. for the year
ended September 30, 1999 and the unaudited financial statements for the 3-month
period ended December 31, 1999 are attached hereto.
No pro forma financial statements are included herein. Parpputt
Enterprises, Inc. has no operations, assets or liabilities and therefore, the
pro forma financial statements are not material.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized officer.
QUEST NET CORP.
By /s/ Charles Wainer, President
--------------------------------
Date: March 22, 2000
<PAGE>
QUEST NET CORP
--------------
(A Development Stage Company)
Page
----
Independent auditors' report........................................... F-2
Balance sheet as of June 30, 1999...................................... F-3
Consolidated statements of operations,
for the years ended June 30, 1999 and
1998, and for the period November 28, 1995
(inception) through June 30, 1999 ................................... F-4
Consolidated statements of shareholders' equity
for the period November 28, 1995 (inception) through June 30, 1999 .. F-5
Consolidated statements of cash flows,
for the years ended June 30, 1999 and
1998, and for the period November 28, 1995
(inception) through June 30, 1999 ................................... F-7
Notes to consolidated financial statements............................. F-8
F-1
<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-2
<PAGE>
<TABLE>
QUEST NET CORP.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash........................................................ $4,298,289
Accounts receivable, net of $867,842 allowance ............. 11,084
Accounts receivable, other.................................. 2,276
Prepaid expenses............................................ 29,155
----------
TOTAL CURRENT ASSETS........................ 4,340,804
PROPERTY AND EQUIPMENT, net of
accumulated depreciation of $266,159 (Note C)............... 1,329,364
PROPERTY NOT IN SERVICE (Note C).................................... 434,144
INTANGIBLE ASSETS, net of
accumulated amortization of $41,453 (Note A)............... 501,031
DEPOSITS............................................................ 69,800
----------
$6,675,143
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, trade..................................... $ 44,114
Accrued compensation (Note E)............................... 1,118,265
Due to related party (Note B)............................... 100,000
Accrued expenses............................................ 25,506
Accrued payroll taxes....................................... 64,814
----------
TOTAL CURRENT LIABILITIES................... 1,352,699
COMMITMENTS (Note H)................................................ -
SHAREHOLDERS' EQUITY
Preferred stock, no par value; 5,000,000 shares authorized;
100,000 shares issued and outstanding, respectively...... 1,000,000
Common stock, no par value; 50,000,000 shares authorized;
22,045,500 shares issued and outstanding ................. 12,988,011
47,000 outstanding common stock warrants.................. 7,191
10,000 outstanding common stock options................... 25,800
Additional paid in capital.................................. 341,700
Deficit accumulated during development stage................ (9,040,258)
----------
TOTAL SHAREHOLDERS' EQUITY ................. 5,322,444
----------
$6,675,143
==========
See accompanying notes to the consolidated financial statements
</TABLE>
F-3
<PAGE>
<TABLE>
QUEST NET CORP.
---------------
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
November 28,
1995
(inception)
For the Years Ended June 30, Through
---------------------------- June 30,
1999 1998 1999
----------- --------- -----------
<S> <C> <C> <C>
REVENUES
Internet related services.. ........................ $ 136,361 $ - $ 136,361
OTHER:
Bandwidth sales (Note H)............................ 396,000 - 396,000
Software sales and development (Note H)............. 537,837 - 537,837
----------- --------- -----------
TOTAL REVENUES 1,070,198 - 1,070,198
----------- --------- -----------
COSTS AND EXPENSES
Cost of internet related services................... 95,088 - 95,088
Cost of revenues - software sales and development... 600,000 - 600,000
Stock based compensation............................ 7,029,485 - 7,029,485
Bad debt expense.................................... 893,095 - 893,095
Salaries and bonuses................................ 383,160 - 383,160
Consulting fees, related party (Note B)............. 135,000 - 135,000
General and administrative.......................... 599,861 4,761 607,325
Depreciation and amortization....................... 313,367 - 313,367
Loss on disposal of assets.......................... 56,559 - 56,559
----------- --------- -----------
TOTAL OPERATING EXPENSES 10,105,615 4,761 10,113,079
----------- --------- -----------
OPERATING LOSS (9,035,417) (4,761) (9,042,881)
NON-OPERATING INCOME (EXPENSE)
Interest expense.................................... (5,943) - (5,943)
Interest income..................................... 8,566 - 8,566
----------- --------- -----------
NET LOSS BEFORE INCOME TAXES $(9,032,794) $ (4,761) $(9,040,258)
INCOME TAXES (NOTE F)
Current tax benefit................................. 1,523,658 678 1,524,722
Deferred tax expense................................ (1,523,658 (678) (1,524,722)
----------- --------- -----------
NET LOSS $(9,032,794) $ (4,761) $(9,040,258)
=========== ========= ===========
NET LOSS PER SHARE:
Basic............................................... $ (0.68) *
=========== =========
Diluted............................................. $ (0.68) *
=========== =========
SHARES USED FOR COMPUTING NET LOSS PER SHARE:
Basic................................................ 13,322,111 960,028
=========== =========
Diluted.............................................. 13,322,111 960,028
=========== =========
* Less than $.01 per share
See accompanying notes to the consolidated financial statements
</TABLE>
F-4
<PAGE>
<TABLE>
QUEST NET CORP.
---------------
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
From November 28, 1998 (inception) through June 30, 1999
<CAPTION>
Deficit
Accumulated
Additional During Total
Preferred Stock Common Stock Paid In DevelopmentShareholders'
Shares Amount Shares Amount Warrants Capital Stage Equity
--------- ----------- ---------- ---------- -------- -------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, November 28, 1995 (inception)....... - $ - - $ - $ - $ - $ - $ -
Net loss for the period ended June 30, 1996.. - - - - - - - -
--------- ----------- ---------- ---------- -------- -------- ------- -----------
BALANCE, June 30, 1996 ...................... - - - - - - - -
July 3, 1996, shares issued for cash (Note B) 300,000 3,000 - - - - - 3,000
September 4, 1996, shares issued for cash.... - - 240,007 * 1,200 - - - 1,200
Net loss for the year ended June 30, 1997.... - - - - - - (2,703) (2,703)
--------- ----------- --------- ---------- -------- -------- ------- -----------
BALANCE, June 30, 1997 ...................... 300,000 3,000 240,007 * 1,200 - - (2,703) 1,497
June 15, 1998, cancellation of
preferred stock............................ (300,000) (3,000) - 3,000 - - - -
June 16, 1998, capital contributed by officer - - - 70 - - - 70
June 30, 1998, shares issued in asset
acquisition (Note D)...................... - - 200,000 * 125,274 - - - 125,274
Net loss for the year ended June 30, 1998.... - - - - - - (4,761) (4,761)
--------- ----------- ---------- ---------- -------- -------- ------- -----------
BALANCE, June 30, 1998 ...................... - - 440,007 * 129,544 - - (7,464) 122,080
July 27, 1998 shares issued for software
purchase (Note D)......................... 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 (Note B)......... - - 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 (Note E)........... - - 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 (Note D)........... 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
Restated (See Note D)
See accompanying notes to the consolidated financial statements
F-5
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
From November 28, 1998 (inception) through June 30, 1999
<CAPTION>
Deficit
Accumulated
Additional During Total
Preferred Stock Common Stock Paid In Development Shareholders'
Shares Amount Shares Amount Warrants Capital Stage Equity
--------- ----------- ---------- ----------- -------- -------- ----------- -----------
<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 (Note D)..................... - - 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. (Note G) - - 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 (Note E)................... - - - - 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
========= =========== ========== =========== ======== ======== =========== ===========
See accompanying notes to the consolidated financial statements
</TABLE>
F-6
<PAGE>
<TABLE>
QUEST NET CORP.
---------------
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
November 28,
1995
(inception)
For the Years Ended June 30, Through
----------------------------- June 30,
1999 1998 1999
----------- -------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss........................................................ $(9,032,794) $ (4,761) $(9,040,258)
Transactions not requiring cash:
Depreciation and amortization........................... 313,367 - 313,367
Loss on disposal of assets.............................. 56,559 - 56,559
Increase to allowance for doubtful accounts............. 867,842 - 867,842
Non-cash software cost of revenues...................... 600,000 - 600,000
Stock based compensation expense........................ 7,029,485 - 7,029,485
Changes in current assets and current liabilities:
Increase in receivables and prepaid expenses........... (910,357) - (910,357)
Increase in accounts payable and accrued liabilities
net of effects from purchase of Wings Online, Inc.... 123,000 3,237 126,237
----------- -------- -----------
NET CASH USED IN
OPERATING ACTIVITIES ........................... (952,898) (1,524) (957,125
----------- -------- -----------
INVESTING ACTIVITIES
Equipment and leasehold purchases............................... (118,756) - (118,756)
Proceeds from sale of equipment................................. 2,100 - 2,100
Cash paid for deposits.......................................... (69,250) - (69,250)
Purchase of Wings Online, Inc, net of $-0- cash received........ (135,000) - (135,000)
----------- -------- -----------
NET CASH (USED IN)
INVESTING ACTIVITIES ........................... (320,906) - (320,906)
----------- -------- -----------
FINANCING ACTIVITIES
Capital contribution............................................ - 70 70
Sale of preferred stock......................................... - - 3,000
Sale of common stock and warrants............................... 5,925,000 - 5,926,200
Cash paid for offering costs.................................... (352,950) - (352,950)
Proceeds from issuance of notes to related party................ 214,900 - 214,900
Principal payments of related party notes....................... (214,900) - (214,900)
----------- -------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES ........................... 5,572,050 70 5,576,320
----------- -------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS.............................. 4,298,246 (1,454) 4,298,289
Cash and cash equivalents, beginning................................... 43 1,497 -
----------- -------- -----------
Cash and cash equivalents, ending...................................... $ 4,298,289 $ 43 $ 4,298,289
=========== ======== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................................. $ 5,943 $ - $ 5,943
=========== ======== ===========
Cash paid for income taxes.............................................. - $ - $ -
=========== ======== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
2,000,000 common shares issued for property............................ - $125,274 $ 125,274
2,649,054 common shares issued for property............................ $ 1,031,520 $ - $ 1,031,520
160,000 preferred shares issued for property and software.............. $ 1,600,000 $ - $ 1,600,000
24,000 common shares issued for payment of offering costs.............. $ 15,000 $ - $ 15,000
29,326 common shares issued in acquisiton of Wings Online, Inc......... $ 200,000 $ - $ 200,000
See accompanying notes to the consolidated financial statements
</TABLE>
F-7
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A: Organization, business, liquidity and summary of significant accounting
- --------------------------------------------------------------------------------
policies
- --------
Organization and business
Quest Net Corp. (the "Company") 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 reincorporated in Florida in December 1998.
As shown in the accompanying financial statements, the Company incurred a net
loss of $9,032,794 for the year ended June 30, 1999, 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 plans to commence significant operations during the next fiscal year,
reduce expenses resulting from stock based compensation and raise an additional
$5,000,000 in equity financing. The ability of the Company to continue as a
going concern is dependent on the success of these plans, and ultimately upon
achieving profitability. The financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.
Summary of significant accounting policies:
Basis of presentation
- ---------------------
The Company's primary operations since July 1998 have been devoted to developing
its Internet services business and raising capital. As a result, the
consolidated financial statements are presented in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by
Development Stage Enterprises." In order to generate significant revenues and
become an operating business, the Company will need to continue to market its
internet access services to customers in its current markets and in markets to
be acquired.
F-8
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of significant accounting policies continued:
Principles of Consolidation
- ---------------------------
The Company's consolidated financial statements include the accounts of the
Company and its wholly 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, which had no revenues and
insignificant accounting transactions during the periods presented. The
accounting transactions of those five subsidiaries consisted primarily of costs
to form the corporations and cash transferred from the parent company to open
bank accounts. 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.
Reclassifications
- -----------------
Certain prior-year amounts have been reclassified for comparative purposes to
conform to the current-year presentation.
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. The Company has
concentrated its credit risk for cash by maintaining $4,246,891 of its
$4,298,289 cash in one money market account. The maximum loss that would have
resulted from that risk totaled $4,246,891 at June 30, 1999. The Company has not
experienced any losses in the account and believes it is not exposed to any
significant credit risk to cash.
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
sixty months.
F-9
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of significant accounting policies continued:
Intangible assets
- -----------------
Intangible assets are stated net of accumulated amortization and include a
non-compete agreement acquired as a result of the Company's acquisition of Wings
Online, Inc. and goodwill resulting from the Company's purchase of equipment and
certain other assets from AVX Communications. 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. Management believes that there
has been no impairment to the intangible assets as reflected in the Company's
consolidated financial statements as of June 30, 1999.
Long-lived assets
- -----------------
The Company periodically reviews the values assigned to long-lived assets, such
as property and equipment, to determine whether any impairments are other than
temporary. Management believes that the 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.
---------------
(A Development Stage Company)
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 in Note E.
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 compensation, and other accrued
liabilities approximate fair value due to the short-term maturity of the
instruments.
Loss per share
- --------------
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share" (SFAS 128). The Company adopted SFAS 128 for the
two-year period ended June 30, 1999. 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, 1999, there were 87,999
stock options and 47,000 common stock purchase warrants outstanding which were
not included in the calculation net loss per share-diluted because they were
antidilutive.
Recently issued accounting pronouncements
- -----------------------------------------
The Company has adopted the following new accounting pronouncements for the year
ended June 30, 1999. There was no material effect on the financial statements
presented from the adoption of the new pronouncements.
SFAS No. 130, "Reporting Comprehensive Income," requires the reporting and
display of total comprehensive income and its components in a full set of
general-purpose financial statements.
F-11
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of significant accounting policies continued:
Recently issued accounting pronouncements continued
- ---------------------------------------------------
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is based on the "management" approach for reporting segments. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. SFAS No. 131 also requires
disclosure about the Company's products, the geographic areas in which it earns
revenue and holds long-lived assets, and its major customers.
SFAS No. 132, "Employers' Disclosures about Pensions and Other Post-retirement
Benefits," which requires additional disclosures about pension and other
post-retirement benefit plans, but does not change the measurement or
recognition of those plans.
Statement of Position ("SOP") 98-1, "Accounting for the costs of Computer
Software Developed or Obtained for Internal Use." This SOP requires that
entities capitalize certain internal-use software costs once certain criteria
are met.
SOP 98-5, "Reporting on the costs of Start-Up Activities." SOP 98-5 provides,
among other things, guidance on the reporting of start-up costs and organization
costs. It requires costs of start-up activities and organization costs to be
expensed as incurred.
The Company will continue to review these new accounting pronouncements over
time, in particular SFAS 131 and SOP 98-1, to determine if any additional
disclosures are necessary based on evolving circumstances.
Note B: Related party transactions
- -----------------------------------
For the year ended June 30, 1999
- --------------------------------
During the year ended June 30, 1999 the President of the Company and another
entity owned by the President of the Company, paid on behalf of the Company
certain expenses totaling $103,976. The President also advanced $35,648 to the
Company for working capital purposes. The Company repaid $29,725 to the
President and issued a seven and half percent note payable to the 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 President advanced the Company an additional $105,000 in exchange for a note
payable to the President. The Company repaid the $105,000 within sixty days of
issuance of the note, and did not accrue any interest.
F-12
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
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. The affiliate also
performed consulting services 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 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. See Note H - Commitments and contingencies
For the year ended June 30, 1998 and the period November 28, 1995 (inception)
through June 30, 1998 - On July 3, 1996, the Company issued 300,000 shares of
its no par value preferred stock to an officer and an affiliate company for
$3,000. In June 1998, the preferred shares were cancelled and the related $3,000
was reclassified as a capital contribution.
Note C: Property and equipment
- -------------------------------
Furniture and equipment consisted of the following at June 30:
1999 1998
---------- ----------
Office equipment ............ $ 44,588 $ 8,196
Computer equipment .......... 1,468,317 66,966
Software .................... 56,588 49,562
Artwork ..................... 9,545 -
Leasehold improvements ...... 16,485 -
---------- ----------
1,595,523 124,724
Less accumulated depreciation (266,159) -
---------- ----------
$1,329,364 $ 124,724
========== ==========
Depreciation expense for the years ended June 30, 1999, 1998 and inception
(November 28, 1995) through June 30, 1999 totaled $271,877, $-0-, and $271,877,
respectively. As discussed in Note A to the financial statements, the Company
has not yet fully commenced planned operations. Certain computer equipment that
was acquired during the year ended June 30, 1999 has not yet been placed in
service. The cost of the equipment not being used at June 30, 1999 is $434,144
and accordingly the Company has not recorded any depreciation expense related to
the unused equipment. Management expects the equipment to be placed in service
during the Company's next fiscal year.
F-13
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 in the 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 subsequent to June
30, 1999.
Common Stock
- ------------
On June 30, 1998, the Company issued 200,000 (restated from 2,000,000 for
reverse stock split) shares of its no par value common stock pursuant to an
Asset Purchase and Sale Agreement, whereby the Company would receive certain
assets from PACT Communication Group, Inc. - See Note G.
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.
F-14
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note D: Shareholders' equity continued
- --------------------------------------
Common stock continued
- ----------------------
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 in $2,950 cash and in 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.
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. - See Note G.
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. -
See Note G.
F-15
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
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.
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.
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.
F-16
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
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. As of June
30, 1999 none of the options were vested.
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.
F-17
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note E: Stock based compensation continued
- -------------------------------------------
Common stock options continued
- ------------------------------
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. As of June 30, 1999 none
of the options were vested. In accordance with APB 25, no compensation expense
was recorded.
Summary
- -------
A summary of the status of the Company's stock option awards as of June 30,
1999, and the changes during the period ended June 30, 1999 is presented below:
Fixed Options Number
------------------------------------ ----------
Outstanding at June 30, 1998 ....... -
Granted ........................... 1,398,692
Exercised .......................... (1,310,693)
Canceled ........................... -
----------
Outstanding at June 30, 1999 ....... 87,999
==========
The weighted average exercise price per share for the 87,999 outstanding options
at June 30, 1999 was $5.97.
SFAS 123
- --------
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting form 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-18
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
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. During
the year ended June 30, 1999, the weighted-average exercise price and fair
values of options granted were $5.97 and $2.03, respectively on the date of
grant for options granted with an exercise price equal to the market price of
the stock. The weighted-average exercise price and fair values of options on the
date of grant for options granted with an exercise price less than the market
price of the stock on the grant date was $.012 and $3.04, respectively. There
were no options granted that exceeded the market price of the underlying stock
on date of grant.
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:
Amount
------------
As reported:
Net loss ................................. $ (9,032,794)
Net loss per share - basic and diluted ... $ (0.68)
Pro Forma:
Net loss ................................. $ (9,121,219)
Net loss per share - basic and diluted ... (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.
F-19
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1999 and 1998:
<TABLE>
<CAPTION>
November 28.
1995
(Inception)
June 30, Through
--------------------------------- June 30.
1999 1998 1999
-------------- -------------- -------------------
<S> <C> <C> <C>
U.S. statutory federal rate.......... 34.00% 15.00% 34.00%
State income tax rate,
net of federal benefit............ - 4.25% -
Permanent differences:
Deferred offering costs.............. 1.42% 1.42%
Excess officers' compensation........ (15.20%) (15.20%)
Other................................ (.02%) (.02%)
Temporary differences:
Depreciation expense................. .20% .20%
Allowance for bad debt............... (3.35%) (3.35%)
Net operating loss for which no tax
benefit is currently available..... (17.05) (19.25%) (17.05)
-------------- -------------- -------------------
-% -% -%
============== ============== ===================
At June 30, 1999 and 1998, deferred taxes consisted of the following:
June 30,
------------------------------
1999 1998
------------- -------------
Deferred tax assets,
Net operating loss............... $ 1,524,722 $ 1,064
Valuation allowance................. (1,524,722) (1,064)
------------- -------------
Net deferred taxes............ $ - $ -
============= =============
The valuation allowance offsets the net deferred tax asset for which there is no
assurance of recovery. The change in the valuation allowance for the years ended
June 30, 1999 and 1998 totaled $1,523,658 and $678, respectively. The net
operating loss carryforward expires through the year 2018.
</TABLE>
F-20
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note F: Income taxes, continued
- --------------------------------
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
- ---------------------
Wings Online, Inc.
- ------------------
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 excess of the purchase price over the fair value of the
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. Amortization
expense of $41,453 has been recorded in the accompanying consolidated financial
statements for the year ended June 30, 1999.
The Company has recorded the transaction as a purchase in accordance with
Accounting Principles Board Opinion No. 16. The accompanying consolidated
financial statements include the results of operations of Wings from the date of
the acquisition, February 15, 1999 through June 30, 1999.
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 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.
F-21
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note G: Acquisitions continued
- -------------------------------
Wings Online, Inc. continued
- ----------------------------
<TABLE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended June 30, 1999
<CAPTION>
Pro Forma
Quest Net Wings Adjustments Consolidated
----------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues ....................................... $ 1,070,198 $ 105,169 (58,705) $ 1,116,662
Operating expenses ............................. (10,105,615) (97,668) (7,798) (10,211,081)
(Loss) income from operations .................. (9,035,417) 7,501 (66,503) (9,094,419)
Interest expense ............................... (5,943) - - (5,493)
Interest income ................................ 8,566 - - 8,566
Net (loss) income .............................. (9,032,794) 7,501 (66,503) (9,091,796)
Net (loss) income per share-basic and diluted .. $ (0.68) $ 37.50 $ (0.68)
Basic and diluted shares outstanding ........... 13,322,111 200 13,322,111
</TABLE>
<TABLE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended June 30, 1998
<CAPTION>
Pro Forma
Quest Net Wings Adjustments Consolidated
----------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues ....................................... $ - $ 46,161 - $ 46,161
Operating expenses ............................. (4,761) (25,456) (110,542) (140,759)
(Loss) income from operations .................. (4,761) 20,705 (110,542) (94,598)
Net (loss) income .............................. (4,761) 20,705 (110,542) (94,598)
Net (loss) income per share-basic and diluted .. * $ 103.52 $ (0.10)
Basic and diluted shares outstanding ........... 960,028 200 29,126 989,354
*Less than $.01 per share
</TABLE>
Pro forma adjustments
- ---------------------
The year ended June 30, 1999:
- -----------------------------
The consolidated financial statements of Quest Net include the results of
operations of Wings for the period February 15, 1999 through June 30, 1999. The
financial information of Wings presented in the pro forma statement is the
results of operations for Wings for the year ended June 30, 1999. Therefore the
adjustments reduce the pro forma consolidated information for the duplication of
the period February 15, 1999 through June 30, 1999 by the following: Revenues:
$58,705, Operating expenses: $61,292, Loss from operations and Net loss: $2,587.
The adjustments also include the increased amortization expense resulting from
the non-compete agreement as if the agreement was amortized for the full year of
$69,090.
F-22
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note G: Acquisitions continued
- -------------------------------
Wings Online, Inc., pro forma adjustments continued
- ---------------------------------------------------
The year ended June 30, 1998:
- -----------------------------
The adjustments include the amortization expense resulting from the non-compete
agreement as if the agreement was amortized for the full year of $110,542 and
the 29,326 share increase to weighted shares outstanding to give effect of the
shares issued in the acquisition.
The pro forma condensed consolidated financial information do not show any
adjustments for a change in the income tax benefit as the total pro forma
consolidated benefit for income taxes would be offset by any valuation allowance
due to any deferred tax asset derived from net operating losses. The valuation
allowance offsets the net deferred tax asset for which there is no assurance of
recovery.
Asset acquisitions
- ------------------
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. As of June 30, 1999, the assets were still in transit and
had not been placed in service. The $89,144 attributed to the equipment and
software is recorded in the Company's consolidated balance sheet as "Property
not in service." As of June 30, 1999 the Company had not amortized any of the
goodwill, however management intends to assess the estimated useful life of the
goodwill once the assets are place in service and amortize the goodwill on a
straight-line basis over the estimated useful life.
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.
F-23
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note G: Acquisitions continued
- -------------------------------
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.
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.
As noted in the accompanying consolidated financial statements, the Company has
recorded a reserve for the doubtful collection of 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, 1999 the outcome of the
lawsuit.
F-24
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note H: Commitments and contingencies continued
- ------------------------------------------------
Employment contracts
- --------------------
The Company has 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, 1999 the Company
incurred compensation expense related to the contracts of $1,729,675, resulting
from the issuance of 175,000 common shares valued at the market price of the
Company's common stock on the anniversary date of the awards. 160,022 shares not
issued, but due at June 30, 1999 total $1,037,015, net of 14,978 shares valued
at $97,360 for the repayment of certain advances made to the President of the
Company. The accrual is recorded in the accompanying consolidated financial
statements as accrued stock compensation expense. - See Note B - Related party
transactions
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. Amounts due at June 30, 1999 for unissued common
stock awards of 12,500 shares have been accrued as stock compensation expense of
$81,250 and is recorded in the accompanying consolidated financial statements as
accrued stock compensation expense.
Non-cancelable leases
- ---------------------
The Company leases office space under three separate non-cancelable operating
leases that expire in January 2004. Total office rent expense incurred under
these leases for the years ended June 30, 1999 and 1998 and for the period
November 28, 1995 (inception) through June 30, 1999 was $25,565, $-0- and
$25,565, respectively. Future minimum lease payments for the leases with initial
terms in excess of one year as of June 30, 1999 are as follows:
June 30, 2000 ......... $ 117,494
June 30, 2001 ......... $ 117,494
June 30, 2002 ......... $ 117,494
June 30, 2003 ......... $ 117,494
June 30, 2004 ......... $ 65,698
F-25
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note I - Year 2000 Compliance
- -----------------------------
The Year 2000 issue ("Y2K") is the result of computer programs written using two
digits rather than four to define the applicable year. Any of the Company's
computer and telecommunications programs that have date sensitive software may
recognize a date using "00" as the year 1900 instead of 2000. This could result
in system failure or miscalculations causing disruptions in operations,
including the ability to process transactions, send invoices, or engage in
similar normal business activities. The Company is currently assessing its
current computer systems and has yet to determine the extent, if any, of
non-compliance. There is no certainty that the Company will not experience Y2K
issues.
The Company cannot determine the extent to which the Company is vulnerable to
third parties' failure to remediate their own Y2K problems. As a result, there
can be no guarantee that the systems of other companies on which the Company's
business relies will be timely converted, or that failure to convert by another
company, or a conversion that is incompatible with the Company's systems, would
have a material adverse affect on the Company. In view of the foregoing, there
can be no assurance that the Y2K issue will not have a material adverse effect
on the Company's business.
F-26
<PAGE>
WINGS ONLINE, INC.
------------------
Index to Financial Statements
Page
----
Independent auditors' report............................................. F-28
Statements of operations, from July 1, 1998 through February 14, 1999
and for the year ended June 30, 1998............................. F-29
Statement of shareholder's equity, July 1, 1997 through
February 14, 1999................................................ F-30
Statements of cash flows, from July 1, 1998 through February 14, 1999
and for the year ended June 30, 1998............................. F-31
Summary of significant accounting policies............................... F-32
Notes to financial statements............................................ F-34
F-27
<PAGE>
To the Board of Directors and Shareholders
Wings Online, Inc.
INDEPENDENT AUDITORS' REPORT
----------------------------
We have audited the accompanying statements of operations, shareholders' equity
and cash flows of Wings Online, Inc. (an "S" Corporation) from July 1, 1998
through February 14, 1999 and for the year ended June 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Wings Online,
Inc. for the period from July 1, 1998 through February 14, 1999 and for the year
ended June 30, 1998 in conformity with generally accepted accounting principles.
s/Cordovano and Harvey, P.C.
Cordovano and Harvey, P.C.
Denver, Colorado
July 10, 1999
F-28
<PAGE>
<TABLE>
WINGS ONLINE, INC.
------------------
Statements of Operations
<CAPTION>
July 1, 1998 For The
Through Year Ended
February 14, June 30,
1999 1998
--------- --------
<S> <C> <C>
SALES................................................... $ 46,463 $ 46,161
COST OF SALES........................................... 9,082 7,458
--------- --------
GROSS PROFIT.................................... 37,381 38,703
--------- --------
EXPENSES
Selling, general and administrative............. 27,293 17,998
--------- --------
NET INCOME...................................... $ 10,088 $ 20,705
========= ========
Basic earnings per common share......................... $ 50.44 $ 103.52
========= ========
Basic weighted average common shares outstanding........ 200 200
========= ========
Pro Forma Statements of Operations
<CAPTION>
July 1, 1998 For The
Through Year Ended
February 14, June 30,
1999 1998
--------- --------
<S> <C> <C>
NET INCOME BEFORE INCOME TAXES.................. $ 10,088 $ 20,705
INCOME TAX EXPENSE ..................................... (1,985) (4,074)
--------- --------
PRO FORMA NET INCOME ........................... $ 8,103 $ 16,631
========= ========
Pro forma basic earnings per common share .............. $ 40.51 $ 83.15
========= ========
Pro forma basic weighted average
common shares outstanding............................ 200 200
========= ========
See accompanying summary of significant accounting policies and
notes to the financial statements.
</TABLE>
F-29
<PAGE>
<TABLE>
WINGS ONLINE, INC.
------------------
Statement of Shareholder's Equity
July 1, 1997 through February 14, 1999
<CAPTION>
Additional Total
Preferred Stock Common Stock Paid-In Retained Shareholders'
Shares Par Value Shares Par Value Capital Earnings Equity
------ --------- ------ ---------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1997................ - $ - 200 $ - $ 200 $ (935) $ (735)
Net income for year ended
June 30, 1998..................... - - - - - 20,705 20,705
------ --------- ------ ---------- ------- -------- -----
BALANCE, JUNE 30, 1998 .... - - 200 - 200 19,770 19,970
Distributions paid to shareholders... - - - - - (26,686) (26,686)
Net income for the period ended
February 14, 1999................. - - - - - 10,088 10,088
------ --------- ------ ---------- ------- -------- ------
BALANCE, FEBRUARY 14, 1999 . - $ - 200 $ - $ 200 $ 3,172 $3,372
====== ========= ====== ========== ======= ======== ======
See accompanying summary of significant accounting policies
and notes to the financial statements
</TABLE>
F-30
<PAGE>
<TABLE>
WINGS ONLINE, INC.
------------------
Statements of Cash Flows
<CAPTION>
July 1, 1998 For The
Through Year Ended
February 14, June 30,
1999 1998
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income .............................................. $ 10,088 $ 20,705
Transactions not requiring cash:
Depreciation and amortization ........................ 3,383 3,528
Loss on write-off of organization costs .............. 125 -
Changes in current assets and current liabilities:
Decrease in receivables and other current assets ..... 13,911 -
Increase in accounts payable and other
current liabilities ............................... 9,136 377
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES .... 36,643 24,610
--------- --------
INVESTING ACTIVITIES
Purchases of furniture and equipment .................... (11,492) (2,507)
--------- --------
NET CASH (USED IN) INVESTING ACTIVITIES ...... (11,492) (2,507)
--------- --------
FINANCING ACTIVITIES
Distributions paid to officers .......................... (26,686) -
Advances paid to officers ............................... - (26,825)
Repayment advances from officers (Note B) ............... - 4,702
--------- --------
NET CASH (USED IN) FINANCING ACTIVITIES ...... (26,686) (22,123)
--------- --------
NET CHANGE IN CASH ........................... (1,535) (20)
Cash, beginning of period................................... 1,535 1,555
--------- --------
CASH, END OF PERIOD .......................... $ - $ 1,535
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ................................................ $ 830 $ 11
========= ========
Income taxes ............................................ $ - $ -
========= ========
See accompanying summary of significant accounting policies
and notes to the financial statements,
</TABLE>
F-31
<PAGE>
WINGS ONLINE, INC.
------------------
Summary of Significant Accounting Policies
February 14, 1999
Use of estimates
- ----------------
The preparation of the financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect certain reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Accordingly, actual results could differ from those estimates.
Cash equivalents
- ----------------
For the purpose of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents. Property, equipment and depreciation
Property and equipment is stated at cost and depreciated using the straight-line
method over the estimated useful lives of the assets. Maintenance and repair
costs are charged to expense as incurred. Gains or losses on disposition of
property and equipment are reflected in income.
Sales
- -----
Sales consist of monthly fees charged to customers for Internet advertisements.
Internet advertisement sales are recognized in the period ads are run.
Income Taxes
- ------------
The Company, with the consent of its shareholders, has elected under the
Internal Revenue Code to be an S corporation. In lieu of corporation income
taxes, the shareholders of an S corporation are taxed on their proportionate
share of the Company's taxable income. Therefore, no provision or liability for
federal income taxes has been included in the accompanying financial statements.
Fair value of financial instruments
- -----------------------------------
The Company has determined, based on available market information and
appropriate valuation methodologies, that the fair value of its financial
instruments approximates carrying value. The carrying amounts of cash,
receivables, payables and other current liabilities approximate fair value due
to the short-term maturity of the instruments.
Earnings per common share
- -------------------------
Effective December 31, 1997, SFAS 128 "Earnings per Share" requires a dual
presentation of earnings per share-basic and diluted. Basic earnings per common
share has been computed based on the weighted average number of common shares
outstanding. Diluted earnings per share reflects the increase in weighted
average common shares outstanding that would result from the assumed exercise of
outstanding stock options. However, the Company has a simple capital structure
for the periods presented and, therefore, there is no variance between the basic
and diluted earnings per share.
F-32
<PAGE>
WINGS ONLINE, INC.
------------------
Summary of Significant Accounting Policies
February 14, 1999
Recently issued accounting pronouncements
- -----------------------------------------
The Company has adopted the following new accounting pronouncements for the year
ended June 30, 1998. There was no effect on the financial statements presented
from the adoption of the new pronouncements. SFAS No. 130, "Reporting
Comprehensive Income," requires the reporting and display of total comprehensive
income and its components in a full set of general-purpose financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is based on the "management" approach for reporting segments. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. SFAS No. 131 also requires
disclosure about the Company's products, the geographic areas in which it earns
revenue and holds long-lived assets, and its major customers. SFAS No. 132,
"Employers' Disclosures about Pensions and Other Post-retirement Benefits,"
which requires additional disclosures about pension and other post-retirement
benefit plans, but does not change the measurement or recognition of those
plans.
F-33
<PAGE>
WINGS ONLINE, INC.
------------------
Notes to Financial Statements
February 14, 1999
Note A: Nature of Organization
- --------------------------------
Wings Online, Inc. (the "Company") was incorporated in Florida on November
29, 1995. The Company sells advertising space on its web site to dealers
and individuals that are looking to sell their aircraft.
On February 15, 1999, the shareholders of the Company entered into a Stock
Purchase Agreement with Quest Net Corp. ("Quest"), whereby the shareholders
received $135,000 and 29,326 shares of Quest's no par value common stock in
exchange for 100 percent of the outstanding common shares of the Company.
As a result, the Company became a wholly owned subsidiary of Quest.
The Company has a tax year-end of December 31; however, the Company adopted
an accounting year-end of June 30 to correspond to the year-end of its
parent corporation, Quest.
Note B: Related party transactions
- ------------------------------------
At July 1, 1998, the officers owed the Company $14,627 for advances
received in prior years. During the period ended February 14, 1999, the
Company advanced the officers, who were the only shareholders, an
additional $13,350 of which the officers repaid $1,292. As a result, the
officers owed the Company $26,686 at February 14, 1999, which was
reclassified as a distribution to shareholders and is included in the
accompanying financial statements in retained earnings. The officers
resigned on February 15, 1999.
On June 3, 1999 and February 14, 1999, the Company received $6,000 and
$8,059, respectively, for working capital in exchange for promissory notes
from Quest. The notes are unsecured, non-interest bearing and are due on
demand.
Note C: Property and equipment
- --------------------------------
Property and equipment consisted of the following at February 14, 1999:
Furniture and fixtures ............. $ 4,868
Equipment .......................... 13,209
--------
18,077
Less: accumulated depreciation ..... (5,907)
--------
$ 12,170
========
Depreciation expense totaled $3,308 and $3,459 for the period from July 1,
1998 through February 14, 1999 and for the year ended June 30, 1998,
respectively.
F-34
<PAGE>
WINGS ONLINE, INC.
------------------
Notes to Financial Statements
February 14, 1999
Note D: Year 2000 compliance
- ------------------------------
The Year 2000 issue (Y2K) is the result of computer programs written using
two digits rather than four to define the applicable year. Any of the
Company's computer and telecommunications programs that have date sensitive
software may recognize a date using "00" as the year 1900 instead of 2000.
This could result in system failure or miscalculations causing disruptions
in operations, including the ability to process transactions, send
invoices, or engage in similar normal business activities.
The Company cannot determine the extent to which the Company is vulnerable
to third parties' failure to remediate their own Y2K problems. As a result,
there can be no guarantee that the systems of other companies on which the
Company's business relies will be timely converted, or that failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would have a material adverse affect on the Company. In
view of the foregoing, there can be no assurance that the Y2K issue will
not have a material adverse effect on the Company's business.
F-35
<PAGE>
QUEST NET CORP
--------------
(A Development Stage Company)
INDEX
Page
----
Consolidated balance sheet as of December 31, 1999 (unaudited)............ F-37
Consolidated statements of operations,
for the six months ended December 31,
1999 (unaudited) and 1998 (unaudited),
and for the period from November 28, 1995
(inception) through December 31, 1999 (unaudited)....................... F-38
Consolidated statements of cash flows, for the
six months ended December 31, 1999 (unaudited) and 1998
(unaudited), and for the period from November 28, 1995
(inception) through December 31, 1999 (unaudited)....................... F-39
Notes to consolidated interim unaudited financial statements.............. F-40
F-36
<PAGE>
<TABLE>
QUEST NET CORP.
---------------
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
December 31, 1999
(Unaudited)
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash...................................................... $1,571,582
Accounts receivable, net of $867,842 allowance............ 22,311
Accounts receivable, related parties...................... -
Accounts receivable, other................................ 32,612
Marketable securities..................................... 82,252
Advances made to acquistion candidate..................... 100,000
Other current assets...................................... 69,261
----------
TOTAL CURRENT ASSETS ..................... 1,878,018
PROPERTY AND EQUIPMENT, net of
accumulated depreciation of $593,236 ..................... 1,954,070
PROPERTY NOT IN SERVICE .......................................... 345,000
INTANGIBLE ASSETS, net of
accumulated amortization of $138,208 ..................... 404,276
DEPOSITS.......................................................... 47,126
----------
$4,628,490
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 499,995
Accrued compensation...................................... 711,583
Accrued expenses.......................................... 25,519
Accrued payroll taxes..................................... 36,111
----------
TOTAL CURRENT LIABILITIES 1,273,208
==========
SHAREHOLDERS' EQUITY
Preferred stock, no par value; 5,000,000 shares authorized;
-0- shares issued and outstanding, respectively......... -
Common stock, no par value; 50,000,000 shares authorized;
22,217,022 shares issued and outstanding................ 14,063,296
47,000 outstanding common stock warrants................ 7,191
10,000 outstanding common stock options................. 25,800
Additional paid in capital................................ 341,700
Deficit accumulated during development stage.............. (11,082,705)
----------
TOTAL SHAREHOLDERS' EQUITY ............... 3,355,282
----------
$4,628,490
==========
The accompanying notes are an integral part of these statements
</TABLE>
F-37
<PAGE>
<TABLE>
QUEST NET CORP.
---------------
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
November 28,
1995
(inception)
For the Six Months Ended Through
December, December 31,
1999 1998 1999
(Unaudited) (Unaudited) (Unaudited)
----------- ----------- ------------
<S> <C> <C> <C>
REVENUES
Internet related services............................ $ 108,817 $ 69,416 $ 245,178
OTHER:
Bandwith sales..................................... - 396,000 396,000
Software sales and development..................... - 531,237 537,837
----------- ----------- ------------
TOTAL REVENUES ...................... 108,817 996,653 1,179,015
----------- ----------- ------------
COSTS AND EXPENSES
Cost of internet related services.................... 16,477 62,042 111,565
Cost of revenues - software sales and development.... - 600,000 600,000
Stock based compensation............................. 668,203 5,432,059 7,697,688
Bad debt expense..................................... - 867,667 893,095
Salaries and bonuses................................. 398,639 152,270 781,799
Consulting fees, related party....................... - 1,572 135,000
General and administrative........................... 694,054 144,779 1,301,379
Depreciation and amortization........................ 415,466 11,625 728,833
Loss on disposal of assets........................... - - 56,559
----------- ----------- ------------
TOTAL OPERATING EXPENSES............ 2,192,839 7,272,014 12,305,918
----------- ----------- ------------
OPERATING LOSS...................... (2,084,022) (6,275,361) (11,126,903)
NON-OPERATING INCOME (EXPENSE)
Interest expense..................................... (33,872) - (39,815)
Interest income...................................... 63,927 - 72,493
Unrealized loss on marketable securities............. (17,751) - (17,751)
Proceeds from settlement............................. 109,454 - 19,454
Other, net........................................... 9,817 - 9,817
----------- ----------- ------------
NET LOSS BEFORE INCOME TAXES........ (2,042,447) (6,275,361) (11,082,705)
INCOME TAXES............................................ - - -
----------- ----------- ------------
NET LOSS........................... $(2,042,447) $(6,275,361) $(11,082,705)
=========== =========== ============
NET LOSS PER SHARE:
Basic................................................ $(0.09) $(1.12)
=========== ===========
Diluted.............................................. $(0.09) $(1.12)
=========== ===========
SHARES USED FOR COMPUTING NET LOSS PER SHARE:
Basic................................................ 22,180,102 5,624,042
=========== ===========
Diluted.............................................. 22,180,102 5,624,042
=========== ===========
The accompanying notes are an integral part of these statements
</TABLE>
F-38
<PAGE>
<TABLE>
QUEST NET CORP.
---------------
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
November 28,
1995
(inception)
For the Six Months Ended Through
December 31, December 31,
1999 1998 1999
(Unaudited) (Unaudited) (Unaudited)
----------- ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................. $(2,042,447) $(6,273,789) $(11,082,705)
Transactions not requiring cash:
Depreciation and amortization...................... 423,832 11,625 737,199
Loss on disposal of assets......................... - - 56,559
Increase to allowance for doubtful accounts........ - 867,667 867,842
Non-cash software cost of revenues................. - 600,000 600,000
Stock based compensation expense................... 668,203 5,432,059 7,697,688
Unrealized loss on marketable securities........... 17,751 - 17,751
Changes in current assets and current liabilities:
Increase in receivables, prepaid expenses,
marketable securities and current deposits....... (181,672) (859,194) (1,092,029)
Increase/(decrease) in accounts payable and
accrued liabilities.............................. 327,191 52,063 453,428
----------- ----------- ------------
NET CASH (USED IN)
OPERATING ACTIVITIES................... (787,142) (169,569) (1,744,267)
----------- ----------- ------------
INVESTING ACTIVITIES
Equipment and leasehold purchases.................... (862,239) (71,852) (980,995)
Proceeds from sale of equipment...................... - - 2,100
Cash refunded/(paid for) non-current deposits........ 22,674 (32,047) (46,576)
Advances made to acquisition candidate............... (100,000) - (100,000)
Purchase of Wings Online, Inc,
net of $-0- cash received.......................... - - (135,000)
----------- ----------- ------------
NET CASH (USED IN)
INVESTING ACTIVITIES.................. (939,565) (103,899) (1,260,471)
----------- ----------- ------------
FINANCING ACTIVITIES
Capital contribution................................. - - 70
Sale of preferred stock.............................. - - 3,000
Sale of common stock and warrants.................... - 150,000 5,926,200
Redemption of preferred stock........................ (1,000,000) - (1,000,000)
Cash paid for offering costs......................... - (2,950) (352,950)
Proceeds from issuance of notes to related party..... - 213,140 214,900
Principal payments of related party notes............ - - (214,900)
----------- ----------- ------------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES.................. (1,000,000) 360,190 4,576,320
----------- ----------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS... (2,726,707) 86,722 1,571,582
Cash and cash equivalents, beginning................... 4,298,289 43 -
----------- ----------- ------------
CASH AND CASH EQUIVALENTS, ENDING $ 1,571,582 $ 86,765 $ 1,571,582
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest................................. $ 33,872 $ - $ 39,815
=========== =========== ============
Cash paid for income taxes............................. $ - $ - $ -
=========== =========== ============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
2,000,000 common shares issued for property............ $ - $ - $ 125,274
2,649,054 common shares issued for property............ $- $ 724,520 $ 1,031,520
160,000 preferred shares issued for
property and software................................ $- $ - $ 1,600,000
24,000 common shares issued for payment
of offering costs.................................... $- $ - $ 15,000
29,326 common shares issued in acquisiton of
Wings Online, Inc. .................................. $- $ - $ 200,000
The accompanying notes are an integral part of these statements
</TABLE>
F-39
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A: The Company
- --------------------
Quest Net Corp. (the "Company") was incorporated in the state of Colorado on
November 28, 1995 under the name 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 reincorporated in Florida in December 1998.
As shown in the accompanying financial statements, the Company incurred a net
loss of $2,042,447 for the six months ended December 31, 1999, 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 plans to commence significant operations during the next fiscal year,
reduce expenses resulting from stock based compensation and raise an additional
$5,000,000 in equity financing. The ability of the Company to continue as a
going concern is dependent on the success of these plans, and ultimately upon
achieving profitability. The financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.
Note B: Basis of presentation
- ------------------------------
Principles of Consolidation
- ---------------------------
The consolidated statements include the accounts of the Company and its
wholly-owned subsidiaries Wings Online, Inc., IP Quest Corp., Quest Wireless
Corp., Globalbot Corp., QuesTel Corp. and Quest Fiber Corp. All significant
intercompany accounts and transactions have been eliminated in consolidation.
F-40
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note B: Basis of presentation, continued
- -----------------------------------------
Interim Statements
- ------------------
The interim period financial statements presented herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. The
interim financial statements should be read in conjunction with the Company's
annual financial statements, notes and accounting policies thereto included in
the Company's Annual Report on Form SB-2 (or Form 10-SB) for the year ended June
30, 1999.
During the interim period the Company purchased marketable securities and has
adopted the following accounting policy:
Marketable securities consist of equity securities and are stated at
current market value. All equity securities are considered "trading"
securities under the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". Accordingly, unrealized gains and losses on equity
securities are reflected in the accompanying statements of operations.
The results of operations for the interim periods presented herein are not
necessarily indicative of the results that may be expected for future periods.
In the opinion of management, the unaudited interim financial statements
furnished reflect all adjustments necessary (which all are of a normal recurring
nature) for a fair presentation of the Company's financial condition as of
December 31, 1999, and the results of its operations and cash flows for the
interim periods ended December 31, 1999 and 1998 and for the period from
November 28, 1995 (inception) through December 31, 1999.
Note C: Shareholders' equity
- -----------------------------
The Company issued 160,022 shares of its common stock to certain officers
pursuant to employment agreements. The liability for the shares was recorded at
June 30, 1999 for a total of $1,037,015. Once the shares was issued the Company
reclassified the liability to common stock.
The Company issued 500 and 1,000 shares of its common stock to two individuals
for payment of consulting fees and settlement of a lease dispute, respectively.
The transactions were recorded at the market value of the Company's stock, $4.00
and accordingly charged $6,000 to operations. The Company also issued 10,000
shares to employees as bonus compensation and recorded a charge to operations
for $31,870.
F-41
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note C: Shareholders' equity, continued
- ----------------------------------------
During the six months ended December 31, 1999 the Company redeemed 100,000
shares of its outstanding preferred stock for $1,000,000. In consideration for
non-redemption by the date required in the preferred stock agreement, the
Company paid $33,872 in interest to the preferred shareholder.
Pursuant to a management agreement with the President of the Company, the
Company accrued a liability for 150,000 shares of the Company's restricted
common stock due to the Executive Chairman of the Board. The Company accrued the
150,000 shares at a rate of 25,000 shares per month in each of the six months
ended December 31, 1999. The total compensation expense of $500,000 was based on
the closing price of the company's common stock at the end of each of those six
months. The $500,000 is included in accrued compensation.
Pursuant to an employment agreement with a past President of the Company, the
Company accrued a liability for 50,000 shares of the Company's restricted common
stock due to the President who served in that capacity from October 11, 1999
through February 21, 2000. The Company accrued the 50,000 shares at a rate of
16,667 shares per month in each of the three months ended December 31, 1999. The
total compensation expense of $130,333 was based on the closing price of the
company's common stock at the end of each of those three months. The $130,333 is
included in accrued compensation.
Note D: Wings Online, Inc. ("Wings")
- -------------------------------------
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 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.
<TABLE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended June 30, 1999
<CAPTION>
Pro Forma
Quest Net Wings Adjustments Consolidated
----------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues ....................................... $ 996,653 $ 37,637 $ 1,034,290
Operating expenses ............................. (7,270,442) (24,206) (55,270) (7,349,918)
(Loss) income from operations .................. (6,273,789) 13,431 (55,270) (6,315,628)
Interest expense ............................... - (371) - (371)
Interest income ................................ - - - -
Net (loss) income .............................. (6,273,789) 13,060 (55,270) (6,315,999)
Net (loss) income per share-basic and diluted .. $ (1.12) $ 65.30 $ (1.12)
Basic and diluted shares outstanding ........... 5,624,042 200 29,126 5,653,168
</TABLE>
F-42
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note D: Wings Online, Inc. ("Wings"), continued
- ------------------------------------------------
The adjustments include the amortization expense resulting from the non-compete
agreement as if the agreement was amortized for the period presented, of $55,270
and the 29,326 (net of the 200 Wings shares) share increase to weighted shares
outstanding to give effect of the shares issued in the acquisition.
The pro forma condensed consolidated financial information do not show any
adjustments for a change in the income tax benefit as the total pro forma
consolidated benefit for income taxes would be offset by any valuation allowance
due to any deferred tax asset derived from net operating losses. The valuation
allowance offsets the net deferred tax asset for which there is no assurance of
recovery.
Note E: Income taxes
- ---------------------
The Company records its income taxes in accordance with Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes". The Company incurred
net operating losses during the six months ended December 31, 1999 resulting in
a deferred tax asset, which was fully allowed for, therefore the net benefit and
expense result in $0 income taxes.
Note F: Property and equipment
- -------------------------------
As discussed in Note A herein, the Company has not yet fully commenced planned
operations. The cost of equipment not being used at June 30, 1999 was $434,144.
During the six months ended December 31, 1999 the Company placed into service
$89,144 of its idle equipment. The equipment placed in service was the equipment
purchased from AVX Communications. The Company has not recorded any depreciation
expense related to the remaining $345,000 of unused equipment. Management
expects the equipment to be placed in service during the Company's next fiscal
year.
During the six months ended December 31, 1999 the Company purchased equipment
for its wireless services totaling $595,905. The equipment was placed in service
during the period. In accordance with the vendor supplying the equipment to the
Company, the Company pays for equipment delivered and installed. The total
anticipated purchases for wireless equipment from the vendor is approximately $2
million. At December 31, 1999 the Company has recorded a payable due to the
vendor for approximately $370,300 for equipment received and placed in service.
F-43
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note G: Contingencies
- ----------------------
On August 19, 1999 the Company entered into a settlement agreement with PSINet,
Inc. whereby PSINet agreed to pay the Company $19,454 and also assign a
receivable due from Pact to the Company. The Company recorded the $19,454 as
settlement proceeds, a non-operating income account. Further the Company did not
record the amount of the receivable due from Pact as the Company as collection
of the receivable is not certain.
Note H: Quest S.A.
- -------------------
On November 23, 1999 the Company entered into a Stock Purchase Agreement with
Africainternet Corp whereby the Company would purchase 49% of the outstanding
stock of Africainternet in exchange for $4 million dollars comprising of
$200,000 cash and $3.8 million of the Company's common stock. On November 23,
1999 the Company paid $100,000 as required by the agreement. On March 5, 2000
both parties rescinded the Stock Purchase Agreement and returned to each party
all consideration exchanged except for $100,000 that the Company had paid to
Africainternet. The $100,000 was consideration for the rescission of the
agreement. In January 1999 the Company had paid the remaining $100,000 to
Africainternet as required by the agreement. Upon rescission, Africainternet
issued the Company a note for the repayment of the $100,000.
Note I: Subsequent events
- --------------------------
Stock option awards
The Executive Chairman of the Board, who is also a former president of the
Company has a bonus plan arrangement whereby he receives options, exercisable at
$.012 per share, for total shares representing every $100 of increase in total
earning assets. On February 23, 2000 the board of directors determined that the
increase in total earning assets, since the grant of the last bonus based on
this arrangement, was $6,835,000. The 68,350 options were granted on February
23, 2000 when the price of the Company's common stock was $1.87. The Company
plans to record stock compensation expense of $127,815, and a corresponding
entry to outstanding stock options.
F-44
<PAGE>
QUEST NET CORP.
---------------
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note I: Subsequent events, continued
- -------------------------------------
Changes in executive management
On February 21, 2000, R. Delmedico the President of the Company since October
11, 1999 was terminated. As part of the termination agreement, Ms. Delmico
received $50,000 and the right to collect 50,000 shares of the Company's common
stock which the Company had accrued over the three months ended December 31,
1999. Mr. Pereira replaced Ms. Delmedico.
On March 1, 2000 Mr. Pereira resigned as President of the Company however, Mr.
Pereira retained his position as Executive Chairman of the Board, including the
rights assigned to him from his employment contract dated March 20, 1998.
Acquisition of CWTEL, Inc.
On February 25, 2000 the Company entered into a Stock Purchase Agreement with
CWTEL, Inc. whereby the Company would purchase all of the outstanding common
shares of CWTEL, Inc. in exchange for $1.2 million. The consideration would be
comprised of $500,000, of which $300,000 is to be guaranteed by the issuance of
30,000 shares of the Company's $10.00 stated value preferred stock, and
restricted common stock valued at $700,000.
Concurrent with the agreement, the sole shareholder of CWTEL, Inc. became the
President of the Company. The new President of the Company entered into an
employment agreement with the Company, whereby the new President would receive a
five-year contract commencing April 1,2000. Upon signing the agreement, the new
President received 1,000,000 options to purchase the Company's common stock
which vest at the rate of 50,000 shares every six months and 50,000 shares for
each time the Company's two- month sustained revenue is increased by $1,000,000.
Upon signing, the new President also received a stock grant of 50,000 shares of
the Company's common stock.
F-45
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 1999, AND THE UNAUDITED
FINANCIAL STATEMENTS FOR THE SIX MONTH PERIOD ENDED DECEMBER 31, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-2000
<PERIOD-END> JUN-30-1999 DEC-31-1999
<CASH> 4,298,289 1,571,582
<SECURITIES> 0 0
<RECEIVABLES> 881,202 922,765
<ALLOWANCES> 867,842 867,842
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,340,804 1,878,018
<PP&E> 1,329,364 1,954,070
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 6,675,143 4,628,490
<CURRENT-LIABILITIES> 1,352,699 1,273,208
<BONDS> 0 0
0 0
1,000,000 0
<COMMON> 12,988,011 14,063,296
<OTHER-SE> (8,698,558) (10,741,005)
<TOTAL-LIABILITY-AND-EQUITY> 6,675,143 4,628,490
<SALES> 1,070,198 108,817
<TOTAL-REVENUES> 1,070,198 108,817
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 10,105,615 2,192,839
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5,943 33,872
<INCOME-PRETAX> (9,032,794) (2,042,447)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (9,032,794) (2,042,447)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (9,032,794) (2,042,447)
<EPS-BASIC> (0.68) (0.09)
<EPS-DILUTED> (0.68) (0.09)
</TABLE>
