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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-KSB (Mark One) [X]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 
 [   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period
 to Commission file number 0-27751 WORLDQUEST NETWORKS, INC.  Delaware
    
    75-2838415(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)14911 Quorum Drive, Suite 140, Dallas, Texas
    
    75254(Address of principal executive offices)
    
    (Zip Code)
 Issuers telephone number, including area code: (972) 361-1980 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months
(or for such shorter period that the issuer was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES [X] NO [  ] Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and none will be contained, to the best of
registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X] The issuers revenues for its most recent fiscal year were: $9,915,354. The aggregate market value of the voting common stock held by non-affiliates of
the issuer, based on the closing sales price of $3.20 per share, was $9,818,070
as of December 31, 2003. At January 31, 2004, the registrant had outstanding 6,420,599 shares of par
value $.01 common stock. DOCUMENTS INCORPORATED BY REFERENCE Part III of this Annual Report on Form 10-KSB incorporates certain information
by reference from the definitive Proxy Statement for the registrants 2004
Annual Meeting of Stockholders. Transitional Small Business Disclosure Format (check one): Yes [  ]      No      [X] 1




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TABLE OF CONTENTS PART IITEM 1.
    
    DESCRIPTION OF BUSINESS
    
    
    3ITEM 2.
    
    DESCRIPTION OF PROPERTY
    
    
    14ITEM 3.
    
    LEGAL PROCEEDINGS
    
    
    14ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    14PART IIITEM 5.
    
    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
    
    
    15ITEM 6.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
    
    
    16ITEM 7.
    
    FINANCIAL STATEMENTS
    
    
    30ITEM 8.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    30ITEM 8A.
    
    CONTROLS AND PROCEDURES
    
    
    30PART IIIITEM 9.
    
    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
    
    
    31ITEM 10.
    
    EXECUTIVE COMPENSATION
    
    
    31ITEM 11.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
    
    
    31ITEM 12.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    31ITEM 13.
    
    EXHIBITS AND REPORTS ON FORM 8-K
    
    
    32ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    33List of SubsidiariesConsent of Grant Thornton LLPCertification of the Company's CEO - Section 302Certification of the Company's CFO - Section 302Certification of the Company's CEO - Section 906Certification of the Company's CFO - Section 906
  2




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WORLDQUEST NETWORKS, INC. 
 PART I 
 ITEM 1. DESCRIPTION OF BUSINESS Forward Looking Statements This Form 10-KSB includes certain statements that are not historical facts
and are deemed to be forward looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934. See Item 6  Managements
Discussion and Analysis of Financial Condition or Plan of Operation  Forward
Looking Statements for a further discussion of these forward looking
statements. General We are an international Internet telephony and money transfer company.
Our customers utilize our networks of Internet gateways and other traditional
networks to place long-distance calls online at discounted rates. We also sell
virtual calling cards processed through other companies platforms and from
time to time we sell our excess capacity to other long distance carriers.
Through our wholly-owned subsidiary, buyindiaonline.com, Inc. (known as
Cash2India), we also provide a web service that enables customers to send money
and a personalized message from the United States to friends, family, or others
in India, Sri Lanka, Russia and The Philippines over our Web and telephony
network. All of our calls are made from phone-to-phone over our networks. The voice
quality of our Internet carried calls is virtually the same as an international
telephone call carried over a traditional telephone line. We focus on the
international long distance market, with particular emphasis on the calling
patterns between the United States and various countries. Our virtual calling
cards may be used to call from the United States to other countries, to call
from other countries to the United States, or to call between countries outside
the United States. A substantial portion of our revenues is derived from the
sale of virtual prepaid phone service to customers calling from the United
States to India. In 2002, we began selling the WorldQuest CashCard, a multi-purpose
stored-value card, and in 2003 we added the ability for customers to upgrade
their WorldQuest CashCard to a WorldQuest prepaid VISA®. The WorldQuest
CashCard and VISA® CashCard, can be used to withdraw money or check balances at
ATMs worldwide and to pay for merchandise at any location associated with the
Plus®, Pulse® or Star® Networks. The WorldQuest VISA® CashCard can be used
anywhere VISA® is accepted. Card holders can add money to their card via the
direct deposit of their paychecks, by cashing their paychecks, by ACH transfer
and by using cash, credit cards, or electronic checks. In addition, the
CashCards also serve as a prepaid long-distance calling card, which operates
using our telecom infrastructure. As of December 31, 2003, we have issued over
2,500 stored value cards. As of December 31, 2003, Eagle Venture Capital, LLC owned approximately
2.6 million, 41%, of our outstanding shares of common stock. Eagle Venture
Capital, LLC is primarily owned by our founder and Chairman of the Board. Merger Agreement with Ntera Holdings On March 16, 2004, the Company entered into an Agreement and Plan of
Merger with Ntera Holdings, Inc., a Delaware corporation (Ntera), providing
for transactions that, once completed, will result in a change of control of
WorldQuest. Under the terms of the Merger Agreement, Ntera will be merged with
and into WorldQuest, with WorldQuest as the surviving company (the Merger).
Stockholders of Ntera at the effective time of the Merger will be entitled to
receive 80% of the common stock of the combined company, with existing
WorldQuest stockholders owning the remaining 20%. The Merger has been
unanimously approved by the Boards of Directors of both WorldQuest and Ntera,
and is subject to various conditions to closing, including approval by the
holders of not less than a majority of WorldQuests outstanding common stock,
approval of continued listing of
WorldQuests common stock on the Nasdaq Stock Market, completion of
audited financial statements for Nteras fiscal year ended December 31, 2003,
receipt of a bring-down of the fairness opinion rendered to the Board of
Directors of 3




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WorldQuest, WorldQuests approval of Nteras financial performance
and certain other conditions. (See ITEM 6. Managements Discussion and
Analysis or Plan of Operations). In connection with the merger agreement, WorldQuest has also extended to
Ntera a bridge loan in the principal amount of $2 million. If the merger
agreement is terminated for any reason, the full amount of the loan will become
due and payable within six months of such termination. Ntera and certain of
its subsidiaries have granted WorldQuest a security interest in their assets to
secure repayment of the loan. The details of the transaction are discussed in WorldQuests Current
Report on Form 8-K, filed with the Securities and Exchange Commission (the
SEC) on March 17, 2004, as amended by the Form 8-K/A file with the SEC on
March 19, 2004. WorldQuest expects to file with the SEC a preliminary proxy
statement on Schedule 14A with the respect to the transactions as soon as
practicable upon completion of the audit of Nteras 2003 financial statements. Industry Background Emergence of Internet Telephony.Internet telephony or Voice over
Internet protocol (VoIP) has emerged as a low cost alternative to traditional
long distance telephony. With VoIP, voice calls are instantly transformed
from analog to a digital signal and transmitted via the Internet to any
telephone in the world. Once a call reaches its destination, the data is
transformed back into analog voice format and forwarded to the recipient via
the public switched telephone network. Routing calls over the Internet is more
cost-effective than routing calls over traditional circuit-switched networks,
because the packet-switching technology that enables Internet telephony is more
efficient than traditional circuit-switched voice technology. Packet-based
networks, unlike circuit-based networks, do not require a fixed amount of
bandwidth to be reserved for each call. This allows voice and data calls to be
pooled, which means that packet networks can carry more calls with the same
amount of bandwidth. This greater efficiency creates network cost savings that
can be passed on to the consumer in the form of lower long distance rates.
Also, the use of the Internet bypasses a significant portion of international
long distance networks and the relevant tariffs. Emergence of Prepaid Calling Card Industry.International Data
Corporation estimates the total number of United States households using
prepaid calling cards will grow from 29.8 million to 49.3 million in 2005.
Furthermore, it estimates that the market for prepaid calling cards will expand
from $3.4 billion to $5.3 billion at the end of 2005. This growth is
attributed to three trends according to industry sources. First, the larger
telecommunications companies have come to understand the strategic and
financial benefits of prepaid calling cards. Second, consumers are becoming
more aware of various advantages of prepaid cards. Third, businesses are
beginning to purchase prepaid cards as a means of controlling telephony costs
and simplifying record keeping. We believe that the affordable pricing,
convenience and enhanced features of prepaid calling cards has attracted price
sensitive customers, business travelers, international callers and other users
of long distance service. Also, while prepaid calling cards are relatively new
in the United States, they have been a widely used and accepted method of
making telephone calls in Europe and Asia since the 1970s. Our Telephony Service Products Virtual Prepaid Calling Cards.We sell virtual prepaid calling cards over
the Internet. They are virtual because we do not issue a physical card. Our
virtual calling cards give us the flexibility of promptly changing the rates
and features to respond to changing consumer demand, rather than having an
inventory of physical cards with set features that cannot be changed until all
are recalled or used. This also allows us to offer and test several different
types of virtual calling cards with varying pricing features, thus providing a
greater selection to our customers. Our system functions as follows: A potential customer accesses our Web
site, follows the prompts to enter their credit card information to purchase
the virtual calling card, we verify the credit card within seconds, and we
electronically issue a personal identification number, or PIN, and a toll free
number to the customer when the
electronic purchase transaction is completed. Once sold, the virtual calling
card can be used immediately to make international and domestic long distance
calls. The customer uses a touch-tone telephone to dial the toll free number
and enters the PIN and the telephone number the customer seeks to reach. Our
enhanced services platform determines whether the virtual calling card is valid
and the number of call minutes remaining on it, based on the rate 4




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for the
country being called. The platform completes the call and reduces the available
credit balance on the virtual calling card at the conclusion of the call.
Historically, substantially all of the minutes purchased on our virtual calling
cards have been used within 45 days of purchase. As of December 31, 2003 we
had approximately 26,000 virtual calling cards in use. We believe this rapid
use and the convenience of our Web site and our buy it now, use it now
capability fosters repeat purchases and repeat customers. Our Web sites are accessible 24 hours per day, seven days a week, so we
are not constrained by the hours a retail store would be open for business. Our
Web sites may also be reached from the customers home or office. The customer
is not required to physically travel to another location to make a purchase and
receive delivery. Our online purchasing and delivery also allows us to deliver
a broad selection of products to customers worldwide in rural or other
locations that do not have convenient access to physical stores. Our Web sites
include the following: Web Site Address
    
    Web Site Descriptionwww.wqn.com
    
    Corporate Web site; focused on India, Sri
Lanka and Pakistan marketswww.supertel.com
    
    Focused on Iranian marketwww.metrotelcom.net
    
    Focused on Iranian marketwww.rocketmobile.net
    
    International calling for cell phone userswww.wqn.com/connectdirect
    
    Provides personal 1-800 serviceswww.wqnconnect.com
    
    Prepaid Internet serviceswww.wqnroadside.com
    
    Prepaid roadside assistancewww.wqnwirless.com
    
    Prepaid wireless plans
 In 2002, we added our Automatic Number Identification (ANI) and recharge
feature to our virtual calling cards and plans. After the product is initially
purchased from our Web site, the customer dials our toll-free number and enters
the telephone number they seek to reach; they do not have to enter a PIN. Our
system reads the incoming telephone number, looks up a database of numbers,
searches and retrieves a customers database file, authorizes the customer to
use our network and delivers the call. This feature eliminates the exchange
and entering of the PIN thereby saving 20 to 30 seconds per call. Customers
can also recharge their prepaid balance without having to return to our Web
site. When their balance runs low, our Interactive Voice Response (IVR) system
prompts the customer to add more calling time which is then processed from the
customers credit card on record. The customer can also recharge prior to
the IVR prompt at anytime. We estimate that as of December 31, 2003, 65% of
our total virtual calling card and plan sales are recharge customers. By continuing to add functionality and quality to our service, such as ANI
recognition and recharge, we believe our customers will be willing to pay a
reasonable premium because our services are more reliable, easier to use and
more feature rich than competitive services. In 2003, we introduced the
ability for customers to see their call detail records and account history
on-line and we added direct mobile access to our network for our cell phone
users which lowers the cost per minute they pay to call foreign destinations. Access.Customers can access our network from the United States and
Canada to call more than 241 countries and territories. When using the a
virtual calling card or plan for a call from the United States or Canada to
another country, the customer uses a touch tone telephone to dial a toll free
number and enters the PIN and the telephone number the customer seeks to reach.
When calling from outside the United States or Canada, the customer initiates
the call through the Internet by accessing our Web site and going to the world
access page on their WebOrganizer. On the world access page, a virtual card is
displayed and the customer enters the telephone number where he or she is, the
telephone number he or she wants to call and his or her PIN and then clicks
on the call button. This information is transmitted over the Internet to our
platform. The platform determines the virtual calling card is valid and has a
sufficient balance and then routes a call to the customer at the number where
he or she is. When the customer answers, the platform completes the call by
connecting to the number the
customer wanted to call. From their WebOrganizer, these features allow
customers to make calls from anywhere in the world at our international United
States long distance rates using the virtual calling card and Internet access
to our Web site and platform. Resale of Virtual Calling Cards.We also buy virtual calling cards
processed through other companies platforms including prepaid Internet,
wireless and roadside assistance. We buy them at a discount and sell them to 5




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our customers on our Web site as our virtual cards. We sell these virtual cards
for calls from the United States to other countries where we have not
established our own Internet network and where our negotiated rates with our
international long distance carriers are not as favorable and to offer other
telecom products and services not available on our platform, such as prepaid
Internet and roadside assistance. We estimate that less than 1% and 34%,
respectively, of our revenues for the fiscal years ended December 31, 2003 and
2002 were generated from these virtual calling cards processed through other
companies platforms. Resale of Network Capacity.From time to time we sell our excess network
capacity to other long distance carriers. For the years ended December 31,
2003 and 2002, approximately 2% and 0%, respectively, of our total revenues
were generated from selling our excess network capacity. Our International Telephony Networks Our Enhanced Services Platform.Our enhanced services platform is a
specialized telephone switch and software. It is connected to our Web sites and
databases and to our network of outgoing and incoming telephone lines and
Internet lines. It sets up all customer account and PIN information when a
virtual calling card is purchased and immediately activates the virtual calling
card so it can be used at the time of purchase. The platform also accepts and
evaluates all calls from virtual calling card holders over the toll free number
and over the Internet and confirms the validity of the virtual calling card and
remaining balance. We have also programmed into the platform a lowest cost
routing matrix. This matrix automatically routes each call over the route most
economical to us. This means it will select our international carrier with the
lowest rate or the Internet if we have a gateway in the call destination
country. Focusing on the international market, the use of our platform is
spread throughout the day as a result of the different world time zones. We plan to develop and offer new products and services, which may require
modifications and enhancements to our platform. For any modification or
enhancement, we will either contract with the manufacturer to develop new
software, develop the software ourselves, or a combination of both. In the
past, we have experienced delays when we have tried to upgrade our platform. If
the software cannot be developed cost effectively, or there will be significant
delays, we may elect to abandon a potential product or service in favor of one
that can be timely developed on a cost effective basis. There can be no
assurance that we can successfully develop the software to enable us to offer
new products or services. Our Internet Gateway Network.As of December 31, 2003, we had
international gateways operational in India, Sri Lanka, Canada and a domestic
gateway operational in Dallas, Texas. Our Internet gateways enable us to route
voice quality calls through our enhanced services platform to and from the
country via the public Internet or private intranet networks such as a frame
relay network. The cost of these calls is based on the local telephone rates
for the country where the gateway is located. The cost is not based on
international or local long distance rates. Before we place a gateway in
another country, we enter into contractual relationships with local persons or
entities to operate them. We typically own or lease the gateway or have the
right to purchase it and the local person or entity is responsible for
procuring local Internet provider connection and local telephone lines and
complying with local law. We pay the local person or entity a negotiated rate
per minute for terminating or originating calls through the gateway. The historical poor sound quality of Internet voice transmission is due to
the Internet not being created for simultaneous voice traffic. Unlike
conventional voice communication circuits, in which the entire circuit is
reserved for a call, Internet telephony uses packet switching technology, in
which voice data is divided into discrete packets that are transmitted over the
Internet. These packets must travel through several routers in order to reach
their destination, which may cause misrouting and delays in transmission and
reception. The software in our
gateways connect the packet switched data transmitted over the Internet to
circuit switched public telephone networks in such a manner that virtually
eliminates the delay in transmission normally involved in Internet voice
transmission and the resulting pause and echo effect. We also select Internet
service providers with Internet connections that permit us to limit the delay
between their Internet connections and ours to less than 200 to 400
milliseconds. This also improves the voice quality of our transmissions over
the Internet. 6




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Our Leased Lines Network.We also lease international telephone lines to
transmit calls. Our lease agreements obligate the carriers to terminate calls
routed by us to them at different rates for different countries and
territories. With these agreements, we have access to more than 241 countries
and territories. Leased capacity is typically obtained on a per-minute basis.
Our agreements are typically one-year agreements with 30-day cancellation
rights by either party. Rates are adjusted approximately every 30 days, are
based on volume and generally decline as volume increases. We are dependent on
these carriers to terminate our calls, and the loss of one or more of them as a
source for terminating calls could have a material adverse affect on us.
However, we believe there are numerous international long distance carriers
that transport calls to the countries we desire to target and we believe we
could replace any of the carriers we lost. If the rates of any replacement
carrier are higher, or our existing carriers raise their rates, our profit
margins would decrease. We also sell to other long distance carriers any excess
line capacity we have. Excess line capacity is the remaining capacity on our
telephone lines not used by us to terminate our own calls during any given
month. Our Third Party Contracts.Our success depends, in part, on our ability
to continue to lease long distance telephone capacity from third parties at
cost-effective rates to serve the foreign countries we target. It also depends,
in part, on our ability to maintain our contractual relationships with local
terminating parties in those countries where we have Internet gateways. If we
lose our leases or contracts or if these parties are unable to provide these
services, we believe we could replace them. However, it would cause a
disruption of our business until they are replaced. Also, any replacement
leases or contracts may not be at rates or on terms as favorable to us. Our Telephony Technology We use a combination of our own proprietary software applications and
commercially available licensed technology to conduct our Internet and
telephone routing operations. Proprietary Technology.We have developed proprietary customer software
which permits a customer to purchase a virtual calling card on our Web site
using a credit card and to have the virtual calling card delivered while on our
Web site. We have also developed proprietary customer software to allow our
world access virtual calling cards and phone collect PINs to initiate calls
through regular telephone lines using our Web site and enhanced services
platform, and we have developed various proprietary credit and fraud management
applications which aid us in checking credit and limiting fraudulent
transactions. Our engineering staff consists of software development engineers and
consultants. We historically have developed and expect to continue to develop
proprietary software internally. Our engineering strategy focuses on the
development of our Web sites, which includes the enhancement of features and
functionality of our existing software components, the development of
additional new software components, and the integration of off-the-shelf
components into our systems. Commercially Available Licensed Technology.Our strategy has also been
to license commercially available technology whenever possible rather than seek
a custom-made or internally developed solution. We believe that this strategy
enables us to reduce our operating costs and to respond to changing demands due
to growth and technological shifts. This strategy also allows us to focus our
development efforts on creating and enhancing the specialized, proprietary
software applications that are unique to our business. Listed below are some of
our key architectural components:  
    
    High speed links to the Internet through Tier 1 carrier backbones;
    
    Dell clustered Servers for Web and data base applications running
Windows NT, Windows 2000 and Microsoft SQL Server 7.0;
    
    Microsoft Internet Information Server 4.0 has been chosen for its
ability to secure sensitive customer information through SSL
encryption; and 7




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
    
    Microsoft SQL Server 7.0 is a relational database within which all
customer names and addresses, PINs, number of purchases and call
records are stored. We depend on Internet service providers to provide Internet access to us
and our customers. As of December 31, 2003, we had two Internet service
providers in Dallas. Our local terminating parties in foreign countries also
rely on local Internet service providers for access to the Internet in their
countries. If we lost our connection with both of our Dallas Internet service
providers, we could not sell our virtual calling cards through our Web sites,
and Web initiated calls could not be made by our customers, until the
connection was reestablished. If a local terminating party in a foreign country
loses its Internet connection, we could not route calls over the Internet to
that destination until the connection was re-established. These failures could
cause us to lose customers and our ability to sell virtual calling cards and
telephone services would be affected. Our Cash2India Services Cash2India is a web-based company that enables consumers to send money and
a personalized message from the United States to friends, family or others in
India, Sri Lanka, Russia and The Philippines. Cash2India has a strategic
relationship with The Punjab National Bank, the second largest bank in India
with more than 2,000 branches, approval from the Reserve Bank of India, a
sophisticated on-line customer sales process, and a streamlined, efficient
local delivery system that allows delivery of funds from the United States to
someone in India, Sri Lanka, Russia, and The Philippines within 48 hours. To transfer funds, customer accesses Cash2Indias Web site, enters the
recipients name and a personalized message along with a designated major
credit card or electronic check for payment of funds. Upon credit card and
electronic check authorization, funds are wired to India and delivered by local
courier to the designated recipient using the Indian banks network. With
every transfer, customers also receive a free 10-minute calling card which
works on our telecom network. Customers can transfer up to $2,500 per
transaction and are allowed twelve transactions per year to India to the same
recipient and unlimited elsewhere. Cash2India receives revenue as a percentage
of the funds transferred. Cash2India has approximately 15,000 customers and
approximately $1.5 million was transferred in December 2003 using the
Cash2India service. Cash2Indias services are aimed primarily at over 2 million people of
Indian origin who live or work in the United States but maintain strong
cultural and financial relationships with friends and families in India.
According to the Reserve Bank of India, more than 40% of the $12 billion
remitted to India during the year 2000 came from North America. Our WorldQuest CashCard Product In 2002, we began selling the WorldQuest CashCard, a multi-purpose
stored-value card, and in 2003 we added the ability for customers to upgrade
their WorldQuest CashCard to a WorldQuest prepaid VISA®. The WorldQuest
CashCard and VISA® CashCard, can be used to withdraw money or check balances at
ATMs worldwide and to pay for merchandise at any location associated with the
Plus®, Pulse® or Star® Networks. The WorldQuest VISA® CashCard can be used
anywhere VISA® is accepted. Card holders can add money to their card via the
direct deposit of their paychecks, by cashing their paychecks, by ACH transfer
and by using cash, credit cards, or electronic checks. CashCard holders can
also check their balances and transfer money from one CashCard to another
through our automated voice response unit, the secure CashCard Web site, or by
calling customer service. The CashCards also serve as a prepaid long-distance
calling card, which operates using our telecom network and infrastructure. As
of December 31, 2003, we have issued over 2,500 stored value cards. Target customers include unbanked consumers, money transfer consumers
who want a less expensive way to send money, travelers who want to avoid
carrying cash but still have access to their funds and parents who want to give
their children access to a pre-set amount of money without having their
children carry cash or credit cards. The card compliments our telecom and
money transfer businesses by leveraging the infrastructure and networks of
these businesses. By selling the CashCard through traditional brick and mortar
locations, we gain access to a retail distribution channel that has the
potential to expand our core Internet-based calling card and money transfer
business. 8




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Credit Card Processing Arrangements All sales of our virtual calling cards and PIN based products are made
over the Internet through credit card purchases. Cash2India money transfers
are made over the Internet through credit cards purchases and e-checks or ACH
drafts. We use processing companies to verify credit cards and e-checks. These
companies are connected to our platform and database and verification or denial
is usually accomplished within seconds. We pay these processing companies a
percentage of sales as their fee for credit card transactions and a fixed fee
per transaction for e-checks. Sales and Marketing We have developed a marketing strategy focused on increasing customer
traffic to our Web site. Internet Advertising.We have taken a selective approach in our
advertising strategy. We attempt to maximize the return from promotional
expenditures by choosing advertising media based on the cost relative to the
likely audience and ability to generate increased traffic for our Web sites. We
generally identify a country and customer group to whom we desire to market our
telecom, money transfer and other products and services. We place
advertisements on various Web sites and Internet portals frequently visited by
this customer group in the United States and abroad. These advertisements
usually take the form of banner ads that encourage readers to click through
directly to our Web sites. We believe banner advertising on these Web sites
and portals significantly increase our targeted exposure to prospective
customers. Customer Electronic Mail Broadcasts.We actively market to our base of
customers through e-mail broadcasts. All new virtual calling card, money
transfer and other purchasers are automatically added to our electronic mailing
list. We e-mail messages to our customers on a periodic basis announcing new
rates, new countries, new products and new features. Our customer database
allows us to introduce new products and services, such as our Cash2India
service, to a targeted audience without the significant customer acquisition
costs normally associated with introducing new products or services. Electronic Mail to Select Mailing Lists.We also deliver e-mail
broadcasts to certain select mailing lists from time to time announcing
pertinent information, including the addition of a new country, new products
and rates. Other Methods.During 2003, we placed advertisements in certain Indian
foreign national based periodicals and cable television channels to market our
Cash2India service and our telecom products. We will continue to use these
methods during 2004, as we deem necessary. We will continually review other
potential cost-effective methods of advertising and marketing our products and
services through the Internet and other channels. Such methods may include the
use of an affiliate program, chat rooms, video e-mail, ethnic movie houses,
ethnic cable television and other methods. Customer Support and Service We believe our ability to establish and maintain long-term relationships
with our customers and encourage repeat purchases is dependent, in part, on the
strength of our customer support and service operations and staff. Our
telephony products come with a 100% satisfaction guarantee. If a customer is
unhappy with their
service, we will refund the remaining balance on their virtual calling card and
or plan. Our primary customer support team in Dallas, Texas provides email and
telephone customer support. Our Dallas based service personnel are available
from 8:00 a.m. to 9:00 p.m. Central time, Monday through Friday, and from 8:00
a.m. to 2:00 p.m. Central time on Saturday and Sunday to provide assistance via
email or telephone. Also, our outsourced New Delhi, India customer service
team answers emails during the off hours. We estimate we resolve 85% of all
email inquiries within 24 hours and that on average, we respond to customer
calls within 60 seconds. Our Web site has been designed around industry standard architectures to
reduce downtime in the event of outages or catastrophic occurrences. Our Web
site provides 24 hours a day, seven-days week availability. Our Web site
operations staff consists of systems administrators who manage, monitor and
operate our Web site. The 9




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continued uninterrupted operation of our Web site is
essential to our business, and it is the job of the site operations staff to
ensure, to the greatest extent possible, the reliability of our Web site. Our
network is built around a redundant, high availability backbone. In order to
achieve maximum redundancy, our network has several connections to the
Internet. We believe these telecommunications and Internet service facilities
are essential to our operation and we anticipate upgrading these facilities as
volume and demand for our services grow. Government Regulation Regulation of the Internet.The United States Congress and the Federal
courts have adopted legislation that regulates certain aspects of the Internet,
including online content, user privacy, taxation, liability for third-party
activities, and jurisdiction. In addition, a number of initiatives pending in
Congress and state legislatures would prohibit or restrict advertising of or
sale of certain products and services on the Internet, which may have the
effect of raising the cost of doing business generally on the Internet. The
European Union has also enacted several directives relating to the Internet,
one of which addresses online commerce. In addition, federal, state, local and
foreign governmental organizations are considering other legislative and
regulatory proposals that would regulate the Internet. Increased regulation of
the Internet may decrease growth, which may negatively impact the cost of doing
business via the Internet or otherwise materially adversely affect our
business, financial condition, and results of operation. Potential Regulation of Internet Telephony.To our knowledge, there are
currently no domestic and few international laws or regulations that prohibit
the transmission of voice communications over the Internet. If Congress, the
FCC, state regulatory agencies or governments of other countries impose
substantial regulations relating to Internet telephony, the growth of our
business could be adversely affected. In the United States, several efforts
have been made to enact federal legislation that would either regulate or
exempt from regulation telecommunication services provided over the Internet.
State public utility commissions may also attempt to regulate the provision of
intrastate Internet telephony services. However, the FCC has issued two
decisions that suggest that all transmissions over the Internet may be
jurisdictionally interstate, and these decisions may restrict the ability of
state public utility commissions to regulate Internet telephony. Recently,
however, a Colorado court ruled that Internet telephony companies would be
subject to payment of originating and terminating access charges to the
incumbent provider. Imposition of such charges on our services would increase
our costs. Internationally, a number of countries that currently prohibit
competition in the provision of voice telephony have also prohibited Internet
telephony. Other countries permit but regulate Internet telephony. On April 10, 1998, the FCC issued a Report to Congress concerning its
implementation of the universal service provisions of the Telecommunications
Act. In the Report, the FCC indicated that it would examine the question of
whether any forms of phone-to-phone Internet Protocol telephony are
information services, which are unregulated, or telecommunications services,
which are fully regulated. The Report noted that the FCC did not have, as of
the date of the Report, an adequate record on which to make any definitive
pronouncements. The FCC did, however, note that the record before it suggested
that some forms of phone-to-phone Internet telephony appear to have the same
functionality as non-Internet Protocol telecommunications services. While the FCC found that it needed a more complete record to establish new
rules, it tentatively concluded that providers of phone-to-phone Internet
telephony services should be treated like other providers of telephone service.
This means they should be required to make payments into Federal universal
service subsidy programs. To
date, the FCC has taken no further action, and has not imposed this obligation
on Internet telephony providers. It may do so at some time in the future,
however, and such a decision could have a material adverse effect on our
business, increasing our costs, and the price at which we can offer our
Internet telephony services. There are several proceedings pending before the FCC that may affect the
regulatory status of Internet telephony. On October 18, 2002, AT&T filed a
petition with the FCC seeking a declaratory ruling that would prevent incumbent
local exchange carriers, or ILECs, from imposing traditional circuit-switched
access charges on phone-to-phone IP services. On February 5, 2003, pulver.com
filed a petition with the FCC seeking a declaratory ruling that its Free World
Dialup, which facilitates point-to-point broadband Internet protocol voice
communications, is neither telecommunications nor a telecommunications service
as these terms are defined in section 153 of the Telecommunications Act of
1996. Vonage has filed a petition for declaratory ruling requesting that the
FCC find an 10




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Order of the Minnesota Public Utilities Commission (MNPUC)
requiring Vonage to comply with state laws governing providers of traditional
telephone service to be preempted because Vonages broadband Internet telephony
service is an information service. These petitions and subsequent industry
reactions may exert pressure on the FCC to render a decision regarding the
regulation of phone-to-phone IP services. The FCC could determine that certain
types of Internet telephony should be regulated like basic interstate
telecommunications services. Thus, Internet telephony would no longer be exempt
from the access charge regime that permits local telephone companies to charge
long distance carriers for the use of the local telephone networks to originate
and terminate long-distance calls. The FCC could also conclude that Internet telephony providers should
contribute to the Universal Service Fund, which provides support to ensure
universal access to telephone service. The imposition of interstate access
charges or universal service contributions would substantially increase our
costs of serving our customers in the U.S. and may diminish the incentives for
companies to continue to develop IP technologies to offer VoIP services. We
cannot predict what regulations, if any, the FCC will impose. Regulation of Leased Lines and Carriers.When we lease long distance
telephone capacity from third-party carriers, we rely on them to comply with
local laws and regulations. We have no control over the manner in which these
companies operate in these countries. Foreign regulatory, judicial, legislative
or political entities may raise issues regarding the compliance of these
companies with local laws or regulations, or limit their ability to carry our
calls. State Laws.Several states have also proposed legislation that would
limit the uses of personal user information gathered online or require online
services to establish privacy policies. Changes to existing laws or the passage
of new laws intended to address these issues could reduce demand for our
services or increase the cost of doing business. In addition, because our
services are accessible worldwide, and we facilitate the sale of goods to users
worldwide, other jurisdictions may claim that we are required to comply with
their laws. We are qualified to do business in Delaware and Texas only, and
failure by us to qualify as a foreign corporation in a jurisdiction where we
are required to do so could subject us to taxes and penalties for the failure
to qualify and could result in our inability to enforce contracts in such
jurisdictions. Any such new legislation or regulation, or the application of
laws or regulations from jurisdictions whose laws do not currently apply to our
business, could have a material adverse effect on our business, financial
condition and operating results. Sales Taxes.We do not currently collect sales or other similar taxes
for virtual calling cards or other services sold through our Web site, other
than for virtual calling cards sold to Texas residents. However, one or more
states may seek to impose sales tax or similar collection obligations on
out-of-state companies, such as ours, which engage in Internet commerce. A
number of proposals have been made at the state and local level that would
impose additional taxes on the sale of goods and services through the Internet.
Such proposals, if adopted, could substantially impair the growth of online
commerce, and could adversely affect our opportunity to derive financial
benefit from such activities. Moreover, a successful assertion by one or more
states or any foreign country that we should collect sales or other taxes on
the sale of virtual calling cards or services on our system could have a
material adverse effect on our operations. Money Transmitter Laws. More than 40 states in the U.S. regulate bill
payers, money transmitters, check sellers, issuers of payment instruments or
similar non-bank payment businesses, which we refer to collectively as money
services businesses. The states enacted most of these statutes before the
Internet emerged as a commercial forum, and the application of these statutes
to online payment service providers has not been interpreted by courts or
regulatory authorities. Based on the specific provisions of many of these state
statutes, we believe that money services regulations cover our business only in
a limited number of states. In other states, we believe the nature of our
services or our fee structure exclude us from the statutes licensing
requirements and money services regulation. Our analysis is subject to
uncertainty, however, and we cannot assure you that state regulators and courts
will agree with our interpretations. We have contacted regulatory authorities
to describe our Cash2India service and have received written interpretation
that our Cash2India service, as we described it to them, does not require a
license from their state. We have not to date been notified by any state or
federal authority that we are not in compliance with money transmitter laws. 11




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Bank Regulation.Because we are not licensed as a bank, we are not
permitted to engage in a banking business. Our Cash2India business does not
allow customers to keep funds in our system in order to use our service.
Although the definition of a banking business varies among state laws, and is
not limited to entities that take deposits, we may be deemed to be keeping
money on account for customers or otherwise accepting deposits. We believe the
nature of our Cash2India service excludes us from the banking business as we do
not allow customers to keep money on account with us for future transfers, and
all money remitted is transferred directly to the recipient, we cannot loan out
these funds or use for any other purposes. If we were found to be subject to
and in violation of any banking laws or regulations in any state, we could be
subject to liability, which could include fines for non-compliance or forced to
cease the Cash2India business. International Regulation.We currently have permission from the Reserve
Bank of India (the RBI) to provide our Cash2India service in India. Under
this permission, we are required to provide to the RBI on a monthly basis a
list of all recipients and the amount of funds received by the recipients. If
we were to lose our permission from the RBI we could be forced to change our
business practices or to cease the Cash2India service. Under the International Money Laundering Abatement and Financial
Anti-Terrorism Act of 2001, or IML Act, we may be required to obtain additional
information, maintain records and file reports regarding any business we
conduct with residents of jurisdictions that are identified by the Secretary of
the Treasury as being of primary money laundering concern. Competition With respect to prepaid calling cards, we compete with many of the largest
telecommunications providers, including AT&T, MCI WorldCom and Sprint. These
companies are substantially larger and have greater financial, technical,
engineering, personnel and marketing resources, longer operating histories,
greater name recognition and larger customer bases than we do. We also compete
with smaller, emerging carriers in the prepaid calling card market, including
IDT Corp., 9278 Communications and ValuCom and with various smaller companies
who resell virtual calling cards provided by other carriers through their web
sites. We may also compete with large operators in other countries. These
companies may have larger, more established customer bases and other
competitive advantages. Deregulation in other countries could also result in
significant rate reductions. We believe that additional competitors will be
attracted to the prepaid card market. These competitors include Internet-based
service providers and other telecommunications companies. Competition from
existing or new competitors could substantially reduce our revenues from the
sale of these cards. A general decrease in telecommunication rates charged by
international long distance carriers could also have a negative effect on our
operations. An increasing number of large, well-capitalized companies are entering the
market for Internet telephony products and services. As a result, we may not be
able to compete effectively with our competitors in this market, or to increase
our customer base. Various major long distance providers, including AT&T,
Verizon and Deutsche Telekom AG, as well as other major companies, including
Motorola, Inc., Intel Corporation and AOL-Time Warner, Inc., have all entered
or plan to enter the Internet telephony market, in some cases by investing in
companies engaged in the development of Internet telephony products. Our
competitors also include a number of
companies that have introduced services that make Internet telephony solutions
available to businesses and consumers. Net2Phone, Delta Three, ITXC Corp.,
iBasis, Inc. and MCI WorldCom provide a range of Internet telephony services to
consumers and businesses that are similar to the ones we offer. Several other
companies, including AT&T, Sprint and Qwest Communications, have announced
their intention to offer these services on a wider basis in both the United
States and internationally. In addition, we compete in the market for Internet telephony services with
companies that produce software and other computer equipment that may be
installed on a users computer to permit voice communications over the
Internet. Also, a number of large companies, including Cisco Systems, Inc.,
Lucent Technologies, Inc., Northern Telecom Limited, Nuera Communications,
Clarent Corporation and Dialogic Corp. offer or plan to offer server-based
Internet telephony products. These products are expected to allow
communications over the Internet between parties using a multimedia PC and a
telephone and between two parties using telephones. 12




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With respect to our Cash2India business, we compete with Western Union,
Moneygram and various regional and local money transmitters. We also compete
with Web based money transmitters such as Remit2India and with banking
institutions such as Citibank and others which offer money transfer and wire
services. We cannot be certain we will be able to compete successfully against
current and future competitors. As a strategic response to changes in the
competitive environment, we may, from time to time, make pricing, service or
marketing decisions that could have a material adverse effect on our business,
financial condition and operating results. New technologies and the expansion of existing technologies may increase
competitive pressures by enabling our competitors to offer lower-cost services.
Certain Web-based applications that direct Internet traffic to other Web sites
may channel users to services which compete with us. In addition, companies
that control access to transactions through network access or Web browsers
could promote our competitors or charge us substantial fees for inclusion. The
occurrence of any of these events could have a material adverse effect on our
business, financial condition and operating results. Intellectual Property and Other Proprietary Rights Our success depends in part upon our ability to protect our proprietary
technology and other intellectual property rights. We rely on a combination of
copyright, trademark, service mark and trade secret laws and contractual
restrictions to establish and protect our proprietary rights in our products
and services. We protect our proprietary software through United States
copyright laws, and the source code for our proprietary software is protected
under trade secret laws. Effective trademark, service mark, copyright and trade
secret protection may not be available in every country in which our services
are made available online, and thus, the steps that we take may be inadequate
to protect our rights. We cannot assure you that we will be issued any of these
trademarks and may find that such marks are unavailable. We currently hold various Internet domain names relating to our
operations, including wqn.com, supertel.com, metrotelcom.net,
rocketmobile.net, wqnroadside.com, cash2.com, and Cash2India.com.
Governmental agencies and their designees are responsible for regulating the
acquisition and maintenance of domain names. The regulation of domain names in
the United States and other countries may change in the near future. Such
changes in the United States are expected to include a transition from the
current system to a system that is controlled by a non-profit corporation and
the creation of additional top-level domains. Governing bodies may establish
additional top-level domain name registrars or modify the requirements for
holding domain names. As a result, we may be unable to acquire or maintain
relevant domain names in countries in which we conduct business. Furthermore,
the relationship between regulations governing domain names and laws protecting
trademarks and similar proprietary rights is unclear. Therefore, we may be
unable to prevent third parties from acquiring domain names that are similar
to, infringe upon or otherwise decrease the value of our trademarks and other
proprietary rights. We have entered into confidentiality and assignment agreements with our
employees and contractors, and nondisclosure agreements with parties with whom
we conduct business. We do this in order to limit access to and disclosure of
our proprietary information. These agreements are designed to make it clear
that we own any technology developed by our employees and contractors during
their engagement by us and to protect us against unauthorized disclosure of our
proprietary information. We cannot assure you that these contractual
arrangements or the other steps taken by us to protect our intellectual
property will prove sufficient. To date, we have not actively policed
unauthorized use of our technology. This is because the global nature of the
Internet makes it difficult to control the ultimate destination or security of
software or other data transmitted. In the future, we may license certain of our proprietary rights to third
parties. While we will attempt to ensure the quality of the WorldQuest
Networks brand is maintained by such licensees, we cannot assure you that such
licensees will not take actions that might materially adversely affect the
value of our proprietary rights or reputation, and have a material adverse
effect on our business, financial condition and operating results. We also rely
on certain technologies that we license from third parties. These may include
suppliers of key database technology, enhanced services platforms, gateway
server platforms, operating systems and specific hardware components for our
service. 13




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We cannot assure you that these third-party technology licenses will
continue to be available to us on commercially reasonable terms. The loss of
such technology could require us to obtain substitute technology of lower
quality or performance standards or at greater cost, which could materially
adversely affect our business, financial condition and operating results. Research and Development We consider the amounts spent by us for research and development during
2003 and 2002 to be immaterial. Environmental Matters Environmental contingencies are not expected to have a material adverse
effect on our results of operations or financial condition. Employees As of December 31, 2003, we had 25 full-time employees. None of our
employees are represented by a labor union. We have not experienced any work
stoppages and consider our employee relations to be good. 
 ITEM 2. DESCRIPTION OF PROPERTY Our executive offices are located in Dallas, Texas, where we lease
approximately 6,200 square feet under a lease at a monthly rental of
approximately $9,400 which expires August 31, 2006. We also have a network hub
in Dallas, Texas under a co-location arrangement at a monthly rental of
approximately $9,800. We believe our space is adequate for our current needs.
As we expand, we expect that suitable additional space will be available on
commercially reasonable terms, although no assurance can be made in this
regard. We also believe our property is adequately covered by insurance. 
 ITEM 3. LEGAL PROCEEDINGS In December 1996, we applied to the United States Patent and Trademark
Office to register the trademarks: WorldQuest and WorldQuest Networks. We
received a registration for the trademark WorldQuest from the U.S. Patent and
Trademark Office on November 23, 1999. In October 1997, the Patent and
Trademark Office issued a notice of publication regarding our application to
register WorldQuest Networks as a trademark. In response to that notice,
Qwest Communications filed a notice of opposition in September 1998. In July
2000, Qwest Communications instituted a cancellation proceeding in the Patent
and Trademark Office for the registered trademark WorldQuest. In December
2001, a judgment was made in the Companys favor whereby Qwests motion to
cancel our WorldQuest trademark was dismissed, however, Qwest filed a motion
appealing the judgment. In December 2002, Qwest filed a separate complaint
stating that the Companys prepaid cashcard
product infringes on the Qwest trademark. In February 2003, the companies
settled all outstanding claims whereby WorldQuest will receive a cash payment
and services from Qwest and Qwest shall retain all right to the trademarks in
question. WorldQuest has approximately 5 months to cease using the name
WorldQuest. We are currently evaluating potential corporate names and
anticipate that a decision will be made within the next 5 months. The Company is a defendant from time to time in lawsuits and disputes
arising in the ordinary course of business. We are not involved in any other
material legal proceedings at this time. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders of the Company
during the fourth quarter ended December 31, 2003. 14




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PART II 
 ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS WorldQuests Common Stock trades on the NASDAQ National Market under the
symbol WQNI. The following table sets forth the per share range of high and
low sales prices of our Common Stock for the periods indicated: High
    
    LowYear ended December 31, 2003First Quarter
    
    $
    2.40
    
    
    $
    1.86Second Quarter
    
    $
    2.75
    
    
    $
    1.85Third Quarter
    
    $
    4.00
    
    
    $
    2.16Fourth Quarter
    
    $
    3.55
    
    
    $
    2.79
 As of February 29, 2004, there were approximately 29 stockholders of
record of our Common Stock and approximately 1,900 additional beneficial owners
of our Common Stock. Dividend Policy We have never paid cash dividends on our Common Stock and anticipate that
we will continue to retain our earnings, if any, to finance the growth of our
business. Use of Proceeds of Initial Public Offering The effective date of our first registration statement, filed on Form SB-2
under the Securities Act of 1933 (no. 333-93019) relating to our initial public
offering of our Common Stock, was February 4, 2000. A total of 3,162,500
shares of our Common Stock were sold at a price of $13.00 per share. Net
proceeds to WorldQuest were $36.3 million. From the time of receipt through
December 31, 2003 the net proceeds were applied toward:  
    
    repayment of indebtedness, $4,498,000;
    
    equipment purchases including additional back-up systems, $4,390,000;
    
    software development, $746,000; and
    
    general corporate purposes, including payment of
outstanding payables, payoffs of capital leases, liability
insurance premiums, development of strategic relationships and
research and development of new products, $8,734,000. The remaining proceeds are being used as working capital or are being held
in high quality, short-term investment instruments such as short-term corporate
investment grade or United States Government interest-bearing securities. Of the $4,498,000 paid for repayment of indebtedness, $1,440,000 was paid
to Eagle Venture Capital, LLC, which owns approximately 41% of our Common Stock
and is controlled by B. Michael Adler, our former Chairman of the Board and
current Chief Executive Officer and President. 15




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ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS The following discussion of the financial condition and results of
operations of WorldQuest Networks, Inc. should be read in conjunction with the
Managements Discussion and Analysis or Plan of Operation (including Risk
Factors That May Affect Results of Operations and Financial Condition) and the
Consolidated Financial Statements and the Notes thereto included in the
Companys Annual Report on Form 10-KSB for the year ended December 31, 2003. Forward-Looking Statements Certain statements in this report, including statements of WorldQuests
and managements expectations, intentions, plans and beliefs, including those
contained in or implied by Managements Discussion and Analysis or Plan of
Operation and the Notes to Condensed Consolidated Financial Statements, are
forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended (the Exchange Act), that are
subject to certain events, risks and uncertainties that may be outside
WorldQuests control. These forward-looking statements include statements of
managements plans and objectives for WorldQuests future operations and
statements of future economic performance, information regarding our expansion
and possible results from expansion, our expected growth, our capital budget
and future capital requirements, the availability of funds and our ability to
meet future capital needs, the realization of our deferred tax assets, and the
assumptions described in this report underlying such forward-looking
statements. Actual results and developments could differ materially from those
expressed in or implied by such statements due to a number of factors,
including, without limitation, those described in the context of such
forward-looking statements, our expansion and acquisition strategy, our ability
to achieve operating efficiencies, our dependence on network infrastructure,
capacity, telecommunications carriers and other suppliers, industry pricing and
technology trends, evolving industry standards, domestic and international
regulatory matters, general economic and business conditions, the strength and
financial resources of our competitors, our ability to find and retain skilled
personnel, the political and economic climate in which we conduct operations
and the risk factors described from time to time in our other documents and
reports filed with the Securities and Exchange Commission (the Commission). Overview We are an international Internet telephony and money transfer company. Our
customers utilize our networks of Internet gateways and other traditional
networks to place long-distance calls online at discounted rates. We also sell
virtual calling cards processed through other companies platforms including
prepaid wireless and prepaid Internet and from time to time we sell our excess
capacity to other long distance carriers. Through our wholly-owned subsidiary,
buyindiaonline.com (known as Cash2India), we also provide a web service that
enables customers to send money and a personalized message from the United
States to friends, family, or others in India, Sri Lanka, Russia and The
Philippines over our Web and telephony networks. In 2002, we began selling the WorldQuest CashCard, a multi-purpose
stored-value card, and in 2003 we added the ability for customers to upgrade
their WorldQuest CashCard to a WorldQuest prepaid VISA®. The WorldQuest
CashCard and VISA® CashCard, can be used to withdraw money or check balances at
ATMs worldwide and to pay for merchandise at any location associated with the
Plus®, Pulse® or Star® Networks. The WorldQuest VISA® CashCard can be used
anywhere VISA® is accepted. Card holders can add money to their card via the
direct deposit of their paychecks, by cashing their paychecks, by ACH transfer
and by using cash, credit cards, or electronic checks. In addition, the
CashCards also serve as a prepaid long-distance calling card, which operates
using our telecom infrastructure. As of December 31, 2003, we have issued over
2,500 stored value cards. As of December 31, 2003, Eagle Venture Capital, LLC (Eagle Venture)
owned approximately 2.6 million, or 41%, of our outstanding shares of common
stock. Eagle Venture is primarily owned by our founder and Chief
Executive Officer. Our primary source of revenue is the fees that we receive from our
telephony customers for completing
calls over our network and processing fees we receive for our money transfer
service and on the usage of our cash card. Our Internet telephony revenue is
dependent on the volume of voice traffic carried over the network, which is 16




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measured in terms of minutes of voice traffic and the fees per minute of
traffic we charge our customers. We recognize this revenue in the period in
which the call is completed. We bill our retail customers on a prepaid basis
through credit cards. Our money transfer and cash card fees are dependent on
the number of transactions processed and the fees we charge per transaction.
Money transfer fees are recognized upon transfer of funds to the recipient.
Cash card fees are recognized upon usage of the cash card. Cost of telephony revenue consists primarily of data communication and
telecommunication expenses to terminate long distance traffic over our
networks, which vary proportionately with the volume of traffic carried over
our network. These costs include Internet related expenses to send voice
traffic over the Internet, fees we pay to terminate calls, fees we pay to
utilize the traditional telephone network to terminate our calls and expenses
incurred to connect our customers to our network. Cost of money transfer and
cash card revenue consists primarily of processing fees and usage fees we pay
for utilizing the Plus®, Pulse® or Star® networks which varies proportionally
with the number of transactions processed. Selling, general and administrative expenses consist of advertising and
promotional expenditures, payroll and related expenses for executive and
administrative personnel, facilities expenses, professional services expenses,
travel and other general corporate expenses. Merger Agreement with Ntera Holdings On March 16, 2004 the Company and Ntera Holdings, Inc., a Delaware
corporation (Ntera), entered into an Agreement and Plan of Merger dated as of
that date (the Merger Agreement), providing for transactions that, once
completed, will result in a change of control of WorldQuest. Under the terms of the Merger Agreement, Ntera will be merged with and
into WorldQuest, with WorldQuest as the surviving company (the Merger).
Stockholders of Ntera at the effective time of the Merger will be entitled to
receive 80% of the common stock of the surviving company, with existing
WorldQuest stockholders owning the remaining 20% of the common stock of the
surviving company. After consummation of the Merger, Mr. Engin Yesil, Nteras
controlling stockholder, could be deemed to control the surviving company by
virtue of his approximately 54% stock ownership therein. The Merger has been unanimously approved by the Boards of Directors of
both WorldQuest and Ntera, and is subject to various conditions to closing,
including approval by the holders of not less than a majority of WorldQuests
outstanding common stock, approval of continued listing of WorldQuests common
stock on the Nasdaq Stock Market, completion of audited financial statements
for Nteras fiscal year ended December 31, 2003, receipt of a bring-down of
the fairness opinion rendered to the Board of Directors of WorldQuest,
WorldQuests approval of Nteras financial performance and certain other
conditions. Michael Adler, who, as sole shareholder of Eagle Venture Capital,
LLC, beneficially owns approximately 42% of WorldQuests stock, has executed a
Voting Agreement and Irrevocable Proxy, dated as of March 16, 2004 (the Voting
Agreement), whereby he has agreed to vote his shares in favor of the Merger so
long as the Merger Agreement has not been terminated. The stockholders of
Ntera have already approved the Merger. Under the terms of the Merger Agreement, the Board of Directors of the
surviving company will consist of WorldQuests four current directors (or their
successors), and three new directors named by Ntera. In addition, Mr. Yesil
has agreed in the Merger Agreement not to exercise his voting rights with
respect to any shares of the surviving company to alter the composition of its
Board of Directors until the earlier of WorldQuests 2005 annual meeting of
stockholders or June 30, 2005. In connection with the Merger, WorldQuest intends to relocate its
executives to Nteras headquarters in Miami, Florida. On March 16, 2004, R.
Stephen Polley resigned as President, Chief Executive Officer and a director of
WorldQuest because of his desire to not relocate to Miami. Gary W. Fiedler
also notified WorldQuest of his resignation from his position as a director of
WorldQuest, effective as of March 10, 2004. As a result, B.
Michael Adler, formerly Chairman of the Board of WorldQuest, was elected
President and Chief Executive Officer of WorldQuest, and Robert A. Farmer, an
existing member of WorldQuests Board, was elected Chairman of the Board of
WorldQuest and also chairman of WorldQuests Audit Committee. Under the terms
of the Merger Agreement, 17




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both gentlemen will continue in those roles after
completion of the Merger. Also under the terms of the Merger Agreement, Mr.
Yesil will serve as President of Business Development of the surviving company
but will not serve on its Board of Directors and Victor E. Grijalva, Vice
President and Chief Financial Officer of WorldQuest, will continue as Vice
President and Chief Financial Officer of the surviving company. The transaction, when consummated, will create a company with the quality,
scale and technology needed to capitalize on the growing demand for consumer
and carrier-grade VoIP solutions. The combined company expects to generate more
than $150 million in diversified annual revenues, anchored by a wholesale
business that is complemented by a higher-margin retail component. Nteras VoIP network currently interconnects 100 cities in the United
States, 100 cities in Mexico, and 23 Canadian cities along with other major
cities around the world through a 300,000-port TDM and 75,000-port VoIP
switching platform that is controlled through proprietary soft-switch
intelligence with current network capacity in excess of 4 billion minutes a
month. Targeted benefits of the proposed transaction include:  
    
    The creation of a publicly traded company with a revenue base
expected to be more than $150 million a year, with a diversified
revenue stream that includes a higher-margin retail business in
addition to a wholesale business presently terminating 2.4 billion
minutes a quarter.
    
    Higher margins due to Nteras proprietary, low-cost telecom
network.
    
    The opportunity for WorldQuest and Ntera to realize
cost-saving synergies through the consolidation of redundant
operations and infrastructure.
    
    The addition of an attractive technology platform that
WorldQuest can leverage to roll out new products and services to
fuel future growth.
    
    The addition of an attractive technology platform that
WorldQuest can leverage to roll out new products and services to
fuel future growth.
    
    Opportunity to significantly expand exposure of WorldQuests
VISA® stored-value card to consumers through Nteras POS technology
and distribution network of more than 5,000 retail outlets. Critical Accounting Policies Financial Reporting Release No. 60 recommends that all companies include a
discussion of critical accounting policies used in the preparation of their
financial statements. The Companys significant accounting policies are
summarized in Note 2 of its consolidated financial statements included in the
Companys Annual Report on Form 10-KSB for the year ended December 31, 2003.
While all these significant accounting policies impact its financial condition
and results of operations, the Company views certain of these policies as
critical. Policies determined to be critical are those policies that have the
most significant impact on the Companys financial statements and require
management to use a greater degree of judgment and/or estimates. Actual results
may differ from those estimates. The Company believes that given current facts
and circumstances, it is unlikely that applying any other reasonable judgments
or estimate methodologies would cause a material effect on the Companys
consolidated results of operations, financial position or liquidity for the
periods presented in this report. The accounting policies identified as
critical are as follows: Revenue Recognition The Company recognizes revenues in accordance with generally accepted
accounting principles as outlined in SAB No. 101 which requires that four basic
criteria be met before revenue can be recognized: (1) persuasive 18




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evidence of an
arrangement exists, (2) product delivery, including customer acceptance, has
occurred or services have been rendered, (3) the price is fixed or determinable
and (4) collectibility is reasonably assured. We bill our telephony calling
card customers on a prepaid basis through credit cards and recognize the
revenue in the period in which the call is completed. A substantial portion of
the Companys revenues is derived from the sale of prepaid phone cards that
terminate in India. Money transfer fees are recognized upon transfer of funds
to the recipient. Cash card fees are recognized upon usage of the cash card. Property and Equipment Property and equipment are depreciated over their useful lives. Useful
lives are based on managements estimates of the period that the assets will
generate revenue. Any change in conditions that would cause management to
change its estimate as to the useful lives of a group or class of assets may
significantly impact the Companys depreciation expense on a prospective basis. Web Site Development Costs Our products and services are sold predominantly through our web sites. We
incur costs to maintain and add new functionality to our existing web sites and
to develop new web sites. Costs related to the planning and post
implementation phases of our web site development efforts are expensed. Direct
costs incurred in the development phase are capitalized and amortized over the
products estimated useful life of one to three years, which is included in
depreciation expense. Costs associated with minor enhancements and maintenance
for web sites are expensed. Income Taxes As of December 31, 2003, we had approximately $25,134,000 of net operating
loss carry forwards for federal income tax purposes, which expire beginning in
2011. We have not recognized an income tax benefit for our losses because of
uncertainty regarding future realizability and we have provided a full
valuation allowance on our deferred tax assets. Off-Balance Sheet Arrangements The Company does not have any off-balance sheet arrangements to report for
the years ended December 31, 2003 and 2002. 19




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Results of Operations Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 Revenue Revenue decreased approximately 14% to $9,915,000 for the year ended
December 31, 2003 from $11,470,000 for the year ended December 31, 2002. This
$1,555,000 decrease is a result of a $1,693,000 decrease in telephony revenues
offset by a $138,000 increase in financial services revenue. The decrease in
telephony revenue is primarily attributable to a decrease in the average price
per minute charged to our customers, a substantial portion of which are calling
from the United States to India. The Indian international telephony market has
been deregulated and opened up to the private sector resulting in increased
competition with a significant drop in international long distance rates and
pricing pressures due to significantly lower rates offered by providers of
Internet telephony. The decrease in the price per minute has been partially
offset by the increase in the minutes of use, which has increased to 50.6
million minutes for the year ended December 31, 2003, up 43% from 35.4 million
minutes for the year ended December 31, 2002. It is unlikely that the trend of
decreasing rates will reverse in the near future. Although our 2003 telephony revenue decreased approximately 15% from 2002,
our 2003 telephony gross profit remained unchanged at approximately $2.4
million. We believe this is attributable to our focus on increasing our minutes
of use by capturing and retaining customers who desire a quality, cost
effective service, by enhancing and developing features which increase the user
friendliness of our service, and by diversifying our revenue base. During
2003, we increased the size of our network to include a point of presence in
Canada. This increases the size of our potential customer base as Indian
foreign nationals, as well as other foreign nationals, in Canada are able to
access our network from Canada to make quality affordable calls to their home
countries. During 2003, we began providing services to Iranian foreign
nationals in the United States and Canada, which accounted for approximately
10% of our telephony revenues in 2003. In the fourth quarter of 2002, we
introduced our ANI recognition and recharge features which let our customers
access our network without having to enter a PIN or password and let customers
recharge their balances, or add more calling time, without having to go back
on-line. In 2003, we introduced the ability for customers to view their call
detail records and account balances on-line. We believe our customers are
willing to pay a reasonable premium because of the reliability, user
friendliness and features of our services. The increase in financial services and other revenues is due primarily to
the increase in money transfer transactions processed due to the growth in our
Cash2India customer base. During the year ended December 31, 2003, we
processed over 29,000 transactions and remitted $16,871,000 compared to 13,000
transactions and remittances of $10,508,000 for the year ended December 31,
2002. Cost of Revenue Cost of revenue decreased approximately 18% to $7,210,000 for the year
ended December 31, 2003 from $8,773,000 for the year ended December 31, 2002.
This $1,563,000 decrease is attributable to a decrease in the price per minute
to terminate long distance traffic which corresponds with the decrease in the
revenue price per minute, partially offset by the increase in the minutes of
use and an increase in gross margin percentage for the year ended December 31,
2003 to approximately 27% compared to approximately 24% in the comparable 2002
period. The increase in gross margin percentage is primarily attributable to an
increase in our telephony gross margin percentage and the growth in higher margin,
financial services revenue. The increase in our telephony gross margin percentage is
primarily attributable to the addition of higher margin telephony services,
increased utilization of our proprietary networks as opposed to using leased
lines and to rate improvements in our lease agreements with carriers to
terminate calls. Selling, General and Administrative Selling, general and administrative expenses increased approximately 7% to
$5,179,000 for the year ended December 31, 2003 from $4,836,000 for the year
ended December 31, 2002. This $343,000 increase is due primarily to higher
personnel costs and other selling, general and administrative expenses incurred
with the 20




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development of the Companys financial services products including the
Companys stored value cash card. Selling, general and administrative expenses
for the 2003-period include a benefit of $421,000 in connection with the
Companys Qwest (see Item 3-Legal Proceedings in Part I of this Report) and
other legal settlements. Selling, general and administrative expenses for the
2002 period include a benefit of $323,000 from a cash payment of $121,000 and
the receipt of a note receivable for $202,000 from a wholesale customer in
satisfaction of a fully reserved receivable from the same wholesale customer.
We expect selling, general and administrative expenses to increase in absolute
dollars, but decrease as a percentage of revenue, as we continue to pursue
advertising and marketing efforts, expand our network termination locations
worldwide, and incur additional costs related to the growth of our business. Depreciation and Amortization Depreciation and amortization was $1,076,000 for the year ended December
31, 2003, which is substantially the same as $1,100,000 for the year ended
December 31, 2002. Interest Income, Net Interest income, net consists of interest earned on cash and cash
equivalents less interest expense on borrowings. Interest earned on cash and
cash equivalents decreased to $209,000 for the year ended December 31, 2003
from $401,000 for the year ended December 31, 2002. This decline is
predominantly due to an overall decrease in short-term interest rates in the
United States financial markets and to a decrease in the average cash balance
invested. Interest expense for the 2003-year totaled $5,000 compared to
$49,000 in 2002. The decrease in interest expense is primarily due to the
repayment of our term loan with Eagle Venture Capital in July 2002. Net Loss We incurred a net loss of $3,345,000 for the year ended December 31, 2003
compared to a net loss of $2,887,000 for the year ended December 31, 2002. The
increase of $458,000 in net loss in the 2003 year is primarily attributable to
higher selling, general and administrative expenses of $343,000 and lower net
interest income of $148,000. Liquidity and Capital Resources As of December 31, 2003, we had approximately $17,932,000 of cash and cash
equivalents and working capital of approximately $17,209,000. We generated
negative cash flow from operating activities of approximately $2,384,000 for
the year ended December 31, 2003, compared with negative cash flow from
operating activities of approximately $2,450,000 during the year ended December
31, 2002. Net cash used in operating activities for the 2003 and 2002 periods
primarily consisted of net operating losses as well as changes in working
capital. Net cash used in investing activities consists of capitalized web site
development cost and additions to property and equipment, including computer
equipment and Internet gateways for voice over the Internet transmission. Net
cash used in investing activities was $405,000 for the year ended December 31,
2003 and $948,000 for the year ended December 31, 2002. Cash used in
investing activities for the year ended December 31, 2003 includes $190,000 of
capitalized web site development costs compared to $207,000 in the comparable
2002 period. Cash used in investing activities for 2002 includes $263,000 paid
for the fair value of assets acquired in connection with the Cash2India
acquisition and approximately $170,000 paid for hardware and software with the
commencement of the Companys financial services. Net cash used by financing activities for the year ended December 31, 2002
was $920,000 due primarily to the $925,000 principal payment on our term loan
with Eagle Venture Capital, a significant stockholder of the Company, which is
controlled by the Companys former Chairman and current Chief Executive Officer
and President. For the year ended December 2002, we paid outstanding interest of
$47,000 on the term loan from Eagle Venture Capital. The principal balance of
$925,000 on the term loan with Eagle Venture Capital was paid in 2002, thereby
satisfying in full the Companys obligation on the term loan. We also had a
$1,400,000 line of credit with Eagle Venture Capital, none of which was ever
utilized and which expired in May 2002. 21




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In 2001, the Company borrowed $300,000 from a financial institution under
a term promissory note agreement (the Note). The Note bears interest at the
financial institutions prime rate as adjusted from time to time (4.0% at
December 31, 2003) less 2.25% per annum. The Note, originally due in October
2003 was extended and is now due in October 2005. The Note is collateralized
by a $300,000 certificate of deposit bearing interest of .95 % per annum. In connection with the merger agreement the Company executed with Ntera
Holdings, Inc., the Company has extended a bridge loan in the principal amount
of $2 million to Ntera. If the merger agreement is terminated for any reason,
the full amount of the loan will become due and payable within six months of
that termination. The Company may elect, in its sole discretion, to receive
services valued at Nteras best wholesale prices in whole or in part as
repayment for the loan. Ntera and certain of its subsidiaries have granted the
Company a security interest in their assets to secure repayment of the loan. We believe our existing cash resources will be sufficient to meet our
anticipated needs for working capital and capital expenditure requirements
through at least the next 18 months. We may need to raise additional funds
prior to the expiration of such period if, for example, we pursue business or
technology acquisitions or experience operating losses that exceed our current
expectations. If we raise additional funds through the issuance of equity,
equity-related or debt securities, such securities may have rights, preferences
or privileges senior to those of the rights of our common stock and our
stockholders may experience additional dilution. We cannot be certain that
additional financing will be available to us on favorable terms or at all. Income Taxes As of December 31, 2003, we had approximately $25,134,000 of net operating
loss carry-forwards for federal income tax purposes, which expire beginning in
2011. We have not recognized an income tax benefit for our losses because of
uncertainty regarding future profitability; therefore, at December 31, 2003, we
have provided a full valuation allowance on our deferred tax assets of
approximately $9,482,000. Limitations on the utilization of these
carry-forwards may result if we experience a change of control, as defined in
the Internal Revenue Code of 1986, as amended, as a result of changes in the
ownership or our common stock. Recent Accounting Pronouncements In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51 (FIN 46). FIN 46 requires
the consolidation of variable interest entities in which an enterprise absorbs
a majority of the entitys expected losses, receives a majority of the entitys
expected residual returns, or both, as a result of ownership, contractual or
other financial interests in the entity. Currently, entities are generally
consolidated by an enterprise that has a controlling financial interest through
ownership of a majority voting interest in the entity. The adoption of FIN 46
will not have a material impact on our consolidated financial statements. Risk Factors That May Effect Results of Operations and Financial Condition You should carefully consider the risks and uncertainties described below
and the other information in thisForm 10-KSB. Additional risks and
uncertainties not presently known to us or those we currently deem immaterial
may also impair our business, financial condition and operating results. Our business and stock price may be adversely affected if the merger with
Ntera is not completed. On March 16, 2004, we entered into an agreement with Ntera Holdings, Inc.,
pursuant to which Ntera will be merged with and into WorldQuest, with
WorldQuest surviving. Stockholders of Ntera at the effective time of the Merger
will be entitled to receive 80% of the common stock of the surviving company,
with existing WorldQuest stockholders owning the remaining 20% of the common
stock of the surviving company. The merger is subject to various conditions to
closing, including approval by the holders of not less than a majority of
WorldQuests outstanding common stock, approval of continued listing of
WorldQuests common stock on the Nasdaq Stock 22




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Market, completion of audited
financial statements for Nteras fiscal year ended December 31, 2003, receipt
of a bring-down of the fairness opinion rendered to the Board of Directors of
WorldQuest, WorldQuests approval of Nteras financial performance and certain
other conditions. If the transaction is not completed, we could be subject to a
number of risks that may adversely affect our business and stock price. First,
we would not realize the strategic benefits or the enhanced financial and
competitive position we expect to realize from being part of a combined company
with Ntera. In addition, the diversion of our managements attention from the
day to day business and the disruption to our employees and our relationships
with customers as a result of efforts and uncertainties relating to the
anticipated merger may detract from our ability to grow revenues and minimize
costs. Also, under certain circumstances we could be required to pay divine a
termination fee equal to $500,000 and up to $300,000 of its transaction related
expenses, as well as our own transaction expenses. If Ntera terminates the
merger agreement because we have breached a covenant or agreement or
representation or warranty, we would be required to pay up to $300,000 of
Nteras transaction related expenses. If our board of directors withdraws its
recommendation of the merger or takes certain actions with respect to another
acquisition proposal, we would be required to pay a termination fee equal to
$500,000. We have a limited operating history with which to judge our performance. We were incorporated in October 1996. We began selling prepaid virtual
calling cards on our Web site in May 1998. We began routing calls over our
enhanced services platform in August 1998. Accordingly, we have a limited
operating history. We may also encounter risks and difficulties frequently
encountered by early stage companies in new and rapidly evolving markets. We
cannot assure stockholders that our business strategy will be successful or
that we will successfully address these risks. Our failure to do so could
materially adversely affect our business, financial condition and operating
results. We have a history of losses and we anticipate future losses and negative
cash flow. Since inception, we have incurred operating losses, and as of December 31,
2003, we had an accumulated deficit of $24,009,000. We incurred net losses of
$3,345,000 and $2,887,000 for the years ended December 31, 2003 and 2002,
respectively. Our revenues may not grow or even continue at their current level. We
will need to increase our revenues significantly to become profitable, however,
if our revenues do not increase as much as we expect or if our expenses
increase at a greater pace then revenues, we may not achieve profitability or,
if we became profitable, we may not be able to sustain or increase
profitability on a quarterly or annual basis. We may incur additional costs
and expenses in 2004 related to:  
    
    marketing and advertising related to traffic generation and brand development;
    
    purchases of equipment for our operations and network infrastructure;
    
    the continued development of our Web site transaction processing and network infrastructure;
    
    development and improvement of additional products and services;
    
    the hiring of additional personnel; and
    
    evaluating and completing potential acquisitions of other companies. Our financial results could suffer if we are unable to maintain or grow
sales levels of virtual prepaid phone cards to customers calling from the
United States to India. We depend on the sale of virtual prepaid phone cards to customers calling
from the United States to India for a significant percentage of our sales
volume. For the years ended December 31, 2003 and 2002, 77% and 95%
respectively of our total virtual prepaid phone card sales were to customers
calling from the United States to India. 23




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A decrease in the number of our
customers calling from the United States to India, or a decrease in the price
per minute charged to these customers could materially adversely offset our
business, financial condition and operating results. Our quarterly operating results are subject to significant fluctuations
and our future operating results are unpredictable. Our operating results are unpredictable and have fluctuated significantly
on a quarterly basis. We expect to continue to experience significant
fluctuations in our quarterly results of operations due to a variety of
factors, many of which are outside of our control. As a result,
period-to-period comparisons of our results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance. Because of our limited operating history, we cannot accurately forecast
our net sales. We rely upon limited historical financial data to predict our
future operating results. Sales and operating results are difficult to forecast
because they generally depend on the volume of traffic on our network and the
volume and timing of sales of our virtual calling cards. Because of these
factors, we may be unable to adjust our spending in a timely manner to adjust
for any unexpected revenue shortfall. If we do not increase the number of Web sites and portals upon which we
advertise we may not be able to grow our business. We market our virtual calling cards and services on third-party Web sites
and portals using banner ads. The banner ads connect directly to our Web site
when clicked by the customer. If we cannot continue to cost effectively
market our virtual calling cards and services, our ability to expand our
customer base would be adversely affected. The telecommunications and Internet telephony markets are highly
competitive and our failure to compete effectively could adversely affect us. With respect to prepaid calling cards, we compete with the largest
telecommunications providers in the United States, as well as smaller, emerging
carriers. We may also compete with large operators in other countries. An
increasing number of large, well-capitalized companies are entering the market
for Internet telephony products and services. These competitors include a
number of companies that have introduced services that make Internet telephony
solutions available to businesses and consumers, and that permit voice
communications over the Internet. Many of our competitors are substantially
larger and have greater financial, technical, engineering, personnel and
marketing resources, longer operating histories, greater name recognition and
larger customer bases than we do. Competition from existing or new competitors
could reduce our revenues from the sale of our virtual prepaid calling cards
and other services. A general decrease in telecommunication rates charged by
international long distance carriers could also have a negative effect on our
operations. Our ability to compete also depends on our ability to anticipate
and adapt to rapid technological and other changes occurring in the
telecommunications industry. We may not be able to compete with providers that can bundle long distance
services with other offerings. Our competitors may be able to bundle services and products that we do not
offer together with long distance or Internet telephony services. These
services could include wireless communications, voice and data services,
Internet access and cable television. This form of bundling would put us at a
competitive disadvantage if
these providers can combine a variety of service offerings at a single
attractive price. In addition, some of the telecommunications and other
companies that compete with us may be able to provide customers with lower
communications costs or other incentives with their services reducing the
overall cost of their communications packages, and significantly increasing
pricing pressures on our services. This form of competition could
significantly reduce our revenues. We may be vulnerable to technical malfunctions which could adversely
affect our operations. We depend upon our software systems, communications hardware and enhanced
services platform to conduct our virtual calling card sales and telephone
routing, manage our network, track virtual calling card balances and 24




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perform
other vital functions. If we experience substantial technical difficulties
with our hardware or software, we may not succeed in routing traffic
effectively, or in tracking virtual calling card balances accurately, which
could adversely affect our operations. We have experienced periodic system
interruptions, which we believe will continue to occur from time-to-time. Since
our operations depend on our ability to successfully expand our network and to
integrate new technologies and equipment into our network, there is an
increased risk of system failure as well as a natural strain on the system. Our systems may not accommodate significant growth in the number of users
which could have a negative effect on our operations. Our success depends on our ability to handle a large number of
simultaneous calls. We expect that the volume of simultaneous calls will
increase significantly as we expand our operations. If this occurs, additional
stress will be placed upon the network hardware and software that manages our
traffic. We cannot assure stockholders of our ability to efficiently manage a
large number of simultaneous calls. If we are not able to maintain an
appropriate level of operating performance, or if our service is disrupted,
then we may develop a negative reputation and our business, results of
operations and financial condition would be materially adversely affected. If the Internet telephony and prepaid calling card markets do not gain
market acceptance by potential customers, our business will be adversely
affected. We cannot be certain that Internet telephone service will gain market
acceptance or prove to be a viable alternative to traditional telephone
service. If the Internet telephony market fails to develop or develops more
slowly than we expect, then our future revenues would be adversely affected. The market for prepaid calling cards is an emerging business with a large
number of market entrants. Therefore, it is difficult to accurately determine
what the demand will be for our products and services in this area. Substantial
markets may not continue to develop for prepaid calling cards, and we may not
be able to sustain or increase our sales of these products and services. If the e-commerce market does not continue to develop and gain market
acceptance, our revenues may be negatively affected. We anticipate that e-commerce will continue to account for substantially
all of our future revenues. Our business will suffer if e-commerce does not
grow or grows more slowly than expected. A number of factors could prevent
acceptance of e-commerce, including:  
    
    e-commerce is at an early stage and buyers may be unwilling
to shift their purchasing from traditional vendors to online
vendors;
    
    increased government regulation or taxation may limit the growth of
e-commerce; and
    
    adverse publicity and consumer concern about the security of
e-commerce transactions may discourage its acceptance and growth. These factors could impair our ability to generate revenues from our
online sales of virtual calling cards, online transmission of telephone calls
and other e-commerce activities. If the Internet and Internet infrastructure do not continue to develop as
anticipated, our operations will be negatively affected. For the Internet to be commercially viable in the long-term, the size of
the network infrastructure, enabling technologies, necessary performance
improvements and user security will need to be continually addressed. To the
extent that the Internet continues to experience an increased number of users,
frequency of use or increased bandwidth requirements, we cannot assure
stockholders that the performance or reliability of the Internet will not be 25




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adversely affected. Furthermore, the Internet has experienced a variety of
outages and other delays as a result of damage to portions of its
infrastructure, and could face such outages and delays in the future. These
outages and delays could adversely affect the level of Internet usage and
affect the level of traffic, the processing of orders and the transmission of
calls on our Web site. We cannot assure stockholders that the infrastructure or complementary
products or services necessary to make the Internet a viable commercial
marketplace for the long term will be developed. Even if these products and
services are developed, we cannot assure stockholders that the Internet will
become a viable commercial marketplace for our virtual calling cards and
services. If not, our business, financial condition and operating results will
be materially adversely affected. Also, we may be required to incur substantial
expenditures in order to adapt our products and services to changing Internet
technologies, which could have a material adverse effect on our business,
financial condition and operating results. The failure to manage our growth in operations and hire additional
qualified employees could have a material adverse effect on us. The expected growth of our operations places a significant strain on our
current management resources. To manage this expected growth, we will need to
improve our:  
    
    transaction processing methods;
    
    operations and financial systems;
    
    procedures and controls; and
    
    training and management of our employees. Competition for personnel is intense, and we cannot assure stockholders
that we will be able to successfully attract, integrate or retain sufficiently
qualified personnel. Our failure to attract and retain the necessary personnel
or to effectively manage our employee and operations growth could have a
material adverse effect on our business, financial condition and operating
results. Our potential customers may have concerns about Internet commerce security
which could inhibit our growth and we may incur losses resulting from credit
card fraud. Consumer concerns over the security of transactions conducted on the
Internet or the privacy of users may inhibit the growth of the Internet and
online commerce. To securely transmit confidential information, such as
customer credit card numbers, we rely on encryption and authentication
technology that we license from third parties. We cannot predict whether events
or developments will compromise or breach the technology that protects
our customer transaction data. If our security measures do not prevent security
breaches, this could have a material adverse effect on our business, financial
condition and operating results. To date, we have suffered minimal losses as a result of orders placed with
fraudulent credit card data even though the associated financial institution
approved payment of the orders. Under current credit card practices, a merchant
is liable for fraudulent credit card transactions where the merchant does not
obtain a cardholders signature. We do not obtain the signature of the
cardholder when we process orders. Although we have implemented mechanisms to
try to detect credit card fraud, we cannot assure you that our efforts will be
successful. Our inability to adequately detect credit card fraud could
materially adversely affect our business, financial condition and operating
results. To the extent that our activities involve the storage and transmission of
proprietary information, such as credit card numbers, security breaches could
expose us to a risk of loss or litigation and possible liability. We do not
presently carry insurance policies to reimburse us for losses caused by
security breaches. We cannot assure 26




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stockholders that our security measures
will prevent security breaches. Our failure to prevent security breaches could
have a material adverse effect on our business, financial condition and
operating results. The market price for our common stock may be volatile, which could cause
stockholders to lose substantial portions of their investment. The market prices of the securities of Internet-related and online
commerce companies have been especially volatile. We cannot assure stockholders
that these trading prices will not continue to be volatile or that valuations
will be sustained. Broad market and industry factors may materially and
adversely affect the market price of our common stock, regardless of our
operating performance. Our business may be adversely affected if we are not able to protect our
intellectual property and other proprietary rights from infringement. Our success depends in part upon our ability to protect our proprietary
technology and other intellectual property rights. We rely on a combination of
copyright, trademark, service mark and trade secret laws and contractual
restrictions to establish and protect our proprietary rights. Effective
trademark, service mark, copyright and trade secret protection may not be
available in every country in which our services are made available online.
Therefore, the steps that we take may be inadequate to protect our rights. The Internet industry may become subject to increased government
regulation which could have a negative effect on our operations. Various actions have been taken by the United States Congress and the
Federal courts that, in some cases impose some forms of regulation on the
Internet, and in other cases protect the Internet from regulation. Domestic and
international authorities regularly consider proposed legislation that could
result in new regulations on the Internet. It is impossible to say at this time
whether and to what extent the Internet may ultimately be regulated
domestically or internationally. Increased regulation of the Internet may
decrease its growth, which may negatively impact the cost of doing business via
the Internet or otherwise materially adversely affect our business, results of
operations and financial condition. In addition, because our services are accessible worldwide, and we
facilitate the sale of goods to users worldwide, other jurisdictions may claim
that we are required to comply with their laws. We are qualified to do business
in Delaware and Texas only, and failure by us to qualify as a foreign
corporation in a jurisdiction where we are required to do so could subject us
to taxes and penalties for the failure to qualify. Sales tax collection by states may adversely affect our growth. We do not currently collect sales or other similar taxes for calling cards
or services sold through our Web site, other than for calling cards sold to
Texas residents. However, one or more states may seek to impose sales tax
or similar collection obligations on out-of-state companies, such as ours,
which engage in Internet commerce. A successful assertion by one or more states
or any other country that we should collect sales or other taxes on the sale of
cards or services on our system could have a material adverse effect on our
operations. The loss of key personnel could adversely affect our business. We believe that our success will depend on the continued services of our
senior management team. We carry key person life insurance on the lives of B.
Michael Adler and R. Stephen Polley. The loss of the services of any of our
senior management team or other key employees could adversely affect our
business, financial condition and operating results. We may not be able to raise needed additional capital in the future. We require substantial working capital to fund our business. Our working
capital requirements and cash flow provided by operating activities can vary
from quarter to quarter depending on revenues, operating expenses, 27




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capital
expenditures and other factors. We anticipate that the net proceeds of our
initial public offering will be sufficient to meet our anticipated needs
through at least the next 18 months. Thereafter, we may need to raise
additional funds. We may also need to raise additional funds sooner than anticipated to:  
    
    fund more rapid expansion;
    
    develop new or enhanced services or products; and
    
    respond to competitive pressures. If additional funds are raised through the issuance of equity or
convertible debt securities the rights and
ownership in our company by existing stockholders may be reduced. We cannot assure stockholders that additional financing will be available
on terms favorable to us or at all. If adequate funds are not available, or are
not available on acceptable terms, we may not be able to fund planned
expansion, take advantage of available opportunities, develop or enhance
services or products or respond to competitive pressures. Such inabilities
could have a material adverse effect on our business, financial condition and
operating results. Compliance with present or future state, federal and international
financial services regulation could be costly, expose us to substantial
liability, force us to change our business practices or force us to cease
offering our current product. We operate in an industry subject to government regulation. Our Cash2India
business is subject to some states money transmitter regulations, to federal
regulations and to federal electronic fund transfer and money laundering
regulations and to international regulations. We have approval from the
Reserve Bank of India to provide our Cash2India services in India. If we were
to lose this approval, we may be forced to change our business practices or
cease offering this service. In the future, we might be subjected to:  
    
    state or federal banking regulations;
    
    additional states money transmitter regulations and federal money laundering regulations;
    
    international banking or financial services regulations or laws
governing other regulated industries; or
    
    U.S. and international regulation of Internet transactions. If we were found subject to or in violation of any laws or regulations
governing banking, we could be subject to liability and forced to change our
business practices. We believe the licensing requirements of the Office of the Comptroller of
the Currency, the Federal Reserve Board and other federal or state agencies
that regulate banks, bank holding companies or other types of providers of
electronic commerce services do not apply to us. One or more states may
conclude that, under its or their statutes, we are engaged in an unauthorized
banking business. We have received written communications from certain
regulatory authorities. If we are found to be engaged in an unauthorized
banking business in one or more states, we might be subject to monetary
penalties and adverse publicity and might be required to cease doing business
with residents of those states. The need to comply with state laws prohibiting
unauthorized banking activities could also limit our ability to enhance our
services in the future. We are subject to laws and regulations on money laundering and reporting
of suspicious activities that could have a material adverse impact on our
business and could subject us to civil and criminal liability. 28




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##### Table of Contents



We are subject to money laundering laws and regulations that prohibit,
among other things, our involvement in transferring the proceeds of criminal
activities. These laws and regulations require us to operate an anti-money
laundering program that contains at least the following elements: written
policies and procedures (including those relating to customer identification),
training for employees, designation of a compliance officer, and regular
independent review of the program. We have adopted a program to comply with
these regulations, but any errors or failure to implement the program properly
could lead to a lawsuit, administrative action, fine and/or prosecution by the
government. We are also subject to regulations that require us to report
suspicious activities involving transactions of $2,000 or more. The
interpretation of suspicious activities in this context is uncertain. Future
regulations under the International Money Laundering Abatement and Financial
Anti-Terrorism Act of 2001, or the USA Patriot Act, may require us to revise
the procedures we take to verify the identity of our customers and to monitor
more closely international transactions. These regulations could impose
significant costs on us or make it more difficult for new customers to join our
network. We could be required to learn more about our customers before sending
money to obtain additional verification of international customers, or to
monitor our customers activities more closely. These requirements could raise
our costs significantly and reduce the attractiveness of our product. Failure
to comply with federal and state money laundering laws could result in
significant criminal and civil lawsuits, penalties and forfeiture of
significant assets. 29




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##### Table of Contents



ITEM 7. FINANCIAL STATEMENTS The financial statements required by this item begin at Page F-1 hereof. 
 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE None. 
 ITEM 8A. CONTROLS AND PROCEDURES Based on the evaluation conducted by management of the Company with the
participation of the Companys Chief Executive Officer and Chief Financial
Officer, regarding the Companys disclosure controls and procedures as of the
end of the fiscal quarter ended December 31, 2003, the Companys Chief
Executive Officer and Chief Financial Officer have concluded that the Companys
disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 under
the Securities Exchange Act of 1934) are effective. There have been no
significant changes in internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses. In addition, during the fiscal quarter ended December 31, 2003, there have
been no significant changes in internal control over financial reporting that
have materially affected, or that are reasonably likely to materially affect,
the Companys internal control over financial reporting. 30




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PART III 
 ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Except for information with respect to our Code of Ethics and Business
Conduct discussed below, the information regarding the directors and executive
officers of WorldQuest in the Proxy Statement relating to WorldQuests 2004
Annual Meeting, which will be filed with the Commission within 120 days after
December 31, 2003, is incorporated herein by reference. WorldQuest has adopted a Code of Ethics and Business Conduct that applies
to directors, officers and employees, including WorldQuests principal
executive officer, principal financial officer and principal accounting
officer. WorldQuests Code of Ethics and Business Conduct can be obtained free
of charge by contacting the company at 972-361-1980. Changes to and waivers
granted with respect to WorldQuests Code of Ethics and Business Conduct
related to officers identified above, and other executive officers and
directors of WorldQuest that we are required to disclose pursuant to applicable
rules and regulations of the SEC will be posted on our website at
http://www.wqn.com. 
 ITEM 10. EXECUTIVE COMPENSATION The information regarding executive compensation in the Proxy Statement
relating to WorldQuests 2004 Annual Meeting, which will be filed with the
Commission within 120 days after December 31, 2003, is incorporated herein by
reference. 
 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information regarding the security ownership of certain beneficial
owners and management in the Proxy Statement relating to WorldQuests 2004
Annual Meeting, which will be filed with the Commission within 120 days after
December 31, 2003, is incorporated herein by reference. 
 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information regarding certain relationships and related transactions
in the Proxy Statement relating to WorldQuests 2004 Annual Meeting, which will
be filed with the Commission within 120 days after December 31, 2003, is
incorporated herein by reference. 31




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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    The following documents are filed as part of this Annual Report on
Form 10-KSB: 1. Financial Statements: The financial statements filed as
part of this report are listed in the Index to Financial
Statements on Page F-1 hereof. 2. Exhibits required to be filed by Item 601 of Regulation
S-B: ExhibitNumber
    
    Description of Exhibits2.1
    
    Agreement and Plan of Merger, dated as of December 6, 2001, by and among
WorldQuest, WQN
Mercury Inc., WQN Mercury Sub Inc., and buyindiaonline.com Inc.,
filed as exhibit 2.1 to WorldQuests Annual Report on Form 10-KSB
for the fiscal year ended December 31, 2001, and incorporated
herein by this reference.2.2
    
    Agreement and Plan of Merger, dated as of March 16, 2004, among
WorldQuest, Ntera Holdings,
Inc. and Engin Yesil, filed as exhibit 2.1 to WorldQuests Current
Report on Form 8-K/A dated March 19, 2004, as amended,
and incorporated herein by this reference.3.1
    
    Certificate of Incorporation of WorldQuest, filed as Exhibit 3.1 to
WorldQuests Form SB-2 Registration Statement, File No. 333-82721 (the
Prior Registration Statement), and incorporated herein by this
reference.3.2
    
    Bylaws of WorldQuest, filed as Exhibit 3.2 to the Prior Registration
Statement, and incorporated herein by this reference.4.1
    
    Specimen common stock certificate, filed as Exhibit 4.1 to the Prior
Registration Statement, and incorporated herein by this reference.4.2
    
    Amended and Restated Note dated May 5, 1999 payable to WorldQuest
Networks, LLC (now known as Eagle Venture Capital, LLC), filed as Exhibit
4.2 to the Prior Registration Statement, and incorporated herein by this
reference.4.3.1
    
    Representatives Warrant dated February 4, 2000 granted to John G.
Kinnard and Company Incorporated for 68,750 shares of common stock, filed
as Exhibit 4.3.1 to WorldQuests Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1999, and incorporated herein by this
reference.4.3.2
    
    Representatives Warrant dated February 4, 2000 granted to Kaufman
Bros., L.P. for 178,750 shares of common stock, filed as Exhibit 4.3.2 to
WorldQuests Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1999, and incorporated herein by this reference.4.3.3
    
    Representatives Warrant dated February 4, 2000 granted to WestPark
Capital, Inc. for 27,500 shares of common stock, filed as Exhibit 4.3.3 to
WorldQuests Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1999, and incorporated herein by this reference.4.4
    
    Amended and Restated Note date August 15, 1999 payable to Eagle Capital
Venture, LLC, which replaces the Amended and Restated Note filed as
Exhibit 4.2, filed as Exhibit 4.4 to the Prior Registration Statement, and
incorporated herein by this reference.4.5
    
    Form of Unsecured Subordinated Convertible Promissory Note issued in the
private placement closed in December 1999 (the Private Placement), filed
as Exhibit 4.5 to WorldQuests Form SB-2 Registration Statement, file no.
333-93019 (the Second Registration Statement), and incorporated herein
by this reference.4.6
    
    Form of Warrant issued in the Private Placement, filed as Exhibit 4.6 to
the Second Registration Statement, and incorporated herein by this
reference.4.7
    
    Warrant to Purchase 50,000 shares of common stock granted to Advanced
Multimedia Group, Inc. on March 16, 2000.4.8
    
    Warrant to Purchase 50,000 shares of common stock granted to Advanced
Multimedia Group, Inc. on April 26, 2000.10.1
    
    Joint Venture Agreement dated April 9, 1999 between WorldQuest and BDC
LLC, filed as Exhibit 10.1 to the Prior Registration Statement, and
incorporated herein by this reference.10.2
    
    Amended 1997 Stock Option Plan, filed as Exhibit 10.2 to the Prior
Registration Statement, and incorporated herein by this reference.10.3
    
    Stock Option Agreement dated December 7, 1998 granted to Michael R.
Lanham by WorldQuest, filed as Exhibit 10.3 to the Prior Registration
Statement, and incorporated herein by this reference.
 32




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits10.4
    
    Stock Transfer Agreement dated December 7, 1998 between WorldQuest
Communications, Inc., WorldQuest Networks, LLC and WorldQuest, filed as
Exhibit 10.4 to the Prior Registration Statement, and incorporated herein
by this reference.10.5
    
    Amendment and Clarification Agreement dated September 27, 1999 between
WorldQuest Communications, Inc., WorldQuest and Eagle Venture Capital, LLC
amending and clarifying the Stock Transfer Agreement filed as Exhibit
10.4, filed as Exhibit 10.7 to the Prior Registration Statement, and
incorporated herein by this reference.10.6
    
    Form of Registration Rights Agreement executed in connection with the
Private Placement, filed as Exhibit 10.6 to the Second Registration
Statement, and incorporated herein by this reference.10.7
    
    Purchase Agreement dated April 17, 2000 between WorldQuest and BDC LLC,
filed as Exhibit 10.1 to WorldQuests Quarterly Report on Form 10-QSB for
the fiscal quarter ended March 31, 2000, and incorporated herein by this
reference.10.8
    
    2001 Stock Option Plan, filed as Exhibit 4.8 to WorldQuests Form S-8
Registration Statement, File No. 333-54498, and incorporated herein by
this reference.10.9
    
    Employment agreement by and between WorldQuest Networks, Inc. and R.
Stephen Polley effective as of May 14, 2001, filed as Exhibit 10.1 to
WorldQuests Quarterly Report as Form 10-QSB for the quarter ended June
30, 2001.10.10
    
    2002 Stock Option Plan.*21.1
    
    List of Subsidiaries.*23.1
    
    Consent of Grant Thornton LLP.*31.1
    
    Certification of the Companys Chief Executive Officer, pursuant to
Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.*31.2
    
    Certification of the Companys Chief Financial Officer, pursuant to
Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.*32.1
    
    Certification of the Companys Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*32.2
    
    Certification of the Companys Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
   *
    
    Filed herewith.  (b)
    
    Reports on Form 8-K The Company filed a Current report on Form 8-K dated November 12,
2003 to furnish in accordance with Securities Exchange Commission
Release No. 33-8126 under Item 12, Results of Operations and
Financial Condition, the Companys press release announcing its
financial results for the third quarter of 2003. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information regarding certain principal accountant fees and services
in the Proxy Statement relating to WorldQuests 2004 Annual Meeting, which will
be filed with the Commission within 120 days after December 31, 2003, is
incorporated herein by reference. 33




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##### Table of Contents



SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. WORLDQUEST NETWORKS, INC.March 23, 2004
    /s/ B. Michael AdlerB. Michael AdlerPresident and Chief Executive Officer (Principal Executive Officer) March 23, 2004
    /s/ Victor E. GrijalvaVictor E. GrijalvaVice President, Chief Financial
Officer, Secretary and Treasurer

(Principal Financial and Accounting
Officer) In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated. March 23, 2004
    /s/ B. Michael AdlerB. Michael AdlerDirector March 23, 2004
    /s/ E. Denton JonesE. Denton JonesDirector March 23, 2004
    /s/ Elizabeth H. BuchlerElizabeth H. BuchlerDirector March 23, 2004
    /s/ Robert A. FarmerRobert A. FarmerDirector (Chairman of the Board) 34




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WorldQuest Networks, Inc. and Subsidiaries Index to Consolidated Financial Statements Contents Report of Independent Certified Public Accountants
    
    
    F-2Consolidated Balance Sheets as of December 31, 2003 and 2002
    
    
    F-3Consolidated Statements of Operations for the years ended December 31, 2003 and 2002
    
    
    F-4Consolidated Statements of Changes in Stockholders Equity for the years ended
December 31, 2003 and 2002
    
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2003 and 2002
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7
 F-1




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Report of Independent Certified Public Accountants Board of Directors
WorldQuest Networks, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of WorldQuest
Networks, Inc. (a Delaware corporation) and subsidiaries as of December 31,
2003 and 2002, and the related consolidated statements of operations, changes
in stockholders equity, and cash flows for the years then ended. 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 auditing standards generally
accepted in the United States of America. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of WorldQuest
Networks, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States
of America. /s/ Grant Thornton LLP Dallas, TexasFebruary 13, 2004(except for Note 16,as to which the date is March 16, 2004)
 F-2




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WORLDQUEST NETWORKS, INC. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS December 31,2003
    
    2002ASSETSCurrent assets:Cash and cash equivalents
    
    $
    17,931,820
    
    
    $
    20,721,207Accounts receivable, net
    
    
    553,251
    
    
    
    355,111Note receivable
    
    
    
    
    
    
    202,383Prepaid expenses and other current assets
    
    
    557,577
    
    
    
    370,325Total current assets
    
    
    19,042,648
    
    
    
    21,649,026Property and equipment, net
    
    
    1,039,783
    
    
    
    1,627,507Other assets, net
    
    
    101,192
    
    
    
    Total assets
    
    $
    20,183,623
    
    
    $
    23,276,533LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,108,152
    
    
    $
    1,195,738Accrued expenses
    
    
    471,746
    
    
    
    146,863Deferred revenue
    
    
    254,121
    
    
    
    238,936Promissory note
    
    
    
    
    
    
    300,000Total current liabilities
    
    
    1,834,019
    
    
    
    1,881,537Promissory note
    
    
    300,000
    
    
    
    Commitments and contingenciesStockholders equity:Preferred stock, par value $0.01 per share:Authorized shares10,000,000; none issued and outstanding
at December 31, 2003 and 2002
    
    
    
    
    
    
    Common stock, par value $.01 per share:Authorized shares50,000,000; issued and outstanding shares  6,386,199
at December 31, 2003 and 2002
    
    
    63,862
    
    
    
    63,862Additional capital
    
    
    41,994,594
    
    
    
    41,994,594Accumulated deficit
    
    
    (24,008,852
    )
    
    
    (20,663,460
    )Total stockholders equity
    
    
    18,049,604
    
    
    
    21,394,996Total liabilities and stockholders equity
    
    $
    20,183,623
    
    
    $
    23,276,533
 The accompany notes are an integral part of these consolidated financial statements. F-3




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WORLDQUEST NETWORKS, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS Year ended December 31,2003
    
    2002Telephony revenue
    
    $
    9,326,627
    
    
    $
    11,019,491Financial services and other
    
    
    588,727
    
    
    
    450,792Total revenue
    
    
    9,915,354
    
    
    
    11,470,283Cost of revenue
    
    
    7,209,788
    
    
    
    8,772,585Gross profit
    
    
    2,705,566
    
    
    
    2,697,698Operating expenses:Selling, general and administrative
    
    
    5,179,072
    
    
    
    4,836,332Depreciation and amortization
    
    
    1,075,763
    
    
    
    1,100,209Total operating expenses
    
    
    6,254,835
    
    
    
    5,936,541Operating loss
    
    
    (3,549,269
    )
    
    
    (3,238,843
    )Interest income, net
    
    
    203,877
    
    
    
    351,706Net loss
    
    $
    (3,345,392
    )
    
    $
    (2,887,137
    )Net loss per share  basic and diluted
    
    $
    (0.52
    )
    
    $
    (0.45
    )Weighted-average common shares outstanding  basic and diluted
    
    
    6,386,199
    
    
    
    6,385,829
 The accompany notes are an integral part of these consolidated financial statements. F-4




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WORLDQUEST NETWORKS, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY Common Stock
    


    Additional
    
    Accumulated
    
    StockholdersShares
    
    Amount
    
    Capital
    
    Deficit
    
    EquityBalance at December 31, 2001
    
    
    6,381,199
    
    
    $
    63,812
    
    
    $
    41,989,644
    
    
    $
    (17,776,323
    )
    
    $
    24,277,133Exercise of employee stock options
    
    
    5,000
    
    
    
    50
    
    
    
    4,950
    
    
    
    
    
    
    
    5,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,887,137
    )
    
    
    (2,887,137
    )Balance at December 31, 2002
    
    
    6,386,199
    
    
    $
    63,862
    
    
    $
    41,994,594
    
    
    $
    (20,663,460
    )
    
    $
    21,394,996Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,345,392
    )
    
    
    (3,345,392
    )Balance at December 31, 2003
    
    
    6,386,199
    
    
    $
    63,862
    
    
    $
    41,994,594
    
    
    $
    (24,008,852
    )
    
    $
    18,049,604
 The accompany notes are an integral part of these consolidated financial statements. F-5




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WORLDQUEST NETWORKS, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31,2003
    
    2002Operating ActivitiesNet loss
    
    $
    (3,345,392
    )
    
    $
    (2,887,137
    )Adjustments to reconcile net loss to net cash
used in operating activities:Depreciation and amortization
    
    
    1,075,763
    
    
    
    1,100,209Loss on disposition of property and equipment, net
    
    
    18,541
    
    
    
    Changes in operating assets and liabilities:Accounts receivable and notes receivable
    
    
    4,243
    
    
    
    (383,396
    )Accounts payable and accrued expenses
    
    
    237,297
    
    
    
    (210,067
    )Deferred revenue
    
    
    15,185
    
    
    
    23,820Other assets
    
    
    (389,635
    )
    
    
    (93,302
    )Net cash used in operating activities
    
    
    (2,383,998
    )
    
    
    (2,449,873
    )Investing ActivitiesAdditions to property and equipment
    
    
    (405,389
    )
    
    
    (948,318
    )Financing ActivitiesPayment on term loan
    
    
    
    
    
    
    (925,000
    )Proceeds from exercise of stock options
    
    
    
    
    
    
    5,000Net cash used in financing activities
    
    
    
    
    
    
    (920,000
    )Decrease in cash and cash equivalents
    
    
    (2,789,387
    )
    
    
    (4,318,191
    )Cash and cash equivalents at beginning of year
    
    
    20,721,207
    
    
    
    25,039,398Cash and cash equivalents at end of year
    
    $
    17,931,820
    
    
    $
    20,721,207Supplemental Disclosures of Cash Flow Information:Cash paid for interest
    
    $
    4,692
    
    
    $
    49,219
 The accompany notes are an integral part of these consolidated financial statements. F-6




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WORLDQUEST NETWORKS, INC. AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003 and 2002 1. Organization and Description of Business WorldQuest Networks, Inc. (WorldQuest or the Company) was incorporated
as a Texas corporation effective October 14, 1996, and reincorporated as a
Delaware corporation effective October 28, 1999. WorldQuest is an
international Internet telephony and money transfer company. WorldQuest sells
virtual prepaid calling cards through its Internet website and transmits long
distance calls at discounted rates through its Internet and traditional
networks. WorldQuest also sells virtual calling cards processed through other
companies platforms including prepaid Internet, prepaid wireless or mobile,
and prepaid roadside assistance and from time to time sells its excess capacity
to other long distance carriers. The Company also provides a web service that
enables customers to send money and a personalized message from the United
States to friends, family or others in India, Sri Lanka, The Philippines and
Russia. In 2002, we began selling the WorldQuest CashCard, a multi-purpose
stored-value card, and in 2003 we added the ability for customers to upgrade
their WorldQuest CashCard to a WorldQuest prepaid VISA®. The WorldQuest
CashCard and VISA® CashCard can be used to withdraw money or check balances at
ATMs worldwide and to pay for merchandise at any location associated with the
Plus®, Pulse® or Star® Networks. The WorldQuest VISA® CashCard can be used
anywhere VISA® is accepted. Cardholders can add money to their card via the
direct deposit of their paychecks, by cashing their paychecks, by ACH transfer
and by using cash, credit cards, or electronic checks. In addition, the
stored-value cards also serve as a prepaid long-distance calling card. As of
December 31, 2003, we have issued over 2,500 stored value cards. As of December 31, 2003, Eagle Venture Capital, LLC (Eagle Venture
Capital) owned approximately 2.6 million, or 41% of our outstanding shares of
common stock. Eagle Venture Capital is primarily owned by our founder and
Chief Executive Officer. 2. Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates. Principles of Consolidation The consolidated financial statements include the accounts of the Company,
its subsidiaries and joint ventures in which the Company owns a controlling
interest. All significant intercompany balances and transactions have been
eliminated in consolidation. Cash Equivalents Cash equivalents include money market mutual funds and other highly liquid
investments purchased with maturities of three months or less. F-7




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WORLDQUEST NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) Depreciation and Amortization Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets.
Amortization of capital leases and leasehold improvements is provided on a
straight line basis over the lives of the related assets or the life of the
lease, whichever is shorter, and is included with depreciation expense. Depreciation expense totaled $974,572 and $1,100,000 for 2003 and 2002,
respectively. Amortization expense totaled $101,191 for 2003 and $0 for 2002. Impairment of Long-lived Assets The Company evaluates long-lived assets for impairment whenever events or
changes in circumstances indicate the carrying amount of an asset may not be
recoverable and the undiscounted cash flows to be generated by these assets are
less than the carrying amounts of these assets. Website Development Costs Costs related to the planning and post implementation phases of our
website development efforts are expensed. Direct costs incurred in the
development phase are capitalized and amortized over the products estimated
useful life of one to three years and are included in depreciation expense.
Costs associated with minor enhancements and maintenance for the website are
expensed. Website development costs capitalized for the years ended December
31, 2003 and 2002 were $190,000 and $207,000, respectively. Income Taxes Income taxes are determined using the liability method, which gives
consideration to the future tax consequences associated with differences
between the financial accounting and tax basis of assets and liabilities. This
method also gives immediate effect to changes in income tax laws. Revenue Recognition Retail prepaid phone card revenue is recorded net of estimated returns and
allowances and is recognized as calling services are used or upon expiration of
the calling card. Wholesale traffic revenue is recognized as calls are
processed. Money transfer fees are recognized upon transfer of funds to the
recipient. CashCard revenues are recognized upon usage of the CashCard. Advertising Costs The Company expenses advertising costs as incurred. Advertising expense
for the years ended December 31, 2003 and 2002 was $565,000 and $807,000,
respectively. Stock-Based Compensation The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, in the primary financial
statements and has provided supplemental disclosures required by Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation and by Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure an
amendment of FASB Statement No. 123. F-8




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WORLDQUEST NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) Statement of Financial Accounting Standards No. 123, Accounting for Stock
Based Compensation, (SFAS 123) requires the disclosure of pro forma net loss
and loss per share computed as if the Company had accounted for its employee
stock options under the fair value method set forth in SFAS 123. The Companys
reported and pro forma net loss for the years ending December 31, 2003 and 2002
are as follows: Year ended December 31,2003
    
    2002Net loss as reported
    
    $
    (3,345,392
    )
    
    $
    (2,887,137
    )Pro forma stock-based employee
compensation expense
    
    
    (170,863
    )
    
    
    (277,722
    )Pro forma net loss
    
    $
    (3,516,255
    )
    
    $
    (3,164,859
    )Net loss per share:As reported  basic and diluted
    
    $
    (0.52
    )
    
    $
    (0.45
    )Pro forma  basic and diluted
    
    $
    (0.55
    )
    
    $
    (0.50
    )
 The fair value of options granted was estimated at the date of grant using
the Black-Scholes option pricing model. The following weighted average
assumptions used in the December 31, 2003 calculation were as follows: risk
free interest rate of 3.25%, dividend yield of zero, volatility factor of .85,
and average expected life of 5 years. The weighted average assumptions used in
the December 31, 2002 calculation were as follows: risk free interest rate of
3%, divided yield of zero, volatility of .9 and average expected life of 4
years. The options granted during 2003 and 2002 had a weighted average fair
value of $1.40 and $1.30 per share, respectively. Net Loss per Share Basic and diluted net loss per share is computed using the Companys net
loss for each period presented divided by the average common shares outstanding
during the period. Stock options and warrants convertible into 1,790,556 and
1,835,947 shares of the Companys common stock for the years ended December 31,
2003 and 2002, respectively, were not considered in the calculation of average
common shares outstanding as the effect would be anti-dilutive due to the
Companys net loss for the periods presented. Comprehensive Income Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. For the years ended December 31, 2003 and 2002, the
Company had no transactions other than those reported in its statement of
operations. Fair Value of Financial Instruments The Companys financial instruments consist primarily of cash equivalents,
accounts and notes receivable, accounts payable and long-term debt. At December
31, 2003 and 2002, the carrying amount of the Companys financial instruments
approximates their fair values. Management believes the Companys debt
approximates fair value due to its short maturity and its variable interest
rate. F-9




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WORLDQUEST NETWORKS,
INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) Concentration of Credit and Business Risks Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, accounts
receivable and notes receivable. Accounts receivable consist of amounts owed by
credit card processing companies relating to prepaid phone card sales and money
transfer services. Customers purchase the Companys prepaid calling cards primarily using
major credit cards, which are reimbursed by credit card processing companies.
The Company does not routinely perform on-going credit evaluations of its
prepaid calling card customers but does evaluate its credit card processors.
The Company performs credit evaluations and establishes credit limits for its
wholesale traffic customers, including requiring deposits when applicable. A substantial portion of the Companys revenues is derived from the sale
of prepaid phone cards that are used for calls to India. At December 31, 2003, three credit card processing companies accounted for
35%, 13% and 10% of total accounts receivable, and at December
31, 2002, three credit card processing companies accounted for 52%, 38%, and 9%
of total accounts receivable. At December 31, 2003 and 2002,
accounts receivable are stated net of an allowance for doubtful accounts of
$25,000 and $2,000, respectively. Bad debt expense for the years ended
December 31, 2003 and 2002 was $115,000 and $82,000, respectively. For the year
ended December 31, 2003, the Company purchased data communication and
telecommunication services from three suppliers, which accounted for 35%, 18%
and 11% of cost of goods sold for telecommunication services. For
the year ended December 31, 2002, the Company purchased data communication and
telecommunication services from four suppliers, which accounted for 24%, 23%,
15% and 10% of cost of goods sold for telecommunication services. New Accounting Pronouncements In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51 (FIN 46). FIN 46 requires
the consolidation of variable interest entities in which an enterprise absorbs
a majority of the entitys expected losses, receives a majority of the entitys
expected residual returns, or both, as a result of ownership, contractual or
other financial interests in the entity. Currently, entities are generally
consolidated by an enterprise that has a controlling financial interest through
ownership of a majority voting interest in the entity. The adoption of FIN 46
will not have a material impact on our consolidated financial statements. Reclassifications Certain reclassifications have been made to the 2002 financial statements
to conform to the 2003 presentation. 3. Note receivable In January 2003, the Company received certain assets of a wholesale
customers prepaid telecom business including, card inventory, customer lists,
patents, trademarks and other assets in satisfaction of a note receivable from
the same wholesale customer. The Company believes the value of the assets
received approximates the value of the balance due on the note receivable of
$202,000 at December 31, 2002. The value of the assets received, which
primarily consists of customer lists, are included in other assets and are
being amortized over two years. Amortization expense for the year ended
December 31, 2003 was $101,191. F-10




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WORLDQUEST NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 4. Property and Equipment Property and equipment consists of the following as of December 31: EstimatedUseful Life(Years)
    
    2003
    
    2002Leasehold improvements
    
    2 to 5
    
    $
    78,134
    
    
    $
    78,134Computers and network equipment
    
    2 to 3
    
    
    3,797,148
    
    
    
    3,656,435Furniture and fixtures
    
    5
    
    
    87,196
    
    
    
    84,737Purchased software and website development
costs
    
    1 to 5
    
    
    1,315,622
    
    
    
    1,105,994Total
    
    
    
    
    5,278,100
    
    
    
    4,925,300Less: accumulated depreciation and amortization
    
    
    
    
    (4,238,317
    )
    
    
    (3,297,793
    )Net property and equipment
    
    
    
    $
    1,039,783
    
    
    $
    1,627,507
 5. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist of the following as of
December 31: 2003
    
    2002Prepaid telecommunication services
    
    $
    33,222
    
    
    $
    7,799Deposits
    
    
    316,936
    
    
    
    242,577Prepaid expenses
    
    
    207,419
    
    
    
    119,949$
    557,577
    
    
    $
    370,325
 6. Accrued Expenses Accrued expenses consist of the following as of December 31: 2003
    
    2002Accrued franchise, property and sales taxes
    
    $
    130,608
    
    
    $
    34,817Accrued payroll expenses
    
    
    62,115
    
    
    
    42,040Accrued legal and other
    
    
    279,023
    
    
    
    70,006$
    471,746
    
    
    $
    146,863
 F-11




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##### Table of Contents



WORLDQUEST NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 7. Debt Long-term debt consists of the following as of December 31: 2003
    
    2002Promissory note
    
    $
    300,000
    
    
    $
    300,000Less current portion
    
    
    
    
    
    
    (300,000
    )Long term debt net of current portion
    
    $
    300,000
    
    
    $
    
 In 2001, the Company borrowed $300,000 from a financial institution under
a term promissory note agreement (the Note). The Note bears interest at the
financial institutions prime rate as adjusted from time to time (4.0% at
December 31, 2003) less 2.25% per annum. The Note, originally due in October
2003 was extended and is now due in October 2005. The Note is collateralized
by a $300,000 certificate of deposit bearing interest of .95 % per annum. For the year ended December 31, 2002, the Company paid outstanding
interest of $47,000 on the term loan from Eagle Venture Capital, a significant
stockholder of the Company, which is controlled by the Chief Executive Officer
and President. The principal balance of $925,000 on the term loan from Eagle
Venture Capital due May 5, 2002 was paid on July 24, 2002, thereby satisfying
in full the Companys obligation on the term loan. The Company also had a
$1,400,000 line of credit with Eagle Venture Capital, none of which was ever
utilized and which expired on May 5, 2002. 8. Related Party Transactions The Companys founder, Chief Executive Officer and President holds a
controlling interest in Eagle Venture Capital, which owns approximately 2.6
million outstanding shares of the common stock of the Company as of December
31, 2003 and 2002. Eagle Venture Capital provided the Company with a term loan
and a line of credit, which expired May 2002. The term loan and line of credit
are described in Note 7. A consulting company managed by one of the Companys directors has
warrants outstanding to acquire 100,000 shares of the Companys common stock.
The warrants have an exercise price of $6.00 per share and expire in 2005. F-12




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##### Table of Contents



WORLDQUEST NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 9. Income Taxes Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of deferred tax assets and liabilities are as follows as of December 31: 2003
    
    2002Deferred tax assets/(liability):Property and equipment
    
    $
    (35,341
    )
    
    $
    (36,502
    )Capital loss carry forward
    
    
    195,941
    
    
    
    195,941Other
    
    
    29,075
    
    
    
    10,448Net operating loss carry forwards
    
    
    9,292,073
    
    
    
    8,080,161Total deferred tax assets
    
    
    9,481,748
    
    
    
    8,250,048Valuation allowance
    
    
    (9,481,748
    )
    
    
    (8,250,048
    )Net deferred tax assets
    
    $
    
    
    
    $
    
 The Company has U.S. net operating loss carry forwards of approximately
$25,134,000 as of December 31, 2003. The Company has not recognized a deferred
tax asset in the accompanying balance sheets due to the uncertainty of future
realization. Accordingly, no tax benefit has been recognized in the
accompanying consolidated statements of operations. No other significant
reconciling items exist between the actual effective tax rate and the expected
effective tax rate. During 2003 and 2002, the valuation allowance increased by
approximately $1,232,000 and $1,244,000, respectively. If unused, accumulated
net operating losses expire as follows: 2011  $214,000; 2012  $1,531,000;
2018  $1,447,000; 2019  $1,999,000; 2020  $4,628,000; 2021  $8,210,000;
2022  $3,828,000; 2023  $3,277,000. 10. Stockholders Equity Common and Preferred Stock The Companys authorized share capital consists of 50,000,000 shares of
common stock with par value of $0.01 per share, and 10,000,000 shares of
preferred stock with par value of $0.01 per share. Warrants At December 31, 2003 and 2002, the Company had outstanding warrants to
purchase 720,775 and 782,000 shares of its common stock, respectively. These
warrants expire December 2004 through July 2006 and have a weighted average
exercise price of $12.03 per share. At December 31, 2003, all of the warrants
were exercisable. The warrants outstanding include warrants granted to a
consulting company managed by one of the Companys directors to acquire 100,000
shares of common stock (see Note 8); warrants granted to representatives of the
Companys underwriters in connection with the Companys initial public offering
to acquire 275,000 shares of common stock; warrants for 306,000 common shares
granted in connection with the Companys December 1999 private placement of
promissory notes; and warrants granted to various service providers and others
to acquire 39,775 shares of common stock. F-13




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WORLDQUEST NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) Stock Options The Company has stock option plans (the Plans) under which the Company
may grant Directors and key employees options to purchase up to 1,750,000
shares of the Companys common stock at an amount at least equal to the fair
value of the Companys common stock on the date of grant. The exercise and
vesting period of each option is determined by the Companys Board of
Directors, but no option shall have a term longer than 10 years. Options
granted under the Plans are non-qualified stock options. The following table
summarizes the employee stock option transactions for the years ended December
31, 2003 and 2002 under the Plans: Weighted AverageNumber of Shares
    
    Exercise PriceOutstanding at December 31, 2001
    
    
    942,602
    
    
    $
    7.20Granted
    
    
    70,000
    
    
    
    2.36Exercised
    
    
    (5,000
    )
    
    
    1.00Cancelled
    
    
    (121,522
    )
    
    
    3.99Outstanding at December 31, 2002
    
    
    886,080
    
    
    $
    4.05Granted
    
    
    55,000
    
    
    
    2.04Exercised
    
    
    
    
    
    
    0.00Cancelled
    
    
    (39,166
    )
    
    
    3.82Outstanding at December 31, 2003
    
    
    901,914
    
    
    $
    3.93Options exercisable:December 31, 2002
    
    
    659,732
    
    
    $
    4.57December 31, 2003
    
    
    794,258
    
    
    $
    4.18
 F-14




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WORLDQUEST NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) A summary of stock options under the Plans outstanding as of December 31,
2003 are as follows: Options Outstanding
    
    
    
    
    
    Options ExercisableWeighted-
    
    Weighted-
    
    
    
    
    
    Weighted-Range of
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Remaining
    
    Exercise
    
    
    
    
    
    ExercisePrices
    
    Shares
    
    Life (years)
    
    Price
    
    Shares
    
    Price$
    1.00 -
    
    
    $
    1.99
    
    
    
    129,500
    
    
    
    4.63
    
    
    $
    1.54
    
    
    
    89,500
    
    
    $
    1.372.00 -
    
    
    
    2.99
    
    
    
    596,314
    
    
    
    6.73
    
    
    
    2.20
    
    
    
    528,658
    
    
    
    2.193.00 -
    
    
    
    3.99
    
    
    
    50,500
    
    
    
    1.93
    
    
    
    3.33
    
    
    
    50,500
    
    
    
    3.335.00 -
    
    
    
    11.00
    
    
    
    25,000
    
    
    
    3.60
    
    
    
    5.75
    
    
    
    25,000
    
    
    
    5.7513.00 -
    
    
    
    14.00
    
    
    
    35,000
    
    
    
    2.90
    
    
    
    13.00
    
    
    
    35,000
    
    
    
    13.0019.00 -
    
    
    
    20.00
    
    
    
    60,000
    
    
    
    3.24
    
    
    
    19.13
    
    
    
    60,000
    
    
    
    19.1321.00 -
    
    
    
    22.00
    
    
    
    5,600
    
    
    
    3.22
    
    
    
    21.63
    
    
    
    5,600
    
    
    
    21.63Total
    
    
    
    
    
    
    
    
    
    
    901,914
    
    
    
    5.08
    
    
    $
    3.93
    
    
    
    794,258
    
    
    $
    4.18
 In December 1998, the Company issued options outside of the option plans
to purchase 167,867 shares of its common stock to a former officer of the
Company at an exercise price of $3.33 with a seven-year term. At December 31,
2003, all of these options were vested and outstanding. 11. Segment Reporting Due to the growth in the Companys financial services business commenced
with the Companys acquisition of Cash2India, the Company determined it had a
second segment and the Company now provides the disclosures required by
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information. This statement requires
the Company to define and report the Companys business segments based on how
management currently evaluates its business. The statement also requires
disclosures about products and services, geographic areas and major customers. The Company manages its business segments primarily on a products and
services basis. The Companys reportable segments are: 1) Internet telephony
services and 2) financial services. Internet telephony services primarily
consist of the sale of virtual calling cards, which allow customers to utilize
our network of Internet gateways and other traditional networks to place
long-distance calls at discounted rates. We focus on the international long
distance market and a substantial portion of our telephony revenue is derived
from the sale of virtual calling cards to customers calling from the Unites
States to India. Financial services consist of a web service that enables
customers to send money and a personalized message from the United States to
friends, family, or others in India, Sri Lanka, Russia and The Philippines. In
addition, financial services include the sale of the WorldQuest cash card that
can be used to withdraw money or check balances at ATMs worldwide and to pay
for merchandise at any location associated with the Plus®, Pulse® or Star®
networks. The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates the
performance of its business units based on segment operating profit. Segment
operating profits includes personnel, sales and marketing expenses and other
operating expenses directly attributable to the segment and excludes certain
expenses that are managed outside the segment. Costs excluded from the segment
operating profit consist of corporate expenses, including interest income and
interest expense. Corporate expenses are primarily comprised of executive
compensation, legal, insurance and other general and administrative expenses
that are F-15




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##### Table of Contents



WORLDQUEST NETWORKS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued) separately managed. Corporate assets are not included in segment assets and
consist primarily of cash and
cash equivalents. Summary information by segment for year-end December 31, 2003 are as
follows: Internet
    
    FinancialTelephony
    
    Services
    
    Corporate
    
    TotalRevenue
    
    $
    9,326,627
    
    
    $
    588,727
    
    
    $
    
    
    
    $
    9,915,354Depreciation and amortization
    
    $
    783,945
    
    
    $
    213,877
    
    
    $
    77,941
    
    
    $
    1,075,763Operating income / (loss)
    
    $
    102,672
    
    
    $
    (1,096,017
    )
    
    $
    (2,555,924
    )
    
    $
    (3,549,269
    )Identifiable assets
    
    $
    1,025,540
    
    
    $
    1,397,617
    
    
    $
    17,760,466
    
    
    $
    20,183,623
 Comparative segment information as of and for the year ended December 31, 2002 is not available. 12. Benefit Plan The Company has a 401(k) benefit plan. The plan provides for voluntary
employee contributions and the Company matches 15% of the first 8% of payroll
contributed by the employee. Employees become 100% vested in employment
contributions after 2 years of service accruing 50% per year of service. For
the years ended December 31, 2003 and 2002, the Companys plan contributions
were $5,400 and $7,000, respectively. 13. Commitments The Company has operating leases relating principally to office
facilities, which expire in 2006 and have future minimum lease commitments:
2004  $112,500; 2005  $112,500; 2006  $75,000. Rental expense under
operating leases was approximately $138,000 and $114,000 for the years ended
December 31, 2003 and 2002, respectively. 14. Contingencies In December 1996, the Company applied to the United States Patent and
Trademark Office to register the trademarks: WorldQuest and WorldQuest
Networks. We received a registration for the trademark WorldQuest from the
U.S. Patent and Trademark Office on November 23, 1999. In October 1997, the
Patent and Trademark Office issued a notice of publication regarding our
application to register WorldQuest Networks as a trademark. In response to
that notice, Qwest Communications filed a notice of opposition in September
1998. Qwest Communications instituted a cancellation proceeding in the Patent
and Trademark Office for the registered trademark WorldQuest. In December
2001, a judgment was made in the Companys favor whereby Qwests motion to
cancel our WorldQuest trademark was dismissed, however, Qwest filed a motion
appealing the judgment. In December 2002, Qwest filed a separate complaint
stating that the Companys prepaid cash card product infringes on the Qwest
trademark. In February 2003, the companies settled all outstanding claims
whereby WorldQuest received a cash payment and telecommunication services
(primarily long distance termination) from Qwest and Qwest shall retain all
rights to the trademarks in question. WorldQuest will have 18 months from the
date of settlement to cease using the name WorldQuest. We are currently
evaluating potential corporate name and anticipate that a decision will be made
in the next five months. The Company is a defendant from time to time in lawsuits and disputes
arising in the ordinary course of business. The Company believes that
resolution of all known contingencies is uncertain, and there can be no
assurance that future costs related to such litigation would not be material to
the Companys financial position
or results of operations. F-16




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##### Table of Contents



WORLDQUEST NETWORKS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued) 15. Interest Income, Net Interest income for the years ended December 31, 2003 and 2002 was
$209,000 and $401,000, respectively. Interest expense for the years ended
December 31, 2003 and 2002 was $5,000 and $49,000, respectively. 16. Subsequent Event On March 16, 2004, the Company entered into an Agreement and Plan of
Merger with Ntera Holdings, Inc., a Delaware corporation (Ntera), providing
for transactions that, once completed, will result in a change of control of
WorldQuest. Under the terms of the Merger Agreement, Ntera will be merged with
and into WorldQuest, with WorldQuest as the surviving company (the Merger).
Stockholders of Ntera at the effective time of the Merger will be entitled to
receive 80% of the common stock of the combined company, with existing
WorldQuest stockholders owning the remaining 20%. The Merger has been
unanimously approved by the Boards of Directors of both WorldQuest and Ntera,
and is subject to various conditions to closing, including approval by the
holders of not less than a majority of WorldQuests outstanding common stock,
approval of continued listing of WorldQuests common stock on the Nasdaq Stock
Market, completion of audited financial statements for Nteras fiscal year
ended December 31, 2003, receipt of a bring-down of the fairness opinion
rendered to the Board of Directors of WorldQuest, WorldQuests approval of
Nteras financial performance and certain other conditions. In
connection with the merger agreement, WorldQuest has also extended to
Ntera a bridge loan in the principal amount of $2 million. If the
merger agreement is terminated for any reason, the full amount of the
loan will become due and payable within six months of such
termination. Ntera and certain of its subsidiaries have granted
WorldQuest a security interest in their assets to secure repayment of
the loan. F-17