<PAGE>
U.S. SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission File Number 0-22351
Virtual Telecom, Inc.
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(Exact name of small business issuer as specified in its charter)
DELAWARE 98-0162893
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12, Ave des Morgines, 1213 Petit-Lancy 1, Geneva, Switzerland N/A
- ------------------------------------------------------------- ---
(Address of principal executive offices) (Zip Code)
41-22-879-0879
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(Issuer's telephone number)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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As of July 31, 1998 the Registrant had 5,781,309 shares of its common stock, par
value $0.001, issued and outstanding.
Transitional Small Business Disclosure Format: Yes No X
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Page 1 of 8 consecutively numbered pages.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VIRTUAL TELECOM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
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ASSETS (Unaudited) (Audited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 670,591 $ 569,264
Trade accounts receivable, net 108,361 65,931
Subscriptions receivable from stockholders 0 2,000,000
Prepaid expenses and other receivables 179,888 138,107
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Total current assets 958,841 2,773,302
Property and equipment, net 1,039,330 1,186,773
Other assets 27,559 25,874
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Total Assets $ 2,025,729 $ 3,985,949
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 11,190 $ 165,557
Accrued liabilities and provisions 301,031 208,825
Current portion of capital lease obligations 67,874 189,526
Advances/convertible loans from stockholders/related parties 0 315,672
Deferred income 72,195 33,756
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Total current liabilities 452,290 913,336
Long Term portion of capital lease obligation 100,082 199,114
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Total Liabilities 552,372 1,112,450
============= ==============
Stockholders' Equity
Common Stock 5,781 5,375
Preferred Stock 1,992 2,072
Additional paid-in capital 6,381,316 6,156,642
Cumulative translation adjustment 270,615 131,707
Accumulated deficit (5,186,347) (3,422,297)
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Total stockholders' equity 1,473,357 2,873,499
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Total Liabilities and Shareholders' Equity $ 2,025,730 $ 3,985,949
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</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
2
<PAGE>
VIRTUAL TELECOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INCOME $ 123,870 $ 832 $ 219,403 $ 832
EXPENSES
Selling & Market Development 326,414 115,743 611,682 240,807
General & Administrative 639,398 282,756 1,212,646 547,561
-------------- -------------- -------------- --------------
965,812 398,499 1,824,327 788,368
-------------- -------------- -------------- --------------
OPERATING RESULT (841,942) (397,667) (1,604,925) (787,536)
OTHER INCOME AND EXPENSES
Interest 8,711 (8,465) 8,034 (13,142)
Foreign Exchange 1,915 (81,550) (167,160) (83,309)
-------------- -------------- -------------- --------------
10,626 (90,015) (159,125) (96,451)
-------------- -------------- -------------- --------------
NET RESULT (831,316) (487,682) (1,764,050) (883,987)
Weighted Average Number of Common Shares 5,730,309 4,994,000 5,578,291 4,994,000
Net Result per Common Share $ (0.15) $ (0.10) $ (0.32) $ (0.18)
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
3
<PAGE>
VIRTUAL TELECOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
------------------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (1,764,050) $ (883,987)
Adjustments to reconcile net loss to net cash used in operating activities:
Exchange loss 167,160 0
Depreciation and amortization 239,488 18,962
Provision for doubtful debitors 2,302 0
Interest accrued on loans payable 5,417 23,971
Capitalization of interest 0 (6,656)
Increase (decrease) resulting from changes in:
Trade accounts receivable (44,732) 0
Prepaid expenses and other receivables (41,781) (562,512)
Trade accounts payable (154,367) (292,911)
Accrued liabilities and provisions 92,207 33,022
Deferred income 38,438 0
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Net cash used-in operating activities (1,459,919) (1,670,111)
CASH USED IN INVESTING ACTIVITIES:
Purchase of equipment (90,372) (319,345)
Other non-current asset expenditures (3,358) 0
Advances to stockholder and related party 0 (6,690)
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Net cash used-in investing activities (93,730) (326,035)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Issuance of stock 0 1,809,633
Proceeds from bridge loans 0 199,867
Collection of stock subscriptions receivable 2,000,000 0
Reimbursements of advances from stockholders and related parties (96,089) (98,614)
Payment of capital lease obligations (220,684) (9,302)
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Net cash provided by financing activities 1,683,227 1,901,584
Effect of Exchange Rate Changes on Cash and cash equivalents (28,251) 43,534
NET INCREASE IN CASH AND CASH EQUIVALENTS 101,327 (51,028)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 569,264 219,139
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 670,591 $ 168,111
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</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
4
<PAGE>
VIRTUAL TELECOM, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - CONDENSED FINANCIAL STATEMENTS
The accompanying financial statements have been prepared by the Company without
audit. In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows at June 30, 1998, and for all periods
presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these unaudited condensed
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's December 31, 1997 audited
financial statements. The results of operations for the six months ended June
30, 1998 are not necessarily indicative of the operating results for the full
year.
NOTE 2 - CONVERTIBLE LOANS FROM STOCKHOLDERS AND RELATED PARTIES
As at December 31, 1997, the Company owed $250,000 plus accrued interest in
respect of the balance of two convertible loans received during 1996. During the
six months ended June 30, 1998, the Company converted $225,000 of the principal
to common stock, and repaid $25,000 of principal and $71,089 of accrued interest
in cash.
NOTE 3 - ISSUANCE OF COMMON STOCK
During the six months ended June 30, 1998, the Company issued 145,161 shares of
its common stock in conversion of $225,000 of loan principal at a price of $1.55
per share.
During the six months ended June 30, 1998, 79,438 shares of Series A Preferred
stock were converted into 158,876 common shares.
During the six months ended June 30, 1998, the Company issued 102,000 shares of
its common stock, as a result of having reset the price of a previous issue of
shares.
NOTE 4 - FIXED ASSETS AND CONTRACTUAL COMMITTMENTS
In September 1996, Virtual Telecom S.A. signed a four-year Partnership
Outsourcing Agreement with Digital Equipment Corporation, for the provision of
computer equipment and maintenance.
Virtual Telecom S.A. has contractual commitments for the servicing of the
equipment acquired above. As of June 30, 1998 there are two and a quarter years
remaining on the contract, which amounts to approximately $220,000 per annum.
5
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
Virtual Telecom, Inc., a Delaware corporation ("Company"), was
organized to engage in the business of developing and marketing various
financial information services utilizing Internet based technologies and,
secondarily, providing network access services to the Internet to corporate
clients, mainly those using the financial information services provided by the
Company. The Company's initial services consist of the delivery of financial
data and other information from securities and commodities exchanges and other
sources worldwide on a real-time and near real-time basis. Unless the context
otherwise requires, all references to the Company include its wholly owned
subsidiary, Virtual Telecom SA, a Swiss corporation.
Having implemented the telecommunications and information processing
infrastructure required to deliver its services during 1996 and the first half
of 1997, the Company commenced pilot commercial operations during the third
quarter of 1997. Thereafter, the Company has been refining various aspects of
its operations to ensure the delivery of a high quality of service to a
professional market, as well as preparing an initial marketing program.
Marketing activities were commenced towards the end of the second quarter of
1998.
The Company's results of operations for the six months ended June 30,
1998 include revenues of $219,403 and a net loss of $1,764,050. Results of
operations for the quarter ended June 30, 1998 include revenues of $123,870 and
a net loss of $831,316. Revenues for the quarter ended June 30, 1998 represent a
30% increase over that of the previous quarter.
Operating expenses amounted to $1,824,327 for the six months and
$965,812 for the quarter ended June 30, 1998. Operating expenditures for quarter
ended June 30, 1998 are 12% higher than those of the previous quarter,
predominantly due to the commencement of marketing activities.
As of June 30, 1998, the Company had working capital of $506,551 and
stockholders' equity of $1,473,357. As of the date of this report, the Company
is seeking to acquire capital through the sale of its debt or equity securities.
If the Company is unable to raise additional capital, the Company may not be
able to continue its present level of activities.
The Company's plan of operations for the next twelve months includes
the completion of this rollout within the Swiss market, and the expansion of its
operations to other key European markets.
This report contains various forward-looking statements that are based
on the Company's beliefs as well as assumptions made by and information
currently available to the Company. When used in this report, the words
"believe," "expect," "anticipate," "estimate" and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
certain risks, uncertainties and assumptions, including, without limitation, the
Company's recent commencement of commercial and marketing operations and the
risks and uncertainties concerning the acceptance of its services and products
by the Swiss market; technological changes; increased competition; and general
economic conditions. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, estimated, or projected. The Company
cautions potential investor not to place undue reliance on any such forward-
looking statements, all of which speak only as of the date made.
6
<PAGE>
PART II - Other Information
Item 1. Legal Proceedings.
Inapplicable.
Item 2. Changes in Securities and Use of Proceeds
Inapplicable.
Item 3. Defaults Upon Senior Securities
Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of shareholders was held on June 23, 1998.
The meeting voted on the proposals presented in the Company's Proxy
Statement concerning the election of directors and the ratification of
the appointment of Arthur Andersen S.A. as the Company's independent
public accountants. The results of voting are set out below:
<TABLE>
<CAPTION>
Item For Against Abstain
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<S> <C> <C> <C>
Election of Directors
Neil Gibbons 3,818,969 0 43
Daniel Huber 3,818,609 360 43
William Cordeiro 3,818,969 0 43
Stuart Townsend 3,818,969 0 43
Ratification of appointment of Arthur Andersen S.A.
as independent public accountants 3,808,739 10 10,263
</TABLE>
Bryan Wood continues as a director, having been appointed by the Series
B Preference shareholders.
Item 5. Other Information
Inapplicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports of Form 8-K
Inapplicable.
7
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VIRTUAL TELECOM, INC.
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(Registrant)
Dated: August 12, 1998 By /s/ Neil Gibbons
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Neil Gibbons
Chief Executive Officer
/s/ Mark Benn
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Mark Benn
Chief Financial Officer
8
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 670,591
<SECURITIES> 0
<RECEIVABLES> 121,893
<ALLOWANCES> 13,531
<INVENTORY> 0
<CURRENT-ASSETS> 958,841
<PP&E> 1,475,895
<DEPRECIATION> 436,565
<TOTAL-ASSETS> 2,025,729
<CURRENT-LIABILITIES> 452,290
<BONDS> 0
0
1,992
<COMMON> 5,781
<OTHER-SE> 1,465,584
<TOTAL-LIABILITY-AND-EQUITY> 2,025,729
<SALES> 188,203
<TOTAL-REVENUES> 219,403
<CGS> 0
<TOTAL-COSTS> 1,824,327
<OTHER-EXPENSES> 159,125
<LOSS-PROVISION> 2,302
<INTEREST-EXPENSE> 5,417
<INCOME-PRETAX> (1,764,050)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,764,050)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
