<PAGE>
[LOGO OF VIRTUAL
TELECOM INC.]
ANNUAL REPORT
1997
[GRAPHICS]
<PAGE>
PRESIDENT'S LETTER
To our stockholders, employees, clients and business partners
This last year was one of investment and construction for Virtual Telecom -
commencing at the outset with the installation of our network and our financial
information systems, ending with the start of commercial operations and
increasing momentum for the Company. During the last year we laid foundations
that will allow the Company to offer a range of different services in the
financial information and network services markets, we believe this will allow
us to maintain a high level of quality of service and an innovative edge in this
rapidly developing market for financial information services over the Internet.
In fiscal 1997, Virtual Telecom reported net revenues of $112,000 for the year,
reflecting the start of commercial operations in late September 1997.
Shareholder equity increased to $2,873,000 compared to $1,000 for fiscal 1996,
and the Company reported a net loss of $2,359,000 for the year. These financial
results reflect a year where our focus was on setting-up and establishing the
infrastructure from which we will develop future business revenues.
For Virtual Telecom, the key to accomplishing increased shareholder value is
revenue growth, which is where our focus is placed today and it is our belief
that we have implemented a structure that will now permit us to deliver
sustainable future growth in revenues. This belief is based on the progress we
made in installing our network infrastructure, strengthening our balance sheet,
building both management and technical teams, and in addition, the early
positive results that we have obtained from clients in Switzerland. Some
accomplishments from 1997 are:
. We strengthened our balance sheet by raising approximately, $5.5 million in
capital through private placements of our stock to mainly institutional
investors over the course of the year. Most notably we concluded in December
1997 a sale of Preferred Stock for an amount of $3 million to a group of
three affiliated funds managed by Alta Berkeley Associates, a private equity
firm in existence 18 years, specialized in European technology investments.
This enables us to finalize preparation of our technical systems and our
marketing programs, and will assist the Company in achieving its strategic
objectives.
. We began a paid subscription service for our FirstQuote real-time financial
data service to a limited base of clients in order to obtain market feedback
and fine tune our services prior to our fully fledged marketing program being
launched in May 1998.
. We fully implemented our Internet compliant network backbone, managed by
Digital Equipment Corp. under a facilities management agreement. This network
is a high-availability, high-performance network with a guaranteed "up time"
of 99.6% underpinning the high level of quality of service the Company aims
to achieve. The network design allows the Company to offer clients a range of
benefits such as a full range of connectivity possibilities, including GSM
cellular connections, the creation of Virtual Private Networks (VPN's), and
the seamless combination of 3public3 Internet services such as email or Web
browsing with our 3private3 subscription based real-time financial
information services.
. We installed our system's platforms, based on both state-of the-art high-
performance Alpha 64-bit and Intel based multi-processor computer systems, to
provide powerful, fast, and fail-safe connections for our clients to real-
time financial data and news feeds, our historical data bases and regular
Internet services.
. We concluded re-distribution and vendor agreements with a series of major
stock exchanges and leading data vendors worldwide. In this respect we were
named by LIFFE, the futures exchange in London, as one of the first providers
to carry their data via the Internet.
Page 1 of 2
<PAGE>
. We enhanced our relationships with our business partners, in particular with
Digital Equipment Corp., SwissCom (formerly Swiss telecom PTT) and Townsend
Analytics by laying the groundwork for an array of new services involving
them to be implemented in 1998.
. We added human resources and continue to do so, filling out the management
team to cover all major functions with dynamic and talented team of managers
with international experience, who bring a well-balanced set of management
skills to our business. An example of this was that we identified and
appointed a Chief Financial Officer with experience in the fields of US GAAP
accounting and SEC filings.
In 1998 we will leverage the infrastructure, operations and processes we have
put in place to enable us to achieve our corporate goals of revenue growth and a
rollout of services into other European markets.
Strategic Perspectives
The size of the opportunity that our Company faces is indeed significant. The
market for online financial database services in 1997 in W. Europe was $3.5
billion growing at a rate of close to 10% per annum. The market is concentrated
principally in 4 countries, with relatively few players, most of whom today are
still operating high-overhead proprietary information systems. A relatively
small market share could represent significant revenue potential to Virtual
Telecom.
Coupled with this market is the rapidly expanding Internet market, where
industry sources estimate that there may now be as many as 50 million users
already in Europe, with a growth rate in Internet usage close to 100% per annum.
The advantage of the Internet is that it places considerable accessibility to
information and functionality in the hands of the end-user "decision maker" -
Virtual Telecom intends to exploit this strong growth potential.
Several other important trends influence our business and market opportunity; a
fast growing base of "baby-boomer" technically-savvy investors, European
industry privatization placing more stocks in the hands of private investors,
the growth of European stock exchanges listing companies with smaller market
capitalization, downsizing and trimming of overheads in the European banking
industry and the growth of tele-banking and electronic exchange services.
Accomplishing the Strategy
The most important actions we commenced last year toward accomplishing this
objective were to fine-tune our systems under market conditions, improve our
data quality and build up our marketing and sales operations.
A key success factor will also be our ability to forge alliances with corporate
partners where win/win situations can be created through the synergies of our
technical solutions with their franchises in the market place. Our track record
to date in creating such alliances, I believe, speaks for itself.
Adding Value
Just as others have shown possible by building major businesses from very modest
beginnings, through their vision, innovation and entrepreneurial flair, we
believe that we have the same opportunity today within the market that we know
the most about -- the financial information market.
We know it will take more than vision, innovation and entrepreneurship to build
our business; that it will also take the support of our stockholders, employees,
clients and business partners. We are prepared to make every effort to earn
that support and to further our commitment to the enhancement of value in
Virtual Telecom to our stockholders, our employees, and quality of our services
to our clients and business partners on an ongoing basis.
[Add Signature]
Neil Gibbons
President and Chief Executive Officer
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ______________________
Commission file number 0-22351
Virtual Telecom, Inc.
(Name of Small Business Issuer in its charter)
<TABLE>
<S> <C>
Delaware 98-0162893
------------------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12, Av. des Morgines
1213 Petit-Lancy 1
Geneva, Switzerland N/A
- ------------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
Issuer's telephone number, including area code +4122-879-0879
--------------
Securities to be registered under Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which
to be so registered each class is to be registered
<S> <C>
None N/A
- -------------------------------------- ------------------------------------
</TABLE>
Securities to be registered under Section 12(g) of the Act:
Common Stock, $0.001 par value
- -------------------------------------------------------------------------------
(Title of class)
<PAGE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [_]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K contained in this form, and will not 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. [_]
The market value of the voting stock held by non-affiliates of the registrant as
of March 20, 1998 was approximately $5,491,462.
The number of shares of the Common Stock outstanding as of March 20, 1998 was
5,534,148.
Documents incorporated by reference: None.
<PAGE>
Part I
Item 1. Description of Business.
Business Development
- --------------------
Virtual Telecom, Inc., a Delaware corporation (the "Company"), was recently
organized to engage in the business of developing and marketing various Internet
content-based products and, secondarily, to act as an Internet Service Provider
("ISP") providing access to the Internet. The Company's initial content-based
products offered over the Internet consist of the delivery of financial data
from securities and commodity exchanges worldwide on a real time and near real-
time basis. During 1996 and the first quarter of 1997, the Company acquired and
implemented the hardware, consisting of routers and servers, and leased
telephone lines through which it offers its financial data service and access to
the Swiss market. During the second fiscal quarter, the Company conducted pilot
operations. The Company commenced full commercial operations during the quarter
ended September 30, 1997.
The Company was organized on July 3, 1996 under the laws of the State of
Delaware and has two corporate predecessors, Virtual Telecom SA, a Swiss
Corporation, and Moke Acquisition Corp. ("Moke"), a Delaware corporation.
Virtual Telecom SA was organized on May 19, 1994 to engage in the development
and marketing of Internet content-based products and Internet dial-up access to
the Swiss market. Pursuant to a Securities Purchase Agreement and Plan of
Reorganization dated July 3, 1996, the holders of all of the issued and
outstanding capital shares of Virtual Telecom SA transferred those shares to the
Company in exchange for the Company's issuance of 3,193,540 shares of its $.001
common stock ("Common Stock"). The share for share exchange between the
shareholders of Virtual Telecom SA and the Company was formally consummated
effective as of July 22, 1996. Virtual Telecom SA presently exists as the
wholly owned operating subsidiary of the Company. Pursuant to an Agreement and
Plan of Merger dated July 31, 1996 between the Company and Moke, Moke merged
with and into the Company effective as of August 30, 1996. Prior to the merger,
Moke was a publicly held shell corporation with approximately 4,090,448 shares
of Common Stock outstanding. Pursuant to the Agreement and Plan of Merger, each
outstanding share of Moke common stock was converted into .0867471 shares of the
Company's Common Stock, for an aggregate issuance of 355,039 shares of the
Company's Common Stock to the shareholders of Moke.
From October 1 through December 2, 1996, the Company conducted a private
placement of units ("Units") of its securities at $3.50 per Unit. Each Unit
consisted of one share ("Series A Preferred Share") of the Company's Series A
Preferred Stock and one common stock purchase warrant ("Unit Warrant"). Each
Series A Preferred Share was initially convertible into Common Stock at a
conversion price of $3.50 per share, provided that on the one year anniversary
of the original issuance of the Series A Preferred Stock, the conversion price
was to be adjusted to 70% of the average last sale price of the Common Stock
during the 30 trading days immediately preceding the first anniversary date. In
December 1997, this conversion price was adjusted to $1.75 per share. Each Unit
Warrant initially entitled its holder to purchase one share of Common Stock at
an exercise price of $7.00 per share until July 31, 1998, at which time the
unexercised Unit Warrants shall expire by their own terms. In December 1997,
the Company adjusted the exercise price of each Unit Warrant to $3.50 per share
and extended the expiration date to December 31, 2000. The Company sold 283,781
Units to European institutional investors for the gross proceeds of $993,233.50.
From January 8, 1997 through March 10, 1997, the Company conducted a
private placement of shares of Common Stock. In the private placement, the
Company sold 534,063 shares of Common Stock for the gross proceeds of $873,000.
In June 1997, the Company conducted a private placement of units ("Units")
of its securities at $5.00 per Unit. Each Unit consisted of two (2) shares of
Common Stock and one (1) warrant which entitled its holder to purchase one share
of Common Stock at an exercise price of $3.50 per share. In the private
placement, the Company sold 204,000 Units for the gross proceeds of $1,020,000.
In February 1998, the Board of Directors of the Company resolved to reduce the
price of the Units from $5.00 per Unit to $4.00 per Unit and to issue an
additional 102,000 shares of Common Stock to the Unit purchasers.
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On December 30, 1997, the Company sold 1,923,716 shares ("Series B Shares")
of its Series B Preferred Stock to Alta Berkeley V, C.V. and two-affiliated
venture capital funds (collectively referred to as "Alta Berkeley") for the
purchase price of $3,000,000. Pursuant to the terms of the Agreement, Alta
Berkeley delivered $1,000,000 at the closing on December 30, 1997 and the
balance of $2,000,000 was delivered in March 1998. The Series B Shares are
convertible at any time into shares of Common Stock on a one-for-one basis,
subject to adjustment pursuant to certain anti-dilution rights, and have full
voting rights along with the Company's Series A Preferred Stock and its Common
Stock. In the event of any liquidation, dissolution or winding up of the
Company, before any distribution or payment to holders of Common Stock may be
made, the holder of each Series B Share shall be entitled to be paid an amount
equal to $3.50 per share, plus any accrued and unpaid dividends, if the event of
liquidation, dissolution or winding up occurs on or before December 31, 1999 and
thereafter $5.20 per share, plus any accrued and unpaid dividends.
Concurrent with the Agreement, the Company and Alta Berkeley entered into
an Investors' Rights Agreement. Pursuant to the terms of their agreement, the
Company increased the authorized number of its directors from four to six and
holders of the Series B Shares are entitled to elect two members of the
Company's Board of Directors. At the closing, the Company appointed Mr. Bryan
Wood of Alta Berkeley to the Board of Directors. In addition, the Company
granted Alta Berkeley the right of first refusal to purchase a pro rata share of
any equity securities, which the Company may issue. The right of first refusal
expires on December 18, 2004. The Investors' Rights Agreement also grants Alta
Berkeley certain approval and disclosure rights over certain management and
strategic matters.
Unless the context otherwise requires, all references to the Company
include its wholly-owned subsidiaries, Virtual Telecom SA, a Swiss corporation,
and Firstquote Limited, an English corporation. The Company's executive offices
are located at 12, Av. des Morgines, 1213 Petit-Lancy 1, Geneva, Switzerland;
telephone number +4122-879-0879.
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BUSINESS OF THE COMPANY
Certain terms used herein are defined below in the section "Glossary." The
Company has entered into certain financial commitments payable in Swiss Francs,
the unit of currency of Switzerland. All Swiss Franc based amounts are
designated by the symbol "CHF." As of March 20, 1998, the Swiss Franc-dollar
exchange rate was 1.4965 Swiss Francs to 1 U.S. dollar.
General
The Company is a value-added Internet Service and Information provider. The
Company has developed and intends to commercialize its ISP and content provider
operations through a network of strategic alliances with internationally
recognized businesses. The Company's ISP operations are conducted pursuant to an
agreement with Digital Equipment Corporation ("DEC") under which DEC has
designed, implemented and operates a network of routers and servers located at
13 to 20 PoP's throughout Switzerland and, in time, additional PoP's throughout
Europe. Swisscom (formerly known as Swiss Telecom PTT) and British Telecom
provide frame relay and IP connectivity services. The Company's financial data
service is offered pursuant to separate non-exclusive licenses entered into by
the Company with the Standard & Poor's ComStock Division of McGraw-Hill
International (UK) Ltd. ("S&P ComStock"), which supplies the Company with a raw
feed of market data from securities and commodities exchanges world-wide, and
Townsend Analytics, Ltd. ("Townsend"), which has licensed to the Company its
proprietary software program which can organize the raw data feed from S&P
ComStock for presentation in tabular and chart formats. DEC operates and manages
the central server over which the Company's subscribers will access the
financial data. See "Strategic Alliances" below for a summary of the terms and
conditions of the Company's contracts with DEC, S&P ComStock, Townsend, Swisscom
and British Telecom.
The Company's strategy is to focus on the development of content-based
Internet services through alliances with internationally recognized service
providers, such as DEC, S&P ComStock and Townsend, and to aggressively market
those services throughout Europe. Through these strategic alliances, the Company
hopes to readily establish a reputation for quality and reliability and, more
importantly, out-source the required expertise in the areas of software
development and system operation, thereby allowing the Company to focus on the
marketing of its products and services. The Company's business strategy also
includes the development of the ISP network, which can be marketed as a stand-
alone service and as a tie-in with its content-based products.
Background
The Internet is a collection of computer networks linking millions of
public and private computers around the world. Historically, the Internet was
used by government agencies and academic institutions to exchange information,
publish research and transfer electronic mail. A number of factors, including
the proliferation of communication-enabled personal computers, the availability
of intuitive graphical user interface software and the wide accessibility of an
increasingly robust network infrastructure, have combined to allow non-technical
users to easily access the Internet and, in turn, have produced rapid growth in
the number of Internet users. The number of users worldwide is variously
estimated to be between 70 and 110 million. Durlacher Multimedia Ltd. estimates
that the number of Internet users will reach 200 million by 2000.
This growth, combined with the emergence of the World Wide Web, the
graphical, multimedia environment of the Internet, has resulted in the
development of the Internet as a new mass communications medium. The ease and
speed of publishing, distributing and communicating text and graphics over the
Internet has lead to a proliferation of Internet-based content, including online
magazines, news feeds, interactive games and a wealth of educational and
entertainment information, as well as to the development of online communities.
In addition, the reduced cost of executing transactions over the Internet
provides individuals and organizations with a new means to conduct business.
The Objectives of the Company
The Company's objectives are to establish itself as an Internet-based
content provider of investor information services and, secondarily, as a
provider of enterprise Internet access for the Swiss market. To achieve its
objectives as a provider of investor information, the Company (i) offers
competitive pricing, (ii) provides detailed content with respect to information
provided to investors (including maintaining a wide range of available stock
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symbols), and (iii) intends to exploit unfilled opportunities with respect to
untapped European markets. To achieve its objectives as an ISP for the Swiss
market, the Company provides (i) competitive pricing (maintaining a price
advantage over the Company's major competitors), (ii) high-availability
(including the provision of call-forwarding so that a subscriber never gets a
busy tone) and (iii) dial-up portability to subscribers (as one would enjoy with
respect to use of a portable computer).
The Company's Services and Products
Financial Data Service. The Company has implemented a system of providing
real-time and near real-time financial market quotation data in tabular or chart
form. The Company offers two services for different market mixes, service
content and types of presentation. A professional online investor service is
offered to professionals under the mark "FirstQuote" and includes real time
market data. A Web-based investor service covering the Swiss market is provided
to individual investors under the mark "InvestMaster" and provides market data
on a real-time snap-quote basis. The Company commenced offering financial data
services on a limited basis end-September, 1997 and commenced full-scale
marketing of its financial data service in March 1998.
"FirstQuote" Professional Online Investor Service. At a relatively low
cost compared to traditional systems, the Company provides the subscriber with a
professional online investor (Intranet) service under the mark "FirstQuote." The
FirstQuote service has the following characteristics:
. After first installing an interface program, the subscriber can dial-
up and access real-time or near real-time data feed via the Internet
. Provides access to up to 280,000 stock symbols
. Provides real-time price data in a boardview (tabular) or chart format
for a major stock exchanges, option/futures markets, currency markets,
commodities markets
. Runs on Microsoft Windows system and information is presented in true
Windows-style format
. Additional value-added features such as alarms, closed captioned news,
trend tools, and automated spreadsheet updates
. Floating user-license provides significant mobility to users
This service is also available in lower-cost "Lite" version
"Investmaster" Commercial Online Investor Service. For a nominal monthly
subscription, the Company offers individual investors with a commercial on-line
investor (web) service known as "InvestMaster" with the following
characteristics:
. Provides personal investors with information in a multi-lingual format
. Provides access to 70,000 stock symbols for all instruments traded on
Swiss markets
. Provides delayed price data in a boardview (tabular) or chart format
for equities, option/futures markets, currency markets, commodities
markets
. Information presented in Web-browser
. Provides additional value-added features such as market & corporate
news, and a personal portfolio feature
"FirstSwiss" Dial-up Internet Access (Internet Service Provider). The
Company provides commercial Internet service under the mark "FirstSwiss." The
Internet consists of high-speed telecommunications circuits connecting routers
that transmit data packets. The circuits are maintained by large
telecommunication (telco) firms (such as, AT&T, MCI, Sprint, Swisscom, British
Telecom, etc.). The routers are generally owned by the ISP's. As a
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Swiss-based ISP, the Company leases lines from Swisscom and British Telecom to
connect its routers located at miscellaneous PoP's located throughout
Switzerland. The customers dial-up into the PoPs through their local phone lines
or have a permanent leased-line type of connection. Their call is then routed to
the Company's central server in Geneva, which then connects the call to the
Internet.
As an ISP, the Company is selling a commodity to consumers, and the
commodity is bandwidth. The Company purchases bandwidth (or line communication
capacity) from Swisscom and British Telecom; then resells bandwidth to its local
subscribers. The Company charges the subscriber or customer a mark-up to cover
the provision of services and the Company's investment in support equipment.
Separately, the subscriber is charged by the local telco for the phone
connection to the Company's PoPs. The greater the bandwidth that the Company
can provide leads to a higher quality to more subscribers simultaneously.
The Company commenced offering its ISP service in September 1997. The
Company provides individual and corporate subscribers with local dial-up
Internet access with the following characteristics:
. A high speed reliable Internet connection for a 33.6 kbps modem or an
ISDN (64 kbps) terminal.
. Local dial-up capability throughout Switzerland via 13 PoPs initially
and additional PoPs as subscribers increase.
. An E-mail account.
. Access to 14,000 worldwide Usenet News groups
. Access to a local FTP software library containing many types of
software, upgrades and documents
. Log-in access to a multi-lingual Web homepage with links to daily
news, financial news, transportation timetables classified
advertising, etc.
Strategic Alliances
The Company's operations and Internet services are provided through a
network of strategic alliances with the following internationally recognized
businesses:
Digital Equipment Corporation. The Company's ISP operations are operated
pursuant to Partnership Outsourcing Agreement ("DEC Agreement") dated September
9, 1996 between Virtual Telecom SA and DEC Digital Equipment Corporation
("DEC"). Pursuant to the DEC Agreement, DEC has designed, implemented and
operates on behalf of the Company a network of routers and servers located at 13
to 20 PoP's throughout Switzerland and, in time, additional PoP's throughout
Europe. Pursuant to the DEC Agreement, the Company has purchased from DEC the
hardware and software required to operate an Internet dial-up access network,
including a central server site located in Geneva that is built around a cluster
of DEC Alpha computers running a UNIX operating system. The DEC Agreement is
for an initial four year term subject to one year renewals thereafter unless
either party provides the other with notice of its intent to cancel at least six
months prior to the pending termination date. The Company enjoys the status of
Digital Business Partner, and Business Partner-AltaVista Internet Software
Solutions. AltaVista is a division of Digital Equipment Corporation.
Standard & Poor's Comstock. The Company's financial data service is
provided through separate arrangements with S&P ComStock and Townsend Analytics.
The Company receives stock and commodity information on a real time basis
pursuant to an Information Distribution License Agreement ("S&P ComStock
Agreement") dated August 23, 1996 between McGraw-Hill International (UK) Ltd.
and Virtual Telecom SA. The Standard & Poor's ComStock Division of McGraw-Hill
is licensed to distribute trading information from most U.S. and international
stock, mercantile, option and currency exchanges. Pursuant to the S&P ComStock
Agreement, McGraw-Hill provides the Company with trading information from S&P
ComStock on a real time basis via a satellite transmission and has granted the
Company a non-exclusive license to redistribute such information as part of the
Company's Internet financial data service.
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Townsend Analytics. The Company receives raw financial data, which it
stores and distributes to graphical user interfaces (GUI) by way of software
licensed on a non-exclusive basis from an affiliate, Townsend Analytics, Ltd.,
of Chicago, Illinois.
Swisscom/British Telecom. The Company's ISP network is carried over a
frame relay telecommunication network operated by the Unisource Division of
Swisscom. The Swiss subsidiary of British Telecom ("British Telecom"), provides
connectivity to the Internet via their global Concert IP network. Pursuant to a
UNIDATA Frame Relay & Unimaster Services Contract dated October 22, 1996 between
Swisscom and Virtual Telecom SA, Swisscom has installed the Company-owned
routers and provided connectivity by way of their frame relay network. The
Company has arranged for connections to the Internet from British Telecom
pursuant to an Agreement for Global Telecommunications Services ("BT Agreement")
dated October 1, 1996 between British Telecom and Virtual Telecom SA.
IQ Net Corporation. The Company has licensed from IQ Net Corporation ("IQ
Net") certain computer software programs designed to enhance the presentation of
its financial data services through its InvestMaster Service. Pursuant to a
Software License Agreement ("Agreement") dated February 27, 1998 between the
Company and IQ Net, IQ Net has granted the Company an exclusive license to use
IQ Net's software to deliver a financial data service over the Internet and to
market and promote such service throughout Europe.
Marketing
The Company markets its ISP and content-based financial services throughout
Switzerland. The Company's strategy is to focus its marketing efforts on the
sale of its FirstQuote and InvestMaster financial data products to the Swiss
investment community. The FirstQuote financial service is marketed primarily to
private banks, investment bankers and money managers, and the InvestMaster
financial service is marketed primarily to private investors. The Company's
strategy is to sell its ISP operations to the FirstQuote and InvestMaster
subscribers as a tie-in service. In addition, the Company markets its ISP
service as a stand-alone product to corporate Swiss Internet users. The Company
employs a combination of direct marketing, print advertisements and direct
mailings in order to market its ISP and content-based financial services. The
Company promotes itself and its financial data services to the Swiss Internet
and financial trade publications for purposes of generating feature articles
that promote the Company and its business. The Company also endeavors, whenever
possible, to market its services to the clients of those companies through which
it outsources its ISP and financial data operations. To date, DEC has actively
promoted the Company's ISP and financial data services directly to the DEC
clients and has promoted the Company as a strategic partner of DEC.
Competition
The market for Internet products and services is expanding rapidly but is
also highly competitive and the Company expects that this competition will
intensify in the future. The Company's current and prospective competitors
include many companies that have substantially greater financial, technical,
marketing, and other resources than the Company. Increased competition could
result in price reductions and increased spending on marketing and product
development. Any of these events could have a material adverse affect on the
Company's financial condition and operating results. There can be no assurance
that the Company will be able to compete successfully against current and future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, financial condition, and results of
operations.
As of the date of this report there are several ISP's providing dial-up
access to Swiss Internet users. There are also several companies that provide
for the delivery of financial data over the Internet or electronic means,
including Reuters, Bloomberg, Dow Jones Telerate, Bridge and Telekurs.
Government Regulation
The Company's ISP operation and content-based products are not currently
subject to direct regulation by Swiss, US or other law, other than regulations
applicable to businesses generally. Changes in the regulatory environment
relating to the Internet content or connectivity industries, including
regulatory changes that directly or indirectly affect telecommunications costs
or increase the likelihood or scope of competition from regional telephone
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companies or others, could have a material adverse affect on the Company's
business. The Company cannot predict the impact, if any, that future regulation
or regulatory changes may have on its business.
Employees
The Company is staffed with 16 full-time employees and 3 full-time
consultants at present, six of whom are involved in the Company's network and
Web operations.
Glossary
Set forth below are definitions of certain terms used in this report.
Backbone A centralized high-speed network that connects smaller,
- -------- independent networks. In other terms, the backbone of a
network is its means of linking its major nodes so all of
its PoPs feed into backbone nodes with high speed
uninterrupted flow.
Bandwidth The number of bits of information which can move over a
- --------- communications medium in a given amount of time.
Dial Up Line A local access line and number provided by domestic telecom
- ------------ operators allowing the subscriber to dial the service
provider's PoP and connect to their backbone.
Electronic Mail As application that allows a user to send or receive
- --------------- messages to or from any other user with an Internet address,
or E-Mail commonly termed an e-mail address.
- ---------
Frame Relay A packet-switched Data network.
- -----------
Graphical User A means of communicating with a computer by manipulating
- -------------- icons and windows rather than using text commands.
Interface
- ---------
Internet An open global network of interconnected commercial,
- -------- education and governmental computer networks which utilize a
common communications protocol, TCP/IP.
ISDN Integrated Services Digital Network. A digital network that
- ---- combines voice and digital network services through a single
medium, making it possible to offer customers digital data
services as well as voice connections. In Europe, a 64
kilobit (64,000 bits per second) leased line is currently
the most current bandwidth transmission data circuit useful
in Internet business applications.
kbps Kilobits per second. A rate of digital information
- ---- transmission. One kilobit equals 1,024 bits.
Leased Line A leased line is the telephone circuit transmission channel
- ----------- reserved for the customer's use from point "a" to point "b"
through phone company physical lines and switches. The line
may be of different bandwidths of data carrying capacity.
mbps Megabits per second. A rate of digital information
- ---- transmission. One megabit equals 1,024 kilobits.
Modem A piece of equipment that connects a computer to an analog
- ----- transmission line (typically a telephone line).
Online Services Commercial information services that offer a computer user
- --------------- access through a modem to a specified slate of information,
entertainment and communications
-7-
<PAGE>
menus. These services are generally closed systems but may
offer Internet access at additional cost.
POPS Points of Presence. A clustered group of modems, routers
- ---- and other computer equipment, located in a particular city
or metropolitan area, that allows a nearby subscriber to
access the Internet through a local telephone call.
Router A device that receives and transmits data packets between
- ------ segments in a network or different networks.
Server Software that allows a computer to offer a service to
- ------ another computer. Other computers connect the server
program by means of matching client software. In addition,
such term means the computer on which server software runs.
Windows A computer operating system developed by Microsoft that
- ------- provides a graphical user interface and multitasking
capabilities.
World Wide Web A network of computer servers that uses a special
- -------------- communications protocol to link different servers throughout
the Internet and permits communications of graphics, video
and sound.
Item 2. Description of Property.
The Company's executive offices are located in Geneva, Switzerland and
consist of approximately 1,800 square feet of leased premises. The Company's
lease for these premises expires on August 30, 1999 and provides for monthly
rent of CHF 7,500.
Item 3. Legal Proceedings.
There are no pending legal proceedings to which the Company or the
properties of the Company are subject. In addition, no proceedings are known to
be contemplated by a governmental authority against the Company or any officer
or director of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Part II
Item 5. Market for Common Equity and Related Stockholder Matters.
Market for Common Shares. The Company's Common Stock has been listed on
the OTC Bulletin Board under the symbol "VITE" since November 18, 1996. During
the fiscal year ended December 31, 1997, the high and low last sale prices were
$3.25 and $0.50, respectively. These high and low sale prices reflect inter-
dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions. The Company considers its Common Stock to be
thinly traded and that any reported bid or sale prices may not be a true market-
based valuation of the Common Stock.
As of March 20, 1998, there were 348 record holders of the Company's Common
Stock.
The Company has not paid any cash dividends since its inception and does
not contemplate paying dividends in the foreseeable future. It is anticipated
that earnings, if any, will be retained for the operation of the Company's
business.
Recent Sales of Unregistered Securities. During the fiscal year ended
December 31, 1997, the Company sold unregistered securities in the following
transactions:
-8-
<PAGE>
A. From January 1997 through March 1997, the Company conducted a private
placement of shares of Common Stock. In the private placement, the Company sold
534,063 shares of Common Stock for the gross proceeds of $873,000. The shares
were sold pursuant to Rule 504 under the Securities Act of 1933 ("1933 Act").
There was no underwriter involved in this issuance.
B. In February 1997, the Company issued 10,000 shares of Common Stock to
a director as consideration for consulting services rendered on behalf of the
Company. The shares were issued pursuant to Section 4(2) of the 1933 Act. There
was no underwriter involved in this issuance.
C. In February 1997, the Company issued 20,000 shares of Common Stock to
one individual as consideration for consulting services rendered on behalf of
the Company. The issuance was made pursuant to Rule 701 under the 1933 Act.
There was no underwriter involved in this issuance.
D. In April 1997, the Company granted one of its directors options to
purchase an aggregate of 100,000 shares of Common Stock pursuant to the
Company's 1997 Stock Option Plan. The options have an exercise price of $3.00
per share and vest at a rate 25,000 shares on each one year anniversary of the
option grant date. The options were issued pursuant to Section 4(2) of 1933
Act. There was no underwriter involved in this issuance.
E. In May 1997, the Company granted eight of its employees options to
purchase an aggregate of 190,000 shares of Common Stock pursuant to the
Company's 1997 Stock Option Plan. The options had an initial exercise price of
$3.50 per share, are immediately exercisable and expire on December 31, 2000.
The exercise price was revised downward to $2.00 in March 1998. The options
were issued pursuant to Section 4(2) of the 1933 Act. There was no underwriter
involved in this issuance.
F. In May 1997, the Company issued 50,000 shares of Common Stock to one
individual as consideration for consulting services rendered on behalf of the
Company. The issuance was made pursuant to Rule 701 under the 1933 Act. There
was no underwriter involved in this issuance.
G. In June 1997, the Company conducted a private placement of units
("Units") of its securities at $5.00 per Unit. Each Unit consisted of two
shares of Common Stock and one warrant which entitled its holder to purchase one
share of Common Stock at an exercise price of $3.50 per share. The Company sold
204,000 Units for the gross proceeds of $1,020,000. In February 1998, the Board
of Directors of the Company resolved to reduce the price per Unit to $4.00 and
to issue an additional 102,000 shares of Common Stock to the Unit purchasers.
The Units were sold pursuant to Regulation S under the 1933 Act. There was no
underwriter involved in this issuance.
H. In December 1997, the Company granted two of its employees options to
purchase an aggregate of 20,000 shares of Common Stock pursuant to the Company's
1997 Stock Option Plan. The options had an initial exercise price of $3.50 per
share and are immediately exercisable and expire on December 31, 2000. The
exercise price was revised downward to $2.00 in March 1998. The options were
issued pursuant to Section 4(2) of the 1933 Act. There was no underwriter
involved in this issuance.
I. On December 30, 1997, the Company sold 1,923,716 shares of its Series
B Preferred Stock to Alta Berkeley V, C.V. and two-affiliated venture capital
funds (collectively referred to as "Alta Berkeley") for the purchase price of
$3,000,000. The shares were issued pursuant to Section 4(2) of the 1933 Act.
There was no underwriter involved in this issuance.
J. In 1997, the Company issued 271,686 shares of Common Stock upon
conversion of the outstanding Series A Preferred Stock. The shares were issued
pursuant to Regulation S under the 1933 Act. There was no underwriter involved
in this issuance.
K. In 1997, the Company issued 133,333 shares of Common Stock upon
conversion of outstanding indebtedness. The shares were issued pursuant to
Regulation S under the 1933 Act. There was no underwriter involved in this
issuance.
L. In 1997, the Company issued 8,000 shares of Common Stock to a
consultant for administrative services rendered. The shares were issued pursuant
to Section 4(2) of the 1933 Act. There was no underwriter involved in this
issuance.
-9-
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation.
The Company was recently organized to engage in the business of developing
and marketing various Internet content-based products and, secondarily, to act
as an Internet Service Provider ("ISP") providing access to the Internet. The
Company's initial content-based products offered over the Internet consist of
the delivery of financial data from securities and commodity exchanges worldwide
on a real time and near real-time basis. During 1996 and the first quarter of
1997, the Company acquired and implemented the hardware, consisting of routers
and servers, and leased telephone lines through which it offers its financial
data service and access to the Swiss market. During the second fiscal quarter,
the Company conducted pilot operations. The Company commenced full commercial
operations during the quarter ended September 30, 1997.
The Company's results of operations for fiscal year ended December 31, 1997
included revenues of $112,446 and a net loss of $2,359,209. As of December 31,
1997, the Company had working capital of $1,859,966. The Company has financed
its operations to date through the sale of its equity securities and has
received gross proceeds of $2,893,000 from the sale of its equity securities
during the 1997 fiscal year and an additional $2,000,000, which was in the form
of subscription receivable as of December 31, 1997 and was collected by the
Company in March 1998. Management believes that its current working capital,
along with expected revenues from operations, will satisfy its capital
requirements throughout the 1998 fiscal year.
The Company's plan of operations for the 1998 fiscal year include a full-
scale roll-out of its on-line financial database products targeted at investment
professionals and personal investors in the Swiss banking, investment and
corporate markets. Subsequent to the rollout to the Swiss market, the Company
intends to expand its operations to other key European markets.
As of March 20, 1998, the Company has in its early stage of commencement of
operations concluded financial database product contracts with 13 banking or
trading enterprises providing for recurring revenue to the Company in the
aggregate amount of $12,500 per month. In addition, the Company has concluded
ISP network service contracts with 14 corporate clients providing for recurring
revenue to the Company in the aggregate amount of $5,000 per month. Additional
non-recurring revenues in the first two months of fiscal 1998 amounting to
$22,000 were derived from the set-up and installation charges. The Company is
in an advanced stage of negotiations with approximately 50 potential corporate
clients, each of which has solicited offers for the Company's provision of
financial data base products or ISP network service or both.
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 registration statement, 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 operations and the risks and
uncertainties concerning the acceptance of its services and products by the
Swiss market; the risks and uncertainties concerning the availability of
additional capital as and when required; 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 investors not to place undue reliance
on any such forward-looking statements, all of which speak only as of the date
made.
-10-
<PAGE>
Item 7. Financial Statements.
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Reports............................... 12-13
Consolidated Balance Sheets at December 31, 1997 and 1996... 14-15
Consolidated Statements of Operations for the years
ended December 31, 1997 and 1996.......................... 16
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996................................ 17
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1997 and 1996............ 18
Notes to Consolidated Financial Statements.................. 19
-11-
<PAGE>
Independent Auditors' Report
To the Board of Directors
Virtual Telecom, Inc.:
We have audited the accompanying consolidated balance sheet of Virtual Telecom
Inc. and its subsidiaries as of December 31, 1997, and the related statements of
operations, stockholders' equity and cash flows for the year then ended. The
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. The consolidated financial statements
of Virtual Telecom Inc. and its subsidiaries as of December 31, 1996 were
audited by other auditors whose report dated March 14, 1997, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit 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 Virtual Telecom Inc.
and its subsidiaries as of December 31, 1997, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
March 30, 1998
-12-
<PAGE>
Independent Auditors' Report
To the Board of Directors
Virtual Telecom, Inc.
Geneva, Switzerland:
We have audited the accompanying consolidated balance sheet of Virtual Telecom,
Inc. at December 31, 1996 and the related consolidated statements of operations,
changes in stockholders' equity (deficit), and cash flows for the year ended
December 31, 1996. The financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Virtual Telecom,
Inc. as of December 31, 1996 and the results of its operations and its cash
flows for the year ended December 31, 1996, in conformity with generally
accepted accounting principles.
Raimondo, Pettit & Glassman
Torrance, California
March 14, 1997
-13-
<PAGE>
VIRTUAL TELECOM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets as of December 31, 1997 and 1996
(Currency - U.S. dollars)
<TABLE>
<CAPTION>
ASSETS
December 31,
-----------------------
1997 1996
----------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalent $ 569,264 $219,139
Trade accounts receivable, net 65,931 --
Advance to a related party -- 38,645
Subscriptions receivable from stockholders 2,000,000 --
Prepaid expenses and other receivables 138,107 23,836
---------- --------
Total current assets 2,773,302 281,620
---------- --------
NONCURRENT ASSETS:
Property and equipment, net 1,186,773 634,472
Other assets 25,874 32,838
---------- --------
Total non current assets 1,212,647 667,310
---------- --------
$3,985,949 $948,930
========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-14-
<PAGE>
VIRTUAL TELECOM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets as of December 31, 1997 and 1996
(Currency - U.S. dollars)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Trade accounts payable $ 165,557 $ 298,635
Current portion of capital lease obligations 189,526 10,849
Advances and convertible loans from
stockholders and other related parties 315,672 590,507
Accrued liabilities and deferred income 242,581 37,171
----------- -----------
Total current liabilities 913,336 937,162
----------- -----------
LONG-TERM CAPITAL LEASE OBLIGATIONS,
net of current maturities 199,114 10,707
----------- -----------
COMMITMENTS (Notes 6, 7 and 12)
STOCKHOLDERS' EQUITY:
Common Stock, $0.001 par value,
20,000,000 shares authorized; 5,375,272
and 3,940,190 shares issued and
outstanding in 1997 and 1996 5,375 3,940
Preferred Stock, $0.001 par value,
10,000,000 shares authorized -
Class A: 147,938 and 283,781 shares
issued and outstanding, liquidation
preference of $517,783 and $993,233,
as of December 31, 1997 and 1996 148 284
Class B: 1,923,716 shares issued and
outstanding in 1997, liquidation
preference of $6,733,006 ($10,003,323
after December 31, 1999) (1996:-) 1,924 --
Additional paid-in capital 6,156,642 994,465
Cumulative translation adjustment 131,707 65,460
Accumulated deficit (3,422,297) (1,063,088)
----------- -----------
Total stockholders' equity 2,873,499 1,061
----------- -----------
$ 3,985,949 $ 948,930
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-15-
<PAGE>
VIRTUAL TELECOM, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 1997 and 1996
(Currency - U.S. dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1997 1996
----------- ----------
<S> <C> <C>
SALES $ 112,446 $ --
OPERATING EXPENSES:
General and administrative (1,754,670) (818,738)
Selling and market development (664,591) (130,335)
----------- ----------
Total operating expenses (2,419,261) (949,073)
----------- ----------
Net operating loss (2,306,815) (949,073)
----------- ----------
INTEREST EXPENSE (52,394) (15,237)
----------- ----------
Net loss $(2,359,209) $ (964,310)
=========== ==========
Basic and diluted weighted average number
of common shares 4,465,486 3,374,108
Basic and diluted net loss per common share $ (0.53) $ (0.29)
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-16-
<PAGE>
VIRTUAL TELECOM, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
For the Years Ended December 31, 1997 and 1996
(Currency-U.S. Dollars)
<TABLE>
<CAPTION>
Class A Class B
Common Stock Preferred Stock Preferred Stock
------------------------ ---------------------- ------------------------
Shares Amount Shares Amount Shares Amount
---------- --------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 3,193,540 $ 3,194 -- $ -- -- $ --
Issuance of common stock in
consideration for 355,039 355
Moke Acquisition Corp.
Issuance of preferred stock 283,718 284
Issuance of common stock in
consideration 191,611 191
for consultancy fees
Issuance of common stock in
consideration 200,000 200
for preferred stock
issuance fees
Net loss
Translation adjustment
---------- --------- -------- -------- --------- ----------
Balance at December 31, 1996 3,940,190 3,940 283,781 284 -- --
Issuance of common stock in
consideration 80,000 80
for consultancy fees
Issuance of common stock
through private 534,063 534
placement offering
Issuance of common stock
through private 408,000 408
placement offering
Issuance of common stock to
repay 133,333 133
the bridging loan
Issuance of common stock in
consideration 8,000 8
for administrative fees
Issuance of common stock 1,923,716 1,924
through private
placement offering
Conversion of preferred to 271,686 272 (135,843) (136)
common stock
Compensation cost related to
stock option
Net loss
Translation gain
---------- --------- -------- --------- --------- ----------
Balance at December 31, 1997 5,375,272 $ 5,375 147,938 $ 148 1,923,716 $ 1,924
========== ========= ======== ========= ========= ==========
<CAPTION>
Additional Cumulative Total
Paid-in Translation Accumulated Stockholders'
Capital Adjustment Deficit Equity
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $ 67,980 $ 10,533 $ (98,778) $ (17,071)
Issuance of common stock in 3,735 4,090
consideration for
Moke Acquisition Corp.
Issuance of preferred stock 825,236 825,520
Issuance of common stock in 47,714 47,905
consideration
for consultancy fees
Issuance of common stock in 49,800 50,000
consideration
for preferred stock
issuance fees
Net loss (964,310) (964,310)
Translation adjustment 54,927 54,927
------------ ----------- ----------- ------------
Balance at December 31, 1996 994,465 65,460 (1,063,088) 1,061
Issuance of common stock in 19,920 20,000
consideration
for consultancy fees
Issuance of common stock 872,466 873,000
through private
placement offering
Issuance of common stock 1,019,592 1,020,000
through private
placement offering
Issuance of common stock to 199,867 200,000
repay
the bridging loan
Issuance of common stock in 7,992 8,000
consideration
for administrative fees
Issuance of common stock 2,998,076 3,000,000
through private
placement offering
Conversion of preferred to (136) --
common stock
Compensation cost related to 44,400 44,400
stock option
Net loss (2,359,209) (2,359,209)
Translation gain 66,247 66,247
------------ ----------- ----------- ------------
Balance at December 31, 1997 $ 6,156,642 $ 131,707 $(3,422,297) $ 2,873,499
============ =========== =========== ============
</TABLE>
-17-
<PAGE>
VIRTUAL TELECOM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997 and 1996
(Currency - U.S. dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1996
------------- ------------
Cash flows used in operating activities:
<S> <C> <C>
Net loss $ (2,359,209) $ (964,310)
Adjustments to reconcile net loss to net
cash used in operating activities:
Net exchange loss 100,234 --
Depreciation 184,794 28,566
Interest accrued on loans payable 39,309 26,362
Capitalization of interest (6,656) (12,883)
Stock issued for consultation fees -- 47,903
Write-off Moke goodwill -- 104,090
Increase (decrease) resulting from changes in:
Trade accounts receivable (65,931) --
Prepaid expenses and other receivables (114,271) (25,789)
Trade accounts payable 95,748 67,623
Accrued liabilities 205,410 33,015
------------- ------------
Net cash used in operating activities (1,920,572) (695,423)
------------- ------------
Cash from (used in) investing activities:
Purchase of equipment (332,982) (358,449)
Purchase of Moke Acquisition Corp. -- (100,000)
Other non-current asset expenditures -- (26,023)
Advances to stockholder and related party -- (40,775)
------------- ------------
Net cash used in investing activities (332,982) (525,247)
------------- ------------
Cash flows from (used in financing activities:
Commission on share issuance (63,500) --
Issuance of stock 2,893,000 875,520
Stock-related expenses 102,902 --
Proceeds from bridge loans -- 500,000
Collection of stock subscriptions receivable -- 40,000
Advances from stockholders and related parties -- 72,282
Paid to stockholder and related party (51,397) --
Reimbursements of advances from
stockholders and related parties (50,000) (64,673)
Reimbursements of advances to related parties 66,180 --
Payment of capital lease obligations (275,230) (19,190)
Bank overdraft -- (1,217)
------------- ------------
Net cash provided by financing activities 2,621,955 1,402,722
------------- ------------
Effect of exchange rate changes on cash and
cash equivalents (18,276) 37,087
Net increase in cash and cash equivalents 350,125 219,139
Cash and cash equivalents, beginning of year 219,139 --
------------- ------------
Cash and cash equivalents, end of year $ 569,264 $ 219,139
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-18-
<PAGE>
VIRTUAL TELECOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of December 31, 1997 and 1996
1. Description of the Company
a) The Company and Its Subsidiaries ("the Group")
Virtual Telecom, Inc. ("Virtual Telecom" or the "Company") was
incorporated in Delaware on July 3, 1996 for the purpose of holding
all the shares of Virtual Telecom S.A., a Swiss corporation formed in
1994. The owners of Virtual Telecom S.A. contributed all of the
Virtual Telecom S.A. shares in consideration for 3,194,540 common
shares of Virtual Telecom, Inc. The accompanying financial statements
have been prepared as if the acquisition had occurred at Virtual
Telecom S.A.'s inception (May 19, 1994), using the historical costs of
each entity. Unless the context otherwise requires, all references to
the Group include its wholly-owned subsidiaries, Virtual Telecom SA, a
Swiss corporation as well as Firstquote Limited, an English
corporation founded in December 1997.
The Group was recently organized to engage in the business of
developing and marketing various Internet content-based products and,
secondarily, to act as an Internet Service Provider ("ISP") providing
access to the Internet. The Group's initial content-based products
offered over the Internet consists of the delivery of financial data
from securities and commodities exchanges worldwide on a real-time and
near real-time basis. During 1996 and the first quarter of 1997, the
Group acquired and implemented the hardware, consisting of routers and
servers, and leased telephone lines through which it offers its
financial data service and access to the Swiss market. During the
second fiscal quarter, the Group conducted pilot operations. The
Group commenced full commercial operations end of September 1997 and
hence 1997 is the first fiscal year in which the Company is no longer
in the development stage.
b) Business Combination with Moke
Pursuant to an Agreement and Plan of Merger dated July 31, 1996
between the Company and Moke Acquisition Corp. ("Moke"), Moke merged
with and into the Company effective as of August 30, 1996. Prior to
the merger, Moke was a publicly held shell corporation with no
operations and approximately 4,090,448 shares of Common Stock
outstanding. Pursuant to the Agreement and Plan of Merger, each
outstanding share of Moke Common Stock was converted into .0867471
shares of the Company's Common Stock, for an aggregate issuance of
355,039 shares of the Company's Common Stock to the shareholders of
Moke. In connection with the merger, the Company incurred
approximately $100,000 in acquisition costs. The business combination
was accounted for using the purchase method. The purchase price was
allocated as follows:
<TABLE>
<S> <C>
Organization costs $ 4,090
Other assets 100
Goodwill 100,000
Accrued liabilities (100)
----------
Total purchase price $ 104,090
==========
</TABLE>
Since Moke's operations were not expected to generate any cash flow in
the future, all of Moke's assets and goodwill were written off.
-19-
<PAGE>
2. Summary of Significant Accounting Policies
a) Principle of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates.
c) Revenue Recognition
The Company's subsidiaries design, install, service and monitor ISP
Services and Online Financial Services. The services represent either
"one time" installation or monthly recurring revenues. Installation
revenues and related costs are recognized upon completion of
installation. For the ISP Services and Online Financial Services, the
Company normally invoices 3 months in advance. The Company therefore
recognizes unearned income for amounts invoiced in advance and the
related deferred revenue is then recognized in the profit and loss
account on a straight-line, monthly basis.
d) Foreign Currency Translation
The Company accounts for foreign currency transactions in accordance
with Statement of Financial Accounting Standard (SFAS) No. 52,
"Foreign Currency Translation" which provides for the translation of
assets and liabilities at the end of period current rate and of
operations and cash flows at the rates existing at the date of the
transaction, or appropriate average. Foreign currency transactions
are translated into the functional currency at the rate existing at
the date of the transactions and outstanding balances are reevaluated
at year-end rate with the resulting exchange gain or loss included in
the statement of operations. The Company's functional currency is the
Swiss Franc (CHF). At December 31, 1997 assets and liabilities were
translated into US dollars (the reporting currency) at CHF 1.455
(1996: CHF 1.340) per US dollar and operations and cash flows at an
average rate of CHF 1.455 and CHF 1.240 per US dollar for 1997 and
1996 respectively. The resulting gain or loss on translation into the
reporting currency is included as a separate component of equity under
"cumulative translation adjustment".
e) Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with an
initial maturity of three months or less to be cash equivalents. The
Company is required to maintain a $30,000 compensating balance in one
of its bank accounts to secure the credit line available on credit
cards used by Company personnel. The amount is classified as cash and
cash equivalents.
f) Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over their estimated useful lives, which range
from 3 to 5 years. Leasehold improvements are depreciated over the
shorter of the life of the lease or the life of the asset. Upon sale,
any gain or loss is included in the statement of operations.
Maintenance and minor replacements are charged to operations as
incurred.
g) Income Taxes
The Company utilizes the liability method to account for income taxes.
Under this method, deferred taxes are determined based on the
differences between the financial statement and tax bases of assets
and liabilities, using enacted tax rates in effect for the year in
which the differences
-20-
<PAGE>
are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be
realized.
The Company's subsidiary, Virtual Telecom SA, is incorporated in
Switzerland. The tax charge in Switzerland is an accumulation of the
taxes due to the city, the canton (state) and the federal authorities.
h) Stock-based Compensation
Statement of financial accounting standards No. 13, "Accounting for
stock-based compensation" ("SFAS No. 123") was effective for fiscal
years beginning after December 15, 1996. This statement provides for
a fair value based method of accounting for grants of equity
instruments to employees or suppliers in return for goods or services.
With respect to stock-based compensation to employees, SFAS No. 123
permits entities to continue to apply the provisions prescribed by APB
Opinion No. 25; however, pro forma disclosures of net income and
earnings per share must be presented as if the fair value based method
had been applied in measuring compensation cost. The Company elected
to continue with the accounting method prescribed by APB Opinion No.
25 and presented the pro forma disclosures in Note 11.
i) Fair Value of Financial Instruments
The carrying value of financial instruments included in current assets
and liabilities approximates fair value because of the short maturity
of these items.
j) Net Loss Per Common Share
Net loss per common share is based on the reported net loss divided by
the weighted average number of common shares outstanding. Convertible
preferred stock and outstanding warrants have not been included, as
their effect would be anti-dilutive.
3. Trade Receivables
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
Trade accounts receivable $ 75,622 $ --
Less - allowance for doubtful
accounts (9,691) --
----------------- -----------------
Trade accounts receivable, net $ 65,931 $ --
================= =================
</TABLE>
Included in trade accounts receivable as of December 31, 1997 is an amount
of $33,756 relating to deferred revenues. This amount is also included
within accrued liabilities at that date.
4. Subscriptions Receivable From Shareholders
The $2,000,000 of subscription receivable from shareholders arose on the
issue of $3,000,000 of series "B" Preferred Stock in December 1997. This
amount was paid in March 1998. Refer to note 11 below for details
concerning numbers of shares issued and related term and conditions of
issuance.
-21-
<PAGE>
5. Property and Equipment, Net
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
Software $ 3,960 $ 4,301
Computer equipment 401,924 30,600
Computer equipment under capital lease 45,766 49,201
Furniture and fixtures 86,295 43,129
Vehicles under capital lease 34,381 19,313
Network equipment under capital lease 830,409 528,928
----------------- -----------------
1,402,735 675,472
Less - accumulated depreciation (215,962) 41,000
----------------- -----------------
$ 1,186,773 $ 634,472
================= =================
</TABLE>
Depreciation amounted to $184,794 and $28,566, including $84,833 and
$11,527 in depreciation of assets under capital leases for the periods
ended December 31, 1997 and 1996, respectively. During 1997 and 1996, the
Company capitalized $6,656 and $12,883 in interest expense incurred during
the installation of the network equipment. The network equipment was used
in operations from October 1, 1997. It is the Company's policy to
depreciate its computer and network equipment over their estimated useful
lives based on current conditions. Given the rapid technological change
affecting such equipment, it is at least reasonably possible that the
Company's estimates may change in the near term.
6. Capital Lease Obligations
The Company's subsidiary is obligated under capital leases (computer and
cars) and operating leases (offices) expiring at various dates through
October 31, 2000. Minimum lease payments for leases that have initial or
remaining non-cancelable terms in excess of one year are:
<TABLE>
<CAPTION>
Operating Leases Capital Leases
---------------- --------------
Future minimum lease payments:
<S> <C> <C>
1998 $ 119,994 $ 190,678
1999 79,996 190,678
2000 -- 7,050
2001 -- 2,565
---------------- --------------
Minimum lease payments 199,990 390,971
----------------
Less - amount representing interest (2,331)
--------------
388,640
Less - current maturities (189,526)
--------------
Long-term capital lease
obligations $ $ 199,114
================ ==============
</TABLE>
-22-
<PAGE>
7. Advances and Convertible Loans From Stockholders and Related Parties
Advances and loans from stockholders and related parties consist of the
following:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
Bridge loans $ 315,672 $ 526,362
Advances from related parties -- 64,145
----------------- -----------------
$ 315,672 $ 590,507
================= =================
</TABLE>
In May 1996 and December 1996, the Company received bridge loans of
$300,000 and $200,000 respectively, with interest on the principal amount
accrued at 12%, due one year from the date the loans were made. The loans
are convertible into shares of Common Stock of the Company at the option of
the Company.
In May 1997, the Company issued 133,333 shares of its Common Stock in
consideration for the conversion of $200,000 of the $300,000 loan. An
additional cash payment of $50,000 was made in September 1997.
Of the remaining unpaid amount of $50,000, together with the second loan of
$200,000, $25,000 plus interest of $71,088 was repaid on March 25, 1998 and
the remaining balance of $225,000 will be converted into 145,161 shares of
Common Stock at $1.55 per share.
8. Related Party Transactions
Employment Agreements
Commencing May 1, 1996, the Company entered into five-year term employment
agreements with the Company's two majority stockholders. Both agreements
provide for compensation of approximately $5,600 per month plus monthly
expense allowances of approximately $420 per month. The agreements can be
extended up to three additional three-year terms and are subject to yearly
consumer price index increases. Total compensation paid under these
agreements during 1997 amounted to approximately $144,480.
Administrative Assistance
In May 1996, the Company entered into an agreement with a related party
whereby the related party provides administrative services to the U.S.
holding corporation for $4,000 per month. Amounts charged under this
contract during 1997 and 1996 were approximately $48,000 and $26,000.
In addition to this monthly fee, the related party received a total of
8,000 shares of Common Stock during 1997.
Office Lease
The Company entered into a month to month sublease agreement with a company
affiliated with a stockholder, whereby the Company recovers approximately
$755 per month for use of its premises, utilities and computer systems
usage. Amounts charged to the affiliate amounted to approximately $9,060
and $3,525 during 1997 and 1996.
Chief Executive Officer
The Chief Executive Officer of the Company was granted a loan in October
1996 with a principal amount of approximately $35,000 and an interest rate
of 6.5%. This amount was fully repaid as of December 31, 1997.
-23-
<PAGE>
9. Major Agreements
Network Equipment Service Agreement
In September 1996, the Company entered into an equipment purchase and
network maintenance service agreement with a major computer equipment
manufacturer, whereby the Company committed to outsource the maintenance
and operation of the network for a total of approximately $635,000 from
1997 through 2000. Decreasing cancellation fees ranging from approximately
$480,000 to $100,000 will apply if the Company terminates the agreement
before the end of the four-year term of the agreement.
There are other major suppliers of similar equipment and services. A
change in supplier, however, could cause disruption in service and a
possible loss of revenues which would adversely affect future operating
results.
License to Use and Disseminate Stock Market Information
In August 1996, the Company entered into a 30-month license agreement to
use and disseminate stock market information. After the initial term, the
agreement is renewable in twelve-month increments, with a 90-day
cancellation notice period. A major portion of the Company's future
revenues will be dependent upon maintaining this license.
Financial Software Solution Provider
In January 1997 the Company's Swiss subsidiary entered into a 3-year
software distributor agreement with a financial software solution provider
based in the USA. After the initial term the agreement is renewable on a
12 monthly basis. A 90-day cancellation period applies throughout the
contract. Although there are other such providers of financial software
solutions on the market, the specialist nature of the software solutions
provided under the agreement means that the Company places significant
reliance on this supplier in terms of securing future revenues.
10. Income Taxes
Deferred income tax assets and liabilities are provided for temporary
differences between financial statement income and amounts currently
taxable.
Both the Company and its Swiss subsidiary have been incurring losses during
the years ended December 31, 1997 and 1996. For US tax reporting purposes
the Company has a net operating loss carry forward of approximately
$656,260 to offset federal income taxes which expire at different dates
through the year 2012. These net operating losses could be restricted due
to a change in ownership. Its Swiss subsidiary has a net operating loss
carry forward of $2,676,718 to offset future income taxes in Switzerland
which expires between the years 2002 and 2004.
Temporary differences that give rise to deferred income tax assets and
liabilities are:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
Net operating loss carry forward $ 967,030 $ 389,000
Valuation allowance (967,030) (389,000)
----------------- -----------------
Net deferred tax asset $ -- $ --
================= =================
</TABLE>
A valuation allowance is used to reduce deferred tax asset to a level
which, more likely than not, will be realized. Due to the fact that
certain doubts exist regarding the use of the tax losses carried forward to
offset future taxable income, the Company decided to record a valuation
allowance for the full amount of deferred tax assets.
-24-
<PAGE>
11. Stockholders' Equity
Common Stock
The Company is authorized to issue 20,000,000 shares of Common Stock, $.001
par value ("Common Stock"), of which, as of December 31, 1997, 5,375,272
shares were issued and outstanding and held by approximately 350
stockholders of record. As of December 31, 1997, there are no outstanding
options, warrants or other securities, which upon exercise or conversion
entitle their holder to acquire shares of Common Stock, other than the Unit
Warrants, Series A and B Preferred Stock and options issued under the Stock
Option Plan, described below.
Holders of shares of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. The approval of proposals
submitted to stockholders at a meeting other than for the election of
directors requires the favorable vote of a majority of the shares voting,
except in the case of certain fundamental matters (such as certain
amendments to the Certificate of Incorporation, and certain mergers and
reorganizations), in which case Delaware law and the Company's Bylaws
require the favorable vote of at least a majority of all outstanding
shares. Stockholders are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefore, and in the event of liquidation, dissolution or
winding up of the Company to share ratably in all assets remaining after
payment of liabilities. The holders of shares of Common Stock have no pre-
emptive, conversion, subscription or cumulative voting rights.
From January 1997 to March 1997, the Company issued 534,063 shares in a
private placement offering for total consideration of $873,000.
In February 1997, the Company issued 10,000 shares of Common Stock to a
Director and a further 20,000 shares to an individual as consideration for
consulting services rendered on behalf of the Company. In May 1997 the
Company issued 50,000 shares of Common Stock in consideration for
consulting services rendered to the Company with a value of $12,500.
In June 1997, the Company issued 204,000 units, each consisting of 2 shares
of Common Stock plus one Common Stock warrant, at a price of $5.00 per
unit. In February 1998, the Board of Directors resolved to reduce the
price per Unit to $4.00 and to issue an additional 102,000 Shares of Common
Stock to the Unit purchasers. The 204,000 warrants provide the holders
with the right to acquire 204,000 shares of the Company's Common Stock at a
price of $3.50 per share up to December 31, 2000 (refer also to Note about
Warrant issues below).
In December 1997, the Company issued 133,333 shares for a total of $200,000
to repay the bridge loan to stockholders and other related parties (refer
to Note 7).
During the year ended December 1997, the Company also issued a further
8,000 shares of its Common Stock (refer to Note 8).
Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock,
$.001 par value ("Preferred Stock"). The Company's Board of Directors is
authorized to issue from time to time, without shareholder authorization,
in one or more designated series or classes, any or all of the authorized
but unissued shares of Preferred Stock with such dividend, redemption,
conversion and exchange provisions as may be provided in the particular
series.
The Board of Directors of the Company has designated an initial series of
Preferred Stock known as "Series A Preferred Stock" consisting of 750,000
authorized shares, and the Company has issued 283,781 units ("Units") of
its securities, each Unit consisting of one share ("Series A Preferred
Share") of the Company's Series A Preferred Stock and one Common Stock
purchase warrant ("Unit Warrant"). Each Series A Preferred Shares has a
par value of $.001 and a liquidation preference of $3.50 per share. The
Series A Preferred Stock does not carry dividend rights or any other rights
senior to the Common Stock and the Series A Preferred Stock has equal
voting rights with the Common Stock. During 1996, 283,781 shares of Series
A Preferred stock and Warrants were issued for a total consideration of
$875,520, net of $117,713 in issuance costs. In connection therewith, the
Company also issued 200,000 shares of its common stock to related parties
as commissions for the issuance of the Preferred Stock. The shares were
-25-
<PAGE>
valued at $.25 a share, the opening trading price of the Company's stock in
November 1996, resulting in a $50,000 deduction from the Preferred Stock
proceeds.
In November 1997 the conversion price of the Series A Preferred Stock has
been reset to $1.75, which allows converting one Series A Preferred Stock
into two shares of Common Stock. Through December 31, 1997, 135,843
Preferred Shares had been converted into 271,686 Common Shares.
The Series A Preferred Stock is redeemable by the Company, at a price equal
to the liquidation preference plus any unpaid dividends, at the earlier of
one year from the date of initial issuance or upon the closing of a public
offering of the Company's Common Stock where immediately following such
offering the Common Stock is listed on the New York or American Stock
Exchange or the NASDAQ Stock Market. No shares of Series A Preferred Stock
shall be redeemed without the consent of the majority of outstanding shares
of Series B Preferred Stock.
In December 1997, the Board of Directors of the Company designated a second
series of preferred shares as "Series B Preferred stock" consisting of
1,923,716 shares of authorized shares. On December 30, 1997, the Company
sold 1,923,716 shares of its Series B Preferred Stock to Alta Berkeley V,
C.V. and two affiliated venture capital funds (collectively referred to as
"Alta Berkeley") for the purchase price of $3,000,000. Pursuant to the
terms of the agreement, Alta Berkeley transferred $1,000,000 at the closing
on December 30, 1997 and the balance of $2,000,000 was delivered to the
Company in March 1998. Each Series B Preferred Stock has a par value of
$.001 and a liquidation preference of $3.50 per share if the event of
liquidation, dissolution or winding up occurs on or before December 31,
1999 and thereafter of $5.20 per share. The shares are convertible at any
time into shares of the Company's Common Stock on a one-for-one basis,
subject to adjustment pursuant to certain anti-dilution rights, and have
full voting rights along with the Company's Series A Preferred Stock and
its Common Stock.
Concurrent with the Agreement, the Company and Alta Berkeley entered into
an Investors' Rights Agreement. Pursuant to the terms of their agreement,
the Company increased the authorized number of its directors from four to
six and holders of the shares of Series B Preferred stock are entitled to
elect two members of the Company's Board of Directors. At the closing, the
Company appointed Mr. Bryan Wood of Alta Berkeley to the Board of
Directors. In addition, the Company granted Alta Berkeley the right of
first refusal to purchase a pro rata share of any equity securities, which
the Company may issue. The right of first refusal expires on December 18,
2004. The Investors' Rights Agreement also grants Alta Berkeley certain
approval and disclosure rights over certain management and strategic
matters.
Warrant Issues
In fiscal year 1996, the Company issued 283,781 units ("Units") of its
securities, each Unit consisting of one Series A Preferred Share and one
Common Stock purchase warrant ("Unit Warrant"). Each Unit Warrant entitles
its holder to purchase one share of Common Stock at an initial exercise
price of $7.00 per share until July 31, 1998, which have been reset to an
exercise price of $3.50 and an expiring date of December 31, 2000, at which
time the unexercised Unit Warrants shall expire by their own terms. The
Unit Warrants are subject to anti-dilution provisions.
During the year ended December 1997, the Company has issued a further
204,000 units ("Units") its securities. Each Unit consists of two Common
Share and one Common Stock purchase warrant ("Unit Warrant"). Each Unit
Warrant entitles its holder to purchase one share of Common Stock at an
exercise price of $3.50 per share until December 31, 2000, at which time
the unexercised Unit Warrants shall expire by their own terms. The Unit
Warrants are subject to anti-dilution provisions.
Stock Option Plan
During the year ended December 31, 1997, the Company adopted a Stock Option
Plan ("the Plan"). The Company accounts for the plan under APB Opinion No.
25 under which no compensation cost has been recognized on options granted
to employees as the fair value of stock equals or is lower than the
exercise price at the date of grant.
During 1997, under the plan, the Company granted 310,000 options in total.
All transactions with individuals other than those considered employees (as
set forth within the scope of APB Opinion No. 25) have been accounted for
under the provisions of SFAS No. 123.
-26-
<PAGE>
Had compensation cost on all options granted been determined consistent
with SFAS No. 123 the Company's net loss and earnings per share would have
been reduced to the following proforma amounts.
Loss Per Share
<TABLE>
<CAPTION>
December 31, 1997
-----------------
<S> <C>
Net loss, as reported $ (2,359,209)
Net loss, pro forma (2,510,409)
Basic loss per share, as reported (0.53)
Basic loss per share, pro forma (0.56)
Diluted loss per share, as reported (0.53)
Diluted loss per share, pro forma $ (0.56)
</TABLE>
The effects of applying SFAS No. 123 in this pro-forma disclosure are not
indicative of future amounts.
The weighted average fair value of options granted in 1997 is $0.63 per
option. The fair value of each option grant is estimated on the date of
grant using the Black Scholes pricing model with the following weighted-
average assumptions for grants in 1997:
. a risk free rate of 5.75%
. an expected life of 1,186 days
. an expected volatility of 69%.
The weighted average remaining contractual life of the options is 954 days.
A total of 500,000 common shares may be issued under the plan and have been
reserved by the Directors for that purpose. The Board of Directors
determines the terms and exercise prices.
Officers, employees and directors of the Company or its subsidiaries, in
addition to consultants, independent contractors or other service providers
are eligible for "non-qualified options". Only officers, employees and
directors who are also employees of the Company or its subsidiaries are
eligible to receive grants of Incentive Stock Options.
No option may be granted under the Plan after April 28, 2007, but options
granted before that date might be exercisable after that date.
The following non-qualified options have been granted to the Board of
Directors, Employees and Consultants:
Notes
<TABLE>
<CAPTION>
<S> <C>
December 31, 1997
-----------------
1) Non-Executive Directors (granted April 28, 1997) $100,000
2) Directors (granted May 12, 1997) 100,000
3) Employees (granted May 12, 1997) 40,000
4) Consultants (granted May and November 1997) 70,000
--------
Total $310,000
========
</TABLE>
-27-
<PAGE>
Notes:
1) The 100,000 Options granted to the Non-Executive Director have an
exercise price of $3.00 and can be exercised under following
conditions:
<TABLE>
<CAPTION>
NO. OF OPTIONS EXERCISE DATE
<S> <C>
25,000 April 28, 1998
25,000 April 28, 1999
25,000 April 28, 2000
25,000 April 28, 2001
</TABLE>
2), 3), 4) The other Options issued are exercisable immediately and allow
the holder to purchase one share of the Company's Common Stock at $3.50
between May or November, 1997 and December 31, 2000. The exercise price of
these options was revised downward to $2.00 in March 1998.
4) Under SFAS No. 123 the fair value of the 70,000 options granted to
consultants as of the date of grant using the Black Scholes pricing
model is $44,400 and has been recorded as expense in the statement of
operations (see above for weighed average assumptions).
A summary of the status of the Company's stock option plan as of December
31, 1997 is presented in the table and narrative below:
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------
Shares Wtd. Avg. Ex. Price
(,000) ($)
--------- -------------------
<S> <C> <C>
Outstanding, beginning of year -- --
Granted 310 3.33
Exercised -- --
Expired -- --
--------- -------------------
Outstanding, end of year 310 3.33
========= ===================
Exercisable 190 3.50
</TABLE>
12. Retirement Plans
All of the Company's Switzerland-based employees, including its executive
officers, participate in the legally required pension or retirement plans
existing in Switzerland, which are similar to defined contribution plans.
All of them are subject to the two pension and retirement plans required
under Swiss law. The first such plan is the Assurance Veillesse et
Survivants ("AVS"), a government-administered plan, under which the
Company's subsidiary deducts on a monthly basis 5.05% of employee
compensation and pays it to the AVS fund, whilst itself contributing 5.05%
to the fund for each employee's account. The second such plan is the
Prevoyance Professionnelle plan ("LPP"), a company-sponsored plan which is
currently administered by an independent insurance company. Under this
plan, a total amount equal to between approximately 5% and 15% of each
employee's compensation, depending on age and sex is deducted by the
Company and paid to each employee's account in the LPP fund. The Company
and employees each contribute 50% of this cost. In addition to the legally
required plans, the Company offers to its management supplemental LPP
programs.
The Company has no pension or retirement liability other than its
obligation to make contributions to the AVS fund and the LPP fund and to
see that the appropriate employee amounts are deducted and paid. Total LPP
and AVS plans expenses (including supplemental programs) for executive
officers and other employees was approximately $59,586 and $21,919 for the
Company's Swiss subsidiary for the years ended December 31, 1997 and 1996
respectively.
-28-
<PAGE>
The Company does not maintain any plans for other post-employment or post-
retirement employee benefits.
13. Supplementary Disclosure to Cash Flow Statement
<TABLE>
<CAPTION>
1997 1996
----------- ----------
Cash paid during the year for:
<S> <C> <C>
Interest $ (1,268) $ (2,056)
Income taxes - -
Non-cash investing and financing transactions:
Capitalization of interest 6,656 12,883
Capital leases to finance equipment (532,500) 15,806
Common stock issued in consideration for consultancy fees (20,000) -
Common stock issued in consideration for Moke - 4,090
Common stock issued for preferred stock - 50,000
Common stock issued for issuance fees - 47,903
Common stock issued to repay a bridging loan (200,000) -
Common stock issued in consideration for administrative fees (8,000) -
Preferred stock issuance costs - 117,713
Interest accrued on loans payable - 26,362
Accrued invoice for equipment acquired - 223,881
Common stock issued to repay a bridging loan (200,000) -
Common stock issued in consideration for administrative fees (8,000) -
</TABLE>
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
On November 21, 1997, the Company terminated the appointment of Raimondo,
Pettit & Glassman as independent auditors for the Company and Arthur
Andersen SA was engaged as independent auditors. The decision to change
independent auditors has been approved by the Board of Directors of the
Company. During the fiscal year ended December 31, 1996 and 1995 and the
subsequent interim period through November 21, 1997 there were no
disagreements between the Company and Raimondo, Pettit & Glassman on any
matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures which disagreements if not
resolved to the satisfaction of Raimondo, Pettit & Glassman would have
caused them to make reference to the subject matter of the disagreement in
connection with their reports.
Except for the explanatory paragraph included in the 1995 report, relating
to substantial doubt existing about the Company's ability to continue as a
going concern, the audit reports of Raimondo, Pettit & Glassman on the
Company's financial statements as of December 31, 1996 and 1995 did not
contain an adverse opinion or a disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or accounting
principles.
-29-
<PAGE>
Part III.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
Directors and Executive Officers
- --------------------------------
Set forth below are the directors and officers of the Company.
Name Age Position
---- --- --------
Neil Gibbons 48 Chairman of the Board, Chief Executive Officer
and President
Daniel Huber 30 Vice President, Chief Financial Officer,
Secretary and
Director
William Cordeiro 52 Director
Stuart Townsend 51 Director
Bryan Wood 52 Director
Mr. Gibbons co-founded Virtual Telecom SA in 1994 and has served as Chief
Executive Officer, President and director of the Company since its inception in
July 1996. From 1991 to 1994, Mr. Gibbons was engaged as a consultant and
independent investment manager.
Mr. Huber co-founded Virtual Telecom SA in 1994 and has served as Vice
President, Chief Financial Officer, Secretary and director of the Company since
its inception in July 1996. Since 1992, Mr. Huber has also served as Chief
Executive Officer of Profilinvest SA, an investment management firm founded by
Mr. Huber.
Mr. Cordeiro has served as director of the Company since July 1996. Since
1990, Mr. Cordeiro has served as Professor of Management at California State
University, Los Angeles. Mr. Cordeiro holds a Ph.D. in Executive Management
from the Peter F. Drucker Graduate Management Center of the Claremont Graduate
School. Mr. Cordeiro also serves as a director of Harrier, Inc.
Mr. Townsend has served as a director of the Company since April 1997. Mr.
Townsend is the founder of Townsend Analytics, Ltd., a developer of financial
data software, and for the past five years has served as its President.
Mr. Wood has served as a director of the Company since December 1997. Mr.
Wood is a founder of Alta Berkeley Associates, a privately held venture capital
group, which was formed in 1982. Mr. Wood holds an MBA from Harvard Business
School and BSC in Industrial Engineering from Virginia Polytechnic Institute.
Those required to make filings under Section 16(a) have done so on a timely
basis.
-30-
<PAGE>
Item 10. Executive Compensation.
Cash Compensation of Executive Officers. The following table sets forth
the cash compensation paid by the Company to its executive officers for services
rendered during the fiscal years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
--------------------------------------- -------------------------
Year Salary Bonus Other Restricted Common All Other
Annual Stock Shares Compensation
Name and Position Compensation Awards Underlying (1)
($) Options
Granted
(# Shares)
- ------------------- ---- --------- ------ ------------ ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Neil Gibbons, CEO 1997 CHF96,000 -0- -0- -0- 50,000 CHF 7,200
1996 CHF62,000 -0- -0- -0- -0- -0-
1995 -0- -0- -0- -0- -0- -0-
Daniel Huber, CFO 1997 CHF96,000 -0- -0- -0- 50,000 CHF7,200
1996 CHF64,000 -0- -0- -0- -0- -0-
1995 -0- -0- -0- -0- -0- -0-
</TABLE>
(1) Represents an allowance of CHF600 per month.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
- -----------------------------------------------------------------------------------------------
Name Number of % of Total Exercise Expiration Date
Securities Options/SARs Granted or
Underlying to Employees in Fiscal Base Price
Options/SARs Year ($/Sh)
Granted (#)
- ----------------- --------------- ---------------------- ---------- ---------------
<S> <C> <C> <C> <C>
Neil Gibbons, CEO 50,000 21% 2.00 12/31/00
Daniel Huber, CFO 50,000 21% 2.00 12/31/00
</TABLE>
Compensation of Directors. Mr. Cordeiro receives a $500 per month
director's fee. All directors receive reimbursement for out-of-pocket expenses
in attending Board of Directors meetings. From time to time the Company may
engage certain members of the Board of Directors to perform services on behalf
of the Company. The Company will compensate the members for their services at
rates no more favorable than could be obtained from unaffiliated parties.
-31-
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the beneficial
ownership of the shares of Common Stock as of March 20, 1998 by (i) each person
who is known by the Company to be the beneficial owner of more than five percent
(5%) of the issued and outstanding shares of Common Stock, (ii) each of the
Company's directors and executive officers and (iii) all directors and executive
officers as a group.
<TABLE>
<CAPTION>
Name and Address Number of Shares Percentage Owned
- ------------------------------------- ------------------- -----------------
<S> <C> <C>
Neil Gibbons (1) 1,446,770(2) 25.9%
Daniel Huber (1) 1,146,770(2) 20.5%
William Cordeiro (3) 10,000(4) (5)
Stuart Townsend (6) 25,000(7) (5)
Bryan Wood (8) 1,923,716(9) 25.8%
Alta Berkeley V, C.V. (8) 1,923,716(9) 25.8%
All officers and directors as
a group 4,552,256 60.0%
</TABLE>
- -----------------------------
(1) Address is 12, Av. des Morgines, 1213 Petit-Lancy 1, Geneva, Switzerland.
(2) Includes 50,000 shares of Common Stock underlying presently exercisable
options.
(3) Address is 23852 Pacific Coast Highway, Suite 283, Malibu, California
90265.
(4) Represents shares held by Bartik, Cordeiro Associates, Inc., of which Mr.
Cordeiro is a shareholder.
(5) Less than one percent.
(6) Address is Townsend Analytics, 100 South Wacker Drive, Suite 1500, Chicago,
Illinois.
(7) Represents shares of Common Stock underlying immediately exercisable
options.
(8) Address is Alta Berkeley Associates, 6 Rue d'Italie, 1211 Geneva 3,
Switzerland.
(9) Represents shares of Common Stock issuable upon conversion of Series B
Preferred Stock held by Alta Berkeley V, C.V. and two affiliated funds.
Mr. Bryan Wood is a partner of Alta Berkeley Associates which serves as a
manager of the three funds.
-32-
<PAGE>
Item 12. Certain Relationships and Related Transactions.
The Company's Chief Financial Officer, Daniel Huber, is also Chief
Executive Officer of Profilinvest SA, an investment management firm in Geneva,
Switzerland. At the present time and for the foreseeable future, Mr. Huber
intends to devote substantially all of his business time to the Company.
However, Mr. Huber's association with Profilinvest SA presents a potential
conflict between his provision of his services to the Company and to
Profilinvest.
Item 13. Exhibits and Reports on Form 8-K.
a) Index to Exhibits
3.1(1) Certificate of Incorporation of the Company
3.2(1) Bylaws of the Company
4.1(1) Specimen of Common Stock Certificate
4.2 Amended Certificate of Designations of the Company
10.1(1) Loan Agreement dated May 15, 1996 between Virtual Telecom SA and
New Capital Investment Fund
10.2(1) Partnership Outsourcing Agreement dated September 9, 1996 between
Virtual Telecom SA and Digital Equipment Corporation
10.3(1) Employment Agreement dated May 31, 1996 between Virtual Telecom SA
and Neil Gibbons
10.4(1) Employment Agreement dated May 31, 1996 between Virtual Telecom SA
and Daniel Huber
10.5(1) Computer Software License Agreement dated January 16, 1997 between
Virtual Telecom SA and Townsend Analytics, Ltd.
10.6(1) Information and Distribution License Agreement dated August 23,
1996 between Virtual Telecom SA and McGraw-Hill International (UK)
Ltd.
10.7(1) Agreement for Global Telecommunications Services dated October 1,
1996 between Virtual Telecom SA and BT Limited London (British
Telecom)
10.8(1) Unidata Frame Relay & Unimaster Services dated October 22, 1996
between Virtual Telecom SA and Swiss Telecom ITT
10.9(1) News Distributor Agreement dated January 7, 1997 between Virtual
Telecom SA and AFX News Limited
10.10(1) 1997 Stock Option Plan of the Company
10.11 Series B Preferred Stock Purchase Agreement dated December 18,
1997
10.12 Investor Rights Agreement dated December 18, 1997
10.13 Software License Agreement between the Company and IQ Net
16.1(2) Letter from Raimondo, Pettit & Glassman regarding Change of
Independent Public Accountant
21.1 The Company has two subsidiaries, Virtual Telecom SA, a Swiss
corporation and Firstquote Limited, an English corporation
27.1 Financial Data Schedule
- --------------------------
(1) Previously filed as part of registration statement on Form 10-SB (SEC File
No. 0-22351) filed with the Securities and Exchange Commission on April 7,
1997.
(2) Previously filed as part of Current Report on Form 8-K/A (SEC File No. 0-
22351) filed with the Securities and Exchange Commission on December 23,
1997.
-33-
<PAGE>
(b) Reports on Form 8-K
During the fiscal year ended December 31, 1997, the Company filed a Current
Report on Form 8-K dated November 21, 1997 to report a change in the Company's
certifying accountant. The Company also filed a current report on Form 8-K
dated December 30, 1997 to report the sale of securities pursuant to Regulation
S to Alta Berkeley V, C.V. and two affiliated funds.
-34-
<PAGE>
Signatures
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
VIRTUAL TELECOM, INC.
Date: March 30, 1998 By: /s/ Neil Gibbons
-----------------
Neil Gibbons, Chief Executive Officer
In accordance with the Exchange Act, this Report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
- ----------------------- ----------------------- --------------
/s/ Neil Gibbons Chief Executive Officer March 30, 1998
- -----------------------
Neil Gibbons
/s/ Daniel Huber Chief Financial Officer March 30, 1998
- -----------------------
Daniel Huber
/s/ William Cordeiro Director March 30, 1998
- -----------------------
William Cordeiro
/s/ Stuart Townsend Director March 30, 1998
- -----------------------
Stuart Townsend
/s/ Bryan Wood Director March 30, 1998
- -----------------------
Bryan Wood
-35-
<PAGE>
<TABLE>
<S> <C> <C>
CORPORATE OFFICES US COUNSEL SWISS COUNSEL
12 Ave des Morgines Oppenheimer Wolff & Niklaus Hodel Poggia Plantin & Bruttin
1213 Petit-Lancy 1 Donnelley LLP 8, Rue du Mont-de-Sion
Geneve, Switzerland Suite 700 1206 Geneve
Tel:(41)(22) 879 0879 500 Newport Center Dr Switzerland
Fax:(41)(22) 879 0880 Newport Beach
[email protected] CA 92660, USA
INVESTOR RELATIONS INDEPENDENT TRANSFER AGENT
Corporate Assistance Co., Inc. ACCOUNTANTS Interwest Transfer Company
2200 Pacific Coast Highway, #301 Arthur Andersen PO Box 17136
Hermosa Beach Route de Pre-Bois 29 Salt Lake City
CA 90254, USA 1215 Geneve 15 Utah 84117
Tel:(310) 376 7721
Fax:(310) 374 5740
[email protected]
ANNUAL MEETING CORPORATE WEBSITES SECURITIES LISTING
June 23, 1998 www.vite.net Nasdaq: OBB - VITE
12 Ave des Morgines www.firstquote.com
1213 Petit-Lancy 1 www.firstswiss.net
Geneve, Switzerland www.investmaster.com
</TABLE>
SERVICES PROVIDED:
<TABLE>
<S> <C> <C>
1st SWISS 1ST INVEST
--------------------------- quote MASTER
BUSINESS INTERNET SOLUTIONS
</TABLE>
