<PAGE>
U.S. SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission File Number 0-22351
Virtual Telecom, Inc.
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(Exact name of small business issuer as specified in its charter)
DELAWARE 98-0162893
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12, Ave des Morgines, 1213 Petit-Lancy 1,
Geneva, Switzerland N/A
- ----------------------------------------- ---
(Address of principal executive offices) (Zip Code)
41-22-879-0879
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(Issuer's telephone number)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
As of October 31, 1998 the Registrant had 5,781,309 shares of its common stock,
par value $0.001, issued and outstanding.
Transitional Small Business Disclosure Format: Yes [_] No [X]
<PAGE>
Part I -- Financial Information
Item 1. Financial Statements
VIRTUAL TELECOM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
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ASSETS (Unaudited) (Audited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 399,080 $ 569,264
Trade accounts receivable, net 134,936 65,931
Subscriptions receivable from stockholders 0 2,000,000
Prepaid expenses and other receivables 97,688 138,107
----------- -----------
Total current assets 631,704 2,773,302
Property and equipment, net 1,146,372 1,186,773
Other assets 29,626 25,874
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Total Assets $ 1,807,701 $ 3,985,949
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 23,979 $ 165,557
Accrued liabilities and provisions 704,733 208,825
Current portion of capital lease obligations 43,842 189,526
Advances/convertible loans from stockholders/
related parties 250,000 315,672
Deferred income 102,814 33,756
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Total current liabilities 1,125,367 913,336
Long Term portion of capital lease obligation 59,802 199,114
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Total Liabilities 1,185,169 1,112,450
=========== ===========
Stockholders' Equity
Common Stock 5,781 5,375
Preferred Stock 1,992 2,072
Additional paid-in capital 6,381,316 6,156,642
Cumulative translation adjustment (147,958) 131,707
Accumulated deficit (5,618,599) (3,422,297)
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Total stockholders' equity 622,532 2,873,499
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Total Liabilities and Shareholders' Equity $ 1,807,701 $ 3,985,949
=========== ===========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
<PAGE>
VIRTUAL TELECOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------- -------------------------
1998 1997 1998 1997
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
INCOME $ 143,627 $ 46,566 $ 363,029 $ 47,398
EXPENSES
Selling & Market Development 327,560 154,440 939,242 395,247
General & Administrative 764,743 353,383 1,977,389 900,944
---------- --------- ----------- -----------
1,092,304 507,823 2,916,631 1,296,191
---------- --------- ----------- -----------
OPERATING RESULT (948,677) (461,257) (2,553,601) (1,248,793)
OTHER INCOME AND EXPENSES
Interest 2,004 (7,700) 10,038 (20,842)
Foreign Exchange 514,421 (3,591) 347,261 (86,900)
---------- --------- ----------- -----------
516,424 (11,291) 357,299 (107,742)
---------- --------- ----------- -----------
NET RESULT (432,252) (472,548) (2,196,302) (1,356,535)
Weighted Average Number of Common Shares 5,578,291 4,998,330 5,578,291 4,998,330
Net Result per Common Share $ (0.08) $ (0.09) $ (0.39) $ (0.27)
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
<PAGE>
VIRTUAL TELECOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-------------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(2,196,302) $(1,356,535)
Adjustments to reconcile net loss to net cash
used in operating activities:
Exchange gain / (loss) (347,261) 86,900
Depreciation and amortization 375,968 69,082
Provision for doubtful debitors 2,302 0
Interest accrued on loans payable 5,417 32,173
Capitalization of interest 0 (6,656)
Increase / (decrease) resulting from changes in:
Trade accounts receivable (71,307) (20,262)
Prepaid expenses and other receivables 40,419 (117,977)
Trade accounts payable (141,578) (248,669)
Accrued liabilities and provisions 495,908 63,273
Deferred income 69,057 0
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Net cash used-in operating activities (1,767,378) (1,498,671)
CASH USED IN INVESTING ACTIVITIES:
Purchase of equipment (334,371) (406,066)
Other non-current asset expenditures (4,947) 0
Advances to stockholder and related party 0 (6,777)
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Net cash used-in investing activities (339,318) (412,843)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Issuance of stock 0 1,829,642
Proceeds from bridge loans 0 199,867
Collection of stock subscriptions receivables 2,000,000 0
Advances from stockholders and related parties 250,000 0
Reimbursements of advances from stockholders
and related parties (96,089) (179,912)
Reimbursements of advances to related parties 0 0
Payment of capital lease obligations (284,996) 0
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Net cash provided by financing activities 1,868,915 1,849,597
Effect of Exchange Rate Changes on Cash and
cash equivalents 67,596 (32,859)
NET DECREASE IN CASH AND CASH EQUIVALENTS (170,184) (94,776)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 569,264 219,139
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 399,080 $ 124,363
=========== ===========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
<PAGE>
VIRTUAL TELECOM, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - CONDENSED FINANCIAL STATEMENTS
The accompanying financial statements have been prepared by the Company without
audit. In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows at September 30, 1998, and for all periods
presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these unaudited condensed
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's December 31, 1997 audited
financial statements. The results of operations for the nine months ended
September 30, 1998 are not necessarily indicative of the operating results for
the full year.
NOTE 2 - CONVERTIBLE LOANS FROM STOCKHOLDERS AND RELATED PARTIES
As at December 31, 1997, the Company owed $250,000 plus accrued interest in
respect of the balance of two convertible loans received during 1996. During the
nine months ended September 30, 1998, the Company converted $225,000 of the
principal to common stock, and repaid $25,000 of principal and $71,089 of
accrued interest in cash.
As at September 30, 1998 the Company owed $250,000 in respect of a convertible
loan received during the quarter from an existing shareholder. This loan has
been extended to a total of $500,000 subsequent to September 30, 1998. The loan
is convertible into preferred stock of the Company upon the conclusion of
additional equity financing, or redeemable at the option of the lender. The loan
will bear interest at 12% per annum with effect from December 31, 1998.
NOTE 3 - ISSUANCE OF COMMON STOCK
During the nine months ended September 30, 1998, the Company issued 145,161
shares of its common stock in conversion of $225,000 of loan principal at a
price of $1.55 per share.
During the nine months ended September 30, 1998, 79,438 shares of Series A
Preferred stock were converted into 158,876 common shares.
During the nine months ended September 30, 1998, the Company issued 102,000
shares of its common stock, as a result of having reset the price of a previous
issue of shares.
NOTE 4 - FIXED ASSETS AND CONTRACTUAL COMMITTMENTS
In September 1996, Virtual Telecom S.A. signed a four-year Partnership
Outsourcing Agreement with Digital Equipment Corporation, for the provision of
computer equipment and maintenance.
Virtual Telecom S.A. has contractual commitments for the servicing of the
equipment acquired above. As of September 30, 1998 there are two years remaining
on the contract, which amounts to approximately $245,000 per annum.
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
Background
Virtual Telecom, Inc., a Delaware corporation ("Company"), was organized to
engage in the business of developing and marketing various financial information
services utilizing Internet based technologies and, secondarily, providing
network access services to the Internet to corporate clients, mainly those using
the financial information services provided by the Company. The Company's
financial information services consist of the delivery of financial data and
other information from securities and commodities exchanges and other sources
worldwide on a real-time and near real-time basis, as well as the capability for
users to trade online in real-time. Unless the context otherwise requires, all
references to the Company include its wholly owned subsidiary, Virtual Telecom
SA, a Swiss corporation.
During 1996 and the first quarter of 1997, the Company implemented the
telecommunications and information processing infrastructure required to deliver
its services. The Company commenced pilot operations during the second quarter
of 1997 and commercial operations during the third quarter of 1997. Active
marketing activities were commenced towards the end of the second quarter of
1998. Thereafter the Company has concentrated on growing its client base for its
range of financial information services, primarily in Switzerland, Germany and
France, as well as developing online dealing services for these markets.
Financial
The Company's results of operations for the nine months ended September 30, 1998
include revenues of $363,029 and a net loss of $2,196,302. Results of operations
for the quarter ended September 30, 1998 include revenues of $143,627 and a net
loss of $432,252. Revenues for the quarter ended September 30, 1998 represent a
16% increase over that of the previous quarter.
Operating expenses amounted to $2,916,631 for the nine months and $1,092,304 for
the quarter ended September 30, 1998. Operating expenditures for quarter ended
September 30, 1998 are 13% higher than those of the previous quarter,
predominantly due to an increase in sales related activities.
The foreign exchange differences included in other income and expenses arise
from the revaluation of certain monetary items within Virtual Telecom SA.
As of September 30, 1998, the Company had negative working capital of $493,663
and stockholders' equity of $622,532. As of the date of this report, the Company
is actively seeking to acquire additional capital through the sale of its debt
or equity securities. If the Company is unable to raise additional capital, the
Company may not be able to continue its present level of activities.
The Company's plan of operations for the next twelve months includes the
continuation of its expansion into other major financial centers in Europe as
well as the launching of its real-time online dealing services for US and
European equities.
Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the European Union
("EU") are scheduled to establish fixed conversion rates between their existing
sovereign currencies and the Euro, and to adopt the Euro as their common legal
currency on that date. Switzerland is not a member of the EU and the Company
currently denominates most of its transactions in Swiss francs, the unit of
currency of Switzerland. However, subscribers to the Company's financial
information and trading products and services typically pay for those products
and services in the currency of their resident jurisdiction. Therefore, the
Company is presently faced with the task of adapting its information systems and
practices to accommodate the Euro conversion in those EU member countries in
which it offers its products and services. Moreover, certain content within the
financial information distributed by the Company (notably security quotations)
will begin to be denominated in Euro, commencing on January 1, 1999.
Euro conversion is expected to generally increase cross-border price
transparency among the participating countries and result in a more competitive
European market. The Company is uncertain as to the effect, if any, that Euro
conversion will have on its ability to sell its products and services in the
European market. Euro conversion could potentially impact pricing strategies and
demand for the Company's services in the European market, lead to increased
competition within the European market for the specific types of services sold
by the Company, or impact the Company's relationships with vendors and
licensors. As a result of competitive pressures, the Company could also
potentially be required to denominate future transactions in the Euro and incur
currency risk and conversion costs as a result.
<PAGE>
While significant efforts have been applied to identifying and resolving the
issues resulting from the introduction of the Euro, there can be no assurance
that Euro conversion will not have a material, adverse effect on the Company's
business, financial condition and results of operation.
Year 2000 Compliance
The Year 2000 problem results from the use by computers of two digits rather
than four digits to define the applicable year. The use of only two digits was
common during the period when computer resources were much more expensive than
today. As a result, when such computer systems must process dates both before
and after January 1, 2000, the two-digit year identification may create
processing errors and system failures. These effects may be apparent in both
information processing systems as well as mechanical operations controlled by
computers (embedded microprocessors). The effects of this issue are further
compounded by the interdependence of computer systems between suppliers and
customers.
The Company utilizes computer software applications and operating systems in
distributing its financial information service, operating its network
infrastructure and various administrative and billing functions. In addition,
the Company's financial information service is reliant receipt of financial data
from external vendors such Standard & Poor's Comstock, and the processing of
that information using software licensed to the Company by third parties such as
Townsend Analytics. To the extent that the Company's computer software
applications, or those of its information vendors and software licensers, are
unable to operate accurately after January 1, 2000, some degree of modification,
or even possibly replacement of such applications, may be necessary.
In the event that the Company's systems or the systems of its third party
information vendors and licensers are not materially Year 2000 compliant, the
Company could experience a disruption in the provision of its financial
information and network access services.
The Company has appointed a Year 2000 Committee to assess the scope of the
Company's risks in this regard and adopt appropriate measures to bring its
applications into compliance. The Committee is currently in the process of
completing its identification of applications that are not Year 2000 compliant.
In addition, the Company has begun to ask its information vendors and software
licensers about their progress in identifying and addressing problems that their
own computer systems may face in correctly processing date information related
to the Year 2000. The findings of this committee will be disclosed in due
course.
The Company is in the early stages of conducting its review of the risks
associated with the Year 2000 and is therefore unable to make a reasonable
estimate of the costs associated with Year 2000 compliance. Accordingly, no
assurance can be given that any of the Company's or third party systems is or
will be Year 2000 compliant, or that the costs required to address the Year 2000
issue or that the impact of the Company's failure to achieve substantial Year
2000 compliance will not have a material adverse effect on the Company's
business, financial condition or results of operations.
Safe Harbor
This report contains various forward-looking statements that are based on the
Company's beliefs as well as assumptions made by and information currently
available to the Company. When used in this report, the words "believe,"
"expect," "anticipate," "estimate" and similar expressions are intended to
identify forward-looking statements. Such statements are subject to certain
risks, uncertainties and assumptions referred to herein and in the Company's
1997 Annual Report on Form 10-KSB, including, without limitation, the Company's
recent commencement of commercial and marketing operations and the risks and
uncertainties concerning the market acceptance of its services and products;
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.
<PAGE>
PART II - Other Information
Item 1. Legal Proceedings.
Inapplicable.
Item 2. Changes in Securities and Use of Proceeds
Inapplicable.
Item 3. Defaults Upon Senior Securities
Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Inapplicable.
Item 5. Other Information
Inapplicable.
Item 6. Exhibits and Reports on From 8-K.
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports of Form 8-K
Inapplicable.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VIRTUAL TELECOM, INC.
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(Registrant)
Dated: November 12, 1998 By /s/ Neil Gibbons
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Neil Gibbons
Chief Executive Officer
/s/ Mark Benn
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Mark Benn
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 399,080
<SECURITIES> 0
<RECEIVABLES> 149,791
<ALLOWANCES> 14,855
<INVENTORY> 0
<CURRENT-ASSETS> 631,704
<PP&E> 1,764,100
<DEPRECIATION> 617,728
<TOTAL-ASSETS> 1,807,701
<CURRENT-LIABILITIES> 1,125,367
<BONDS> 0
0
1,992
<COMMON> 5,781
<OTHER-SE> 614,758
<TOTAL-LIABILITY-AND-EQUITY> 1,807,701
<SALES> 333,975
<TOTAL-REVENUES> 363,029
<CGS> 0
<TOTAL-COSTS> 2,916,631
<OTHER-EXPENSES> (357,299)
<LOSS-PROVISION> 2,302
<INTEREST-EXPENSE> 5,417
<INCOME-PRETAX> (2,196,302)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,196,302)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
