<PAGE>
U.S. SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB/A
ANNUAL REPORT PURSUANT SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File Number 0-22351
Virtual Telecom, Inc.
---------------------
(Name of small business issuer as specified in its charter)
Delaware 98-0162893
------------------------------- ------------------
(State or other jurisdiction of (IRS 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
--------------
(Issuer's telephone number)
Securities to be Registered Under Section 12(b) of the Act:
None N/A
-------------------- -------------------------------
(Title of each class (Name of each exchange on which
to be so registered) each class is to be registered)
Securities To Be Registered Under Section 12(g) Of The Act:
Common Stock, $.001 par value
-----------------------------
(Title of class)
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 22, 1999 was approximately $14,749,961
As of March 22, 1999 the registrant had 6,016,309 shares of its common stock,
par value $0.001, issued and outstanding.
Documents Incorporated By Reference: None
<PAGE>
Part I
Item 1. Description of Business.
Business Development
- --------------------
Virtual Telecom, Inc., a Delaware corporation (the "Company"), was organized
to engage in the business of developing and marketing various real-time market
data and financial information services as well as online brokerage capabilities
via a range of client interfaces based on Internet technologies. Its services
are marketed under the brand name "FirstQuote" and are available via its own
wide-area Internet protocol network by dial-up or dedicated access, as well as
from any other Internet access point. The Company also provides related
supporting network services to users of its financial information services.
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.
During the last quarter of 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.
During the first quarter of 1997, the Company conducted a private placement
of shares of Common Stock whereby 534,063 shares of Common Stock were sold for
gross proceeds of $873,000.
During the second quarter of 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 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 thereby to issue an additional 102,000 shares of
Common Stock to the Unit purchasers.
In December 1997, the Company sold 1,923,716 shares ("Series B Shares") of
its Series B Preferred Stock to Alta-Berkeley V, C.V. and three affiliated Alta-
Berkeley venture capital funds (collectively referred to as "Alta-Berkeley") for
$3,000,000 of which $1,000,000 was received in December 1997 and $2,000,000 in
March 1998.
-2-
<PAGE>
In January 1999 the Company sold 3,783,784 shares of its Series C Preferred
Stock to five parties, including Alta-Berkeley, two other venture capital funds,
a bank and a private investor, for a total consideration of $7,000,000.
Concurrent with the issuance of the Series B Preferred Stock, the Company
and Alta-Berkeley entered into an Investors' Rights Agreement, which has been
amended to include the holders of the Series C Preferred Stock. Pursuant to the
terms of this agreement, the Company increased the authorized number of its
directors to nine. Holders of the shares of both the Series B Preferred Stock as
a class, and the Series C Preferred Stock as a class, are each entitled to elect
two members of the Company's Board (four in total). In addition, the Company has
granted the holders of the Series B Preferred Stock and the Series C Preferred
Stock (the "Holders") the right of first refusal to purchase a pro rata share of
any new equity securities which the Company may issue. The right of first
refusal expires on January 24, 2006. The Investors' Rights Agreement also grants
the Holders demand registration rights in certain circumstances as well as
certain approval and disclosure rights over certain management and strategic
matters.
The shares of both the Series B Preferred Stock and the Series C Preferred
Stock have a liquidation preference of the greater of (i) $3.50 per share if the
event of liquidation, dissolution or winding up occurs on or before December 31,
2000 and thereafter of $5.20 per share and (ii) $1.85 plus a pro-rata share of
any excess liquidation proceeds accruing to the common shareholders. The shares
are all 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.
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 Avenue des Morgines, 1213 Petit-Lancy 1, Geneva, Switzerland;
telephone number +41 (22) 879 0879.
Business of the Company
- -----------------------
Certain terms used herein are defined below in the section "Glossary."
Certain financial information is presented in Swiss Francs, the unit of currency
of Switzerland. All Swiss Franc based amounts are designated by the symbol
"CHF." As of March 22, 1999, the Swiss Franc-dollar exchange rate was 1.4640
Swiss Francs to 1 US dollar.
General
Virtual Telecom is engaged in the business of developing and marketing
Internet-based financial services and solutions to the European investment
community. The Company provides real-time or delayed market data, news and
financial information as well as online dealing capabilities over the Internet
to institutional, corporate and private users.
The Company's financial information services are offered on a direct
subscription basis or as a co-branded product to third parties, including,
brokerage firms, banks, insurance companies, fund managers, institutional,
professional traders, news organizations and Internet service providers, who
desire to offer the services directly to their own customers. The Company also
offers to institutional clients turnkey solutions for Internet-based online
dealing capabilities. In order to provide an end-to-end solution, the Company
also derives revenue through the provision of Internet access and network
connectivity services to its corporate and institutional clients.
The Company's services are available via its own wide-area Internet
network backbone by dial-up or dedicated access, as well as from any other
Internet point of access world-wide. Its "ticker plant" and client interface
technologies are based on systems developed in the USA.
Background
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 and thereafter commercial operations
during the second and third quarters of 1997. Active marketing activities were
commenced
-3-
<PAGE>
towards the end of the second quarter of 1998. Thereafter the Company has
concentrated on growing its client base, primarily in Switzerland, Germany and
France, as well as developing online dealing services for these markets.
During the last quarter of 1998, the Company developed and commenced hosting
of a financial portal website for Les Echos, a member company of the Pearson
Group, a leading European financial media organization. This strategic alliance
also embodies a joint marketing arrangement for the Company's FirstQuote
services as well as promotion of its activities to the website visitors.
Following the introduction of this service, the Company has opened a sales
office in Paris. The Company has implemented a similar project for Agefi.com, a
leading Swiss financial media concern during the first quarter of 1999.
In January 1999, the Company entered into an arrangement with Maerki Baumann
& Co., a Swiss (Zurich) based private bank, for implementation and joint
marketing of an Internet-based electronic trading service enabling its clients
to trade securities and receive account information over the Internet. The on-
line trading service is offered as a co-branded version of FirstQuote. The
Company receives monthly fees for operating and maintaining the system as well
as a share of the transactional revenue generated by trades routed through the
system.
Strategy
The Company believes that until recently western European investors have had
relatively limited interest in investing in publicly traded equity securities
compared to those in the US. However, in recent years western Europeans have
directed more of the their investments towards the equity securities, evidenced
by the emergence of several junior equity markets, including the New Market
section of the Frankfurt Stock Exchange, the Alternative Investment Market
section of the London Stock Exchange, the Nouveau Marche section of the Paris
Stock Exchange and the European Automated Securities Dealers and Quotation
System (EASDAQ). The growth in European equity investments has created an
opportunity for providers of related financial information services and
electronic brokerage solutions. According to Frost & Sullivan, a market research
firm, the market for financial information services alone in Western Europe was
estimated to be $3.5 billion and growing at the rate of 10% per annum in 1997.
The Company further believes that most providers of Internet-based
electronic brokerage services in western Europe are affiliates or subsidiaries
of US providers, and as such provide services having a distinctly US focus. The
Company's internal marketing studies indicate that European banks and brokerage
firms have a high degree of interest in offering an Internet-based information
and brokerage services to the their client base. However, few of the European
banks or brokerages presently offer these services. As a result, the Company
believes that significant market opportunities exist for a provider of financial
information and electronic brokerage services that is able to address the
interests and requirements of the European investor.
The Company's objective is to be a leading provider of Internet-based
services and solutions to the European investment community. The Company plans
to achieve these objectives through the development of joint-venture
arrangements (strategic alliances) with banks and securities brokerages,
financial service providers, financial news organizations and Internet service
providers throughout Europe. As required, the Company will develop and operate
co-branded websites for the purpose of offering basic free-of-charge quote
services (delayed data), which serve a marketing platform for its more
sophisticated subscription-based FirstQuote market data and online brokerage
solutions. FirstQuote services will also be co-branded within the framework of
such joint-venture arrangements. The Company also intends to aggressively market
its FirstQuote services on a direct sales basis. Furthermore, the Company
markets its FirstQuote services directly from its website in a highly automated
e-commerce manner, requiring little or no human intervention in the sales
process.
Key elements of the Company's strategy include:
State of the Art Technology: The Company's technologies and services are
based on software licensed from Townsend Analytics Ltd. The Company believes
that Townsend Analytics is a recognized world leader in the development and
commercialization of software and technologies dedicated to Internet-based
quotation, trading and exchange activities. The owner and President of Townsend
Analytics, Mr. Stuart Townsend, has served on the Board of Directors of the
Company since April 1997.
European Focus: The Company believes that it offers Internet-based
information and on-line brokerage services that are uniquely European in nature.
Until now, the dominant providers of Internet-based information and brokerage
services in Europe have been US based companies which, in the opinion of the
Company, offer a service
-4-
<PAGE>
that is distinctly US in nature. The Company's quotation and financial services
cover all major world markets and exchanges. However, in the opinion of
management, the Company's services provide greater focus on pan-European markets
and exchanges than other competing services. In the case of joint-venture
arrangements for the provision of a co-branded service, the Company works with
its local partner to customize the offered service to suit the cultural need
and investment profile of the partner's existing and targeted clientele.
Target Existing Customer Bases: By focusing on the development of co-branded
information and brokerage services pursuant to strategic alliances, the Company
will acquire an immediate access to an existing client base. The Company plans
to enter into one or more strategic relationships with banks and securities
brokerages, financial services providers, financial news organizations and
Internet service providers in each of the major investment and geographical
communities of Western Europe. The Company believes that this strategy will
accelerate the expansion of its services throughout Europe and, at the same
time, reduce the marketing costs typically associated with the rollout of a
service of this nature throughout an area made up of several large and
culturally diverse communities.
Development of FirstQuote Brand Name: The Company has applied for trademark
registration of the FirstQuote mark in the USA, Switzerland and throughout the
European Union. The Company intends to market its services and solutions
throughout Europe under the FirstQuote brand name. The Company shall endeavor to
create a high degree of consumer awareness of the FirstQuote name and the
association of quality and reliable services with such name in the European
investment banking community. The Company intends to leverage its FirstQuote
brandname through the future development and marketing of additional services,
including a portal website linking the customer to an array of Internet websites
offering financial and investment services.
Services and Solutions
- ----------------------
Market Data and Financial Information Services
The Company provides real-time or delayed market data, news and financial
information using Internet technologies. The Company's services are marketed to
European financial institutions, including brokerage firms, banks, insurance
companies, fund managers, professional traders, and private investors. The
market data comprises a real-time `ticker plant' database of more than 380,000
securities, including stocks, options on stocks, major stock and option indices,
commodities and currencies, from over 44 exchanges worldwide, including major
European, North American and Asian exchanges.
The market data is gathered from ticker and news feeds from stock exchanges
and other sources and processed on demand into a single user data feed driven by
a range of client interfaces allowing clients to monitor market data symbols on
a dynamic real-time basis. The Company's primary data processing plant is
located in its executive offices in Geneva, Switzerland.
The Company's services are obtainable directly from its product web site at
http://www.firstquote.com/.
- --------------------------
The Company offers three versions of its market data and financial
information service, tailored to different segments of the investment community:
FirstQuote Professional: The service is a decision support interface for
investment related operations by institutional investors, brokerage firms and
corporations. The service provides wide real-time data coverage, sophisticated
analytical tools, alarm settings, historical data, news and all investment
indicators regularly used by professional traders. FirstQuote Professional
displays financial information in multiple windows on multiple pages, each of
which can be modified to suit individual requirements. Pages may be stored and
retrieved instantly by a single key press. FirstQuote Professional customers are
granted a floating license, allowing the software to be installed and used on
multiple machines, for example an office PC, home PC and portable PC, and thus
providing a highly mobile solution. However only one simultaneous access is
permitted per subscription.
The principal features of the FirstQuote Professional include:
Market Minder A quote screen with rows of symbols and columns of prices
and other data related to the symbols.
-5-
<PAGE>
MultiQuote Provides detailed fundamental information on a symbol in
a customizable layout
Ticker Scrolling ticker window showing trade price and volume
information.
Time & Sales Tabular display of each transaction showing transaction
type price and volume.
News A scrolling list of headlines with full news stories
where available.
Charts Graphical analysis of market data with a variety of
different studies available.
Point & Figure Market display of price trends.
QuickQuote Detailed quote information may be linked to other windows
to synchronize the symbol being viewed.
Forex Foreign exchange calculator
Table Tabular display of each transaction for a given symbol
Turbo Options Advanced options quote screen
Market Makers Comparative table of regional or NASDAQ Level II stocks'
showing bids and asks by market maker
Alarm Automated price-monitoring tool.
Internet Browser With built in drag and drop enables quick look up of
symbols on Internet based databases such as Yahoo and
Edgar On-line.
DDE Link Links live data into customers' own spreadsheet for real-
time modeling.
FirstQuote Lite: This service is designed for corporate treasurers,
portfolio managers, smaller brokers and sophisticated private investors. The
service provides real-time data and news, and includes a reduced range of
analytical tools and functions when compared to FirstQuote Professional. The
service consists of a fixed page market data screens featuring (from the above
table) Market Minder; MultiQuote; Ticker; Time and Sales; News; Charts; and
Internet Browser. The fixed page nature of this product provides for
customizable configurations to be implemented for larger groups, which are then
non-modifiable by users.
InvestMaster: The InvestMaster range of technologies is designed for the
personal investor and small professional user, directly or as clients of
strategic partners. The service is based on Web push-technology, using the same
server side data engine that powers the FirstQuote Professional Lite services,
and client side web plug-ins based on Java and ActiveX technologies, producing
tabular or chart format output. The InvestMaster technology provides either
delayed or real-time data or news in snapquote formats.
The Company's market data and financial information services are based on
software licenses from Townsend Analytics Ltd. of Chicago, Illinois. See
"Trademarks and Technology Licenses" below for a summary of the terms and
conditions of the Company's license agreement with Townsend Analytics. The
Company's operations are conducted pursuant to arrangements with other
significant third party providers, including Standard & Poor's Comstock (a
Division of McGraw-Hill International), Fides Informatique, Compaq Computer,
Swisscom, British Telecom, Transpac/France Telecom, Carrier One and Colt
Telecom. See `Third Party Providers" below for a summary of the terms of the
arrangements with these third party providers.
On-Line Trading Solution
FirstQuote Trader: the Company offers an on-line dealing solution under
the name FirstQuote Trader. The service consist of a turnkey solution to banks
and brokerage firms providing them the ability to offer Internet-based
electronic brokerage services to their clients. The service involves the design
of appropriate network architectures as well as the integration of the Company's
licensed trading server platform software with the institution's existing
settlement and administration systems. The Company provides the electronic order
entry and routing technologies as well as the security systems, while the
institution's existing computer systems provide order approval and execution
functions. As a result the institution's clientele is offered a complete order
entry, execution, and real time profit/loss portfolio information via the
Internet. The FirstQuote Trader interface also incorporates the
-6-
<PAGE>
FirstQuote Professional or FirstQuote Lite service functionality thus providing
a complete package of decision support, order entry, order routing and portfolio
monitoring capability.
The Company is not a licensed bank or securities brokerage firm nor does it
intend to obtain any such licenses at this time. Therefore, the Company intends
for the foreseeable future to offer the on-line trading solution as a co-branded
product to licensed banks and brokerage firms. The Company's on-line trading
solution is based on a software license from Townsend Analytics. See "Trademarks
and Technology Licenses" below for a summary of the terms and conditions of the
Company's license agreement with Townsend Analytics.
The FirstQuote Network Services
In order to offer a complete end-to-end package of services, the Company
also provides network development and connectivity services including Internet
access and network security services to its corporate and institutional clients.
The Company maintains its own wide-area Internet protocol network backbone
in Switzerland, enabling clients to access the market data, financial
information and online dealing services by way of dial-up or dedicated line. The
Company also leases bandwidth from various European telecommunications carriers
further enabling access to the Company's services from any Internet access point
worldwide.
The Company also provides services relating to the development and hosting
of customized web sites associated with the co-branded implementations of the
market data and financial information services and electronic brokerage
solutions described above.
Strategic Partnering Arrangements
- ---------------------------------
The Company's business plan focuses on the development of significant
partnering arrangements with key banks and securities brokerages, financial
service providers, news organizations and Internet content providers throughout
Europe. The purpose of these partnering arrangements is to provide investment
and financial related services, such as market data and financial information
services or on-line brokerage activities, to a targeted clientele as the co-
branded service of the Company and the particular partner. To date, the Company
has entered into three such arrangements, as follows:
Maerki Baumann: The Company has entered into a Real-Time Financial
Information and On-Line Dealing Agreement dated March 10, 1998 with Maerki
Baumann & Co. a Zurich, Switzerland based private bank. Pursuant to the
agreement, the Company and has developed for Maerki Baumann's use a real-time
Internet based order matching system for all stocks traded on the Swiss Stock
Exchanges, as well as for US securities. The Company has implemented a trading
server platform based on software licensed by the Company from Townsend
Analytics and has integrated this with Maerki Baumann's existing securities
settlement and client account administration systems. The result is a solution
that allows Maerki Baumann the ability to offer its clientele complete order
entry and execution, and real time account and portfolio information via the
Internet. Each on-line brokerage service will also include a subscription for
the FirstQuote Professional or FirstQuote Lite client interface as well.
Under their agreement, the Company is responsible for the development,
installation and maintenance of the trading servers and application software.
The Company is not licensed under the laws of Switzerland, or any other
jurisdiction, to engage in securities brokerage activities. Therefore, the
Company's role is that of a technology solution provider. Maerki Baumann is
responsible for all brokerage activities and client account responsibility.
In consideration for the above services, the Company will receive fixed
monthly fees, user license fees, plus a transaction fee on each electronic
trade.
Les Echos: The Company has entered into an agreement dated November 4, 1998
for the development and hosting of additional web site material (http://stocks.
--------------
lesechos.fr/) including international market data and charts to the existing web
- ------------
site of Les Echos, a leading financial media group in France. Under the terms of
the agreement, Les Echos undertook to perform certain promotional activities for
a jointly marketed FirstQuote-Les Echos co-branded service. Revenues from
subscriptions to the FirstQuote-Les Echos co-branded service will be shared.
-7-
<PAGE>
Agefi: The Company has entered into an agreement dated November 6, 1998 for
the provision of web site material (http://www.agefi.com/) including
---------------------
international market data and charts for Agefi, a leading financial media group
in Switzerland. Under the terms of the agreement, Agefi has undertaken to
provide product marketing for FirstQuote within its own and other financial
publications.
Trademarks and Technology Licenses
- ----------------------------------
The Company has registered, or has applied for registration, for the
trademarks FirstQuote and InvestMaster in Switzerland and the European Union.
The Company has registered the InvestMaster mark with the US Patent and
Trademark Office and has applied for a US registration of the FirstQuote mark.
The Company's market data and financial information services and its on-line
brokerage solutions are based on software licensed to the Company by Townsend
Analytics Ltd. of Chicago, Illinois. Pursuant to a Computer Software License
Agreement dated January 16, 1997 between Townsend Analytics and the Company,
Townsend Analytics has appointed the Company as a distributor for the sale,
support and servicing of Townsend Analytics' proprietary software programs
relating to market data and financial information services and on-line brokerage
activities. Pursuant to the agreement, the Company is authorized to implement
and resell these software programs in return for agreed royalty payments.
In December 1998, the Company and Townsend Analytics amended their
agreement to restrict the right of Townsend Analytics to grant further software
licensing rights in those regions.
The Company's information services and brokerage solution are substantially
dependent on the technologies licensed to the Company by Townsend Analytics. In
the event the Company's continued access to the licensed software is terminated
or interrupted for a significant length of time, the Company would have to
either develop or acquire suitable replacement software, of which there can be
no assurance, or discontinue its present operations.
Third Party Providers
- ---------------------
The Company's services are provided with the assistance of the following
businesses:
Standard & Poor's ComStock: The Company receives stock and commodity
information pursuant to an Information Distribution License Agreement dated
August 23, 1996 between the Company and the Standard & Poor's ComStock (a
division of McGraw-Hill International (UK) Ltd.). Standard & Poor's ComStock is
licensed to distribute market data and financial information from most US and
international stock, mercantile, options and currency exchanges. Standard &
Poor's ComStock provides the Company with data 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 services.
Compaq Computer (formerly Digital Equipment Corporation): The Company's
Internet access and network equipment and implementation were provided pursuant
to Partnership Outsourcing Agreement dated September 9, 1996 between the Company
and Digital Equipment Corporation. Pursuant to the agreement the Company has
purchased from Digital 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 agreement is for an initial four-year term expiring in September
2000.
Effective January 1, 1999, and following a transfer of know-how from Digital
to the Company, the Company has assumed full operating responsibility for the
equipment, in return for a reduced series of payments.
Swisscom/British Telecom/Carrier One/Transpac-France Telecom/Colt Telecom.
The Company's Internet access and network connectivity is carried over a frame
relay data communications network operated by Swisscom. In addition, the Company
has arranged for further dedicated connections to the Internet from British
Telecom (Sunrise), Carrier One, Transpac-France Telecom, and Colt Telecom.
-8-
<PAGE>
Competition
- -----------
The market for financial information and on-line brokerage services over the
Internet is rapidly evolving and becoming competitive. The Company expects
competition to continue and intensify in the future. In the area of market data
and financial services, the Company faces direct competition from several
companies that provide for the delivery of financial data over the Internet or
other electronic means. The Company believes its primary competitors include
Reuters, Bloomberg, and Bridge.
In the area of electronic brokerage services, the Company seeks to enter
into partnering arrangements with licensed banks and brokerage firms enabling
them to provide the service in turn to their own clients. Such arrangements will
compete with electronic brokerage firms as the eSchwab division of Charles
Schwab & Co., Inc., E-Trade Group and DLJdirect, a subsidiary of Donaldson,
Lufkin & Jenrette Securities Corporation. The partnering arrangements will also
encounter competition from brokerage firms offering conventional assisted sales
operations.
Many of the Company's competitors have longer operating histories and
significantly greater financial, technical, marketing and other resources than
the Company. In addition, many of the Company's competitors offer a wider range
of services and financial products, and thus may be able to respond more quickly
to new or changing opportunities, technologies and customer requirements. There
can be no assurance that the Company will be able to compete effectively with
current or future competitors or that such competition will not have a material
adverse affect on the Company's business, financial condition and operating
results.
Government Regulation
- ---------------------
The Company's market data and financial and on-line brokerage services are
not currently subject to direct regulation by Swiss, European Union 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, 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 25 full-time employees and 3 full-time
consultants at present, 6 of whom are involved in administration, 11 of whom are
involved in software development and engineering and 11 of whom are involved in
sales, sales support and marketing.
Item 2. Description of Property.
The Company's executive offices are located in Geneva, Switzerland and
consist of approximately 340 square meters of leased premises. The Company's
lease for these premises expires on August 30, 1999 and provides for monthly
rent of $10,800.
In addition the Company rents office space in Zurich, Switzerland (50 square
meters) and Paris, France (30 square meters) on a calendar year basis for a
combined total of approximately $4,900 per month.
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.
-9-
<PAGE>
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, 1998, the high and low closing prices were $2.00 and $0.69, respectively.
These high and low prices reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions. The following
table reflects the Company's stock price movements in more detail:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------
1998 1997
-------------------------- -----------------------
Quarter High Low High Low
------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Fourth $ 2.00 $ 0.69 $ 2.63 $ 2.00
Third 1.13 0.91 3.25 2.50
Second 2.00 1.00 3.25 2.38
First 2.13 1.56 2.56 1.75
</TABLE>
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 22, 1999, there were approximately 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, 1998, the Company sold
unregistered securities in the following transactions:
In June 1998, the Company granted three of its employees options to purchase
an aggregate of 110,000 shares of Common Stock pursuant to the Company's 1997
Stock Option Plan. The options had an exercise price of $2.00 per share, have a
one-year vesting period and expire in June 2001. The options were issued
pursuant to Section 4(2) of the 1933 Act. There was no underwriter involved in
this issuance.
In December 1998, the Company granted thirteen of its employees options to
purchase an aggregate of 270,000 shares of Common Stock pursuant to the
Company's 1997 Stock Option Plan. The options had an exercise price of $2.00 per
share, have a one-year vesting period and expire in December 2001. The options
were issued pursuant to Section 4(2) of the 1933 Act. There was no underwriter
involved in this issuance.
Item 6. Management's Discussion And Analysis Or Plan Of Operation.
Background
- ----------
The Company is engaged in the business of developing and providing various
real-time market data and financial information services as well as online
dealing capabilities via a range of client interfaces based on Internet
technologies. Its services are marketed under the brand name "FirstQuote". Its
services are available via its own wide-area Internet protocol network by dial-
up or dedicated access, as well as from any other Internet access point. The
Company also provides related supporting network services to users of its
financial information services
-10-
<PAGE>
Unless the context otherwise requires, all references to the Company include
its wholly owned subsidiary, Virtual Telecom SA, a Swiss corporation and
FirstQuote Ltd. a UK company.
As of March 1999, the Company is providing financial information or
networking services to over 160 clients, with associated recurring monthly
revenues of approximately $80,000. Non-recurring revenues have averaged $12,000
per month since commercial marketing activities commenced.
Regarding the Company's plan of operations for the 1999 fiscal year, it has
targeted strategic alliances in key European financial centers from which to
leverage its growth. It plans to market its financial market information,
analytical tools and online order entry/matching systems both under its own
product names and as co-branded implementations with institutional clients.
Currency Exchange Rates: Although the Company reports its results in US
dollars, virtually all of its revenues and expenses are denominated in other
currencies, primarily Swiss francs, Euros and Pounds sterling. Consequently, the
Company's net results are directly affected by any changes in the exchange rate
between the US dollar on the one hand, and the Swiss franc, Euros or Pounds
sterling on the other. Transactions of the Company and its subsidiaries are
recorded based on the functional currency of each particular company. Assets and
liabilities of the Company and its subsidiaries are translated at the exchange
rate in effect at each year-end. Income statement accounts are translated at the
average rate of exchange prevailing during the year. Translation adjustments
arising from differences in exchange rates from period to period are included in
the cumulative translation adjustment account in stockholders' equity.
Results of Operations
- ---------------------
This section should be read in conjunction with the annual financial
statements presented on pages 15 to 32.
Revenue of $534,715 was reported for the year ended December 31, 1998 which
amounts to an increase of 376% over that of $112,446 for the prior year.
Revenues in the fourth quarter of 1998 were 20% above those of the third quarter
of 1998. Revenue is comprised of financial market data services and related
network connectivity services, including web services. While network related
revenues accounted for 53% of total revenue for the current year, the relative
importance of this source of revenue is diminishing as the Company's FirstQuote
user base expands. Financial market data services accounted for 52% of revenue
for the fourth quarter of 1998.
Selling & Market Development expenses for the current year were $1,430,597
or 115% above the amount of $664,591 for the prior year. This reflects increased
levels of operating activity as well as the commencement of commercial marketing
activities during the year.
General and administrative expenses were $2,861,662 for the current year, an
increase of 73% from $1,654,436 in the prior year. Staff costs represent the
major component of this expense and have increased 171% from $454,560 to
$1,232,645. Depreciation has increased by 182% from $184,794 to $520,421. Office
expenses (including travel expenses) have increased by 70% from $521,015 to
$885,316. Professional fees have decreased by 50% from $444,485 to $223,280.
The net operating loss for the year was $3,996,322, which is 69% above the
loss for the previous period of $2,357,781, and results from the factors
mentioned above.
The foreign exchange gains in the current year and losses in the previous
year arise essentially from the revaluation of amounts due by Virtual Telecom SA
to Virtual Telecom Inc., which have been denominated in US dollars.
Liquidity and Financial Condition
- ---------------------------------
As of December 31, 1998, the Company had negative working capital of
$1,595,476 including an amount of $1,000,000 due to a related party, which was
converted to Series C Preferred Stock in January 1999. The negative working
capital was the result of a build up of payables during the time that additional
financing was being secured.
-11-
<PAGE>
Subsequent to the year-end, the Company secured additional equity financing
through the sale of 3,783,784 shares of Series C Preferred Stock for $7,000,000,
including the conversion of $1,000,000 due from a related party.
The amount of cash and cash equivalents has decreased from $569,264 to
$229,450 during the current year. The Company has continued to generate negative
cashflows since its cost base exceeds its revenues from operating activities.
The net cash burn rate (excluding capital expenditure) during the current year
and fourth quarter of 1998 was approximately $270,000 and $350,000 per month,
respectively. The increase in the amount for the fourth quarter compared with
the whole year, reflects the increasing levels of operating activity during the
course of the year. Capital expenditure for the year amounted to $466,824.
Based on the current levels and trends of revenue and operating expenses,
the Company believes that it has sufficient capital to continue its activities
for the next twelve months. However, the plan of operations for the 1999 fiscal
year will require increases in the amounts of operating and capital expenditure
above those incurred to date. While revenues are similarly projected to increase
during the year, it is not certain that these revenues and the above-mentioned
financing will be sufficient to cover these expenditures until the time that a
breakeven situation may be achieved. At this time there are no firm commitments
or agreements on the part of any party to provide any additional debt or equity
capital to the Company and there can be no assurance that the Company will be
able to obtain additional capital. The Company's inability to increase revenue
or obtain additional debt or equity capital on a timely basis will, in all
likelihood, materially adversely affect its future planned growth of operations
and revenues.
Euro Conversion
- ---------------
On January 1, 1999, eleven of the fifteen member countries of the European
Union ("EU") establish fixed conversion rates between their existing sovereign
currencies and the Euro, and adopted the Euro as their common legal currency.
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.
Furthermore, subscribers to the Company's services are typically invoiced in the
currency of their resident jurisdiction. The Company has successfully adapted
its information systems and practices to accommodate the Euro in those EU member
countries in which it offers its services. Moreover, the content within the
financial information distributed by the Company (notably security quotations)
has successfully begun 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.
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.
-12-
<PAGE>
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 upon the 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 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. To date the costs associated with this project
have amounted to approximately $10,000, all of which are internal expenses.
The committee has completed the process of identifying the core processes,
internal equipment as well as external services and software licenses that may
not be Year 2000 compliant. The cost of replacing internal IT equipment and
applications known to be not Year 2000 compliant is approximately $20,000.
Internal non-IT systems employed are not critical and have been determined not
to pose significant risks.
Where external risks have been identified, the Company has sent confirmation
letters to information vendors and software licensors to ascertain 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
Company is in the process of reviewing the responses received from these parties
in order to assess further steps to be taken.
In addition, and independent from Year 2000 issues but having the effect of
reducing risks related thereto, the Company has begun to diversify the equipment
and data suppliers that it uses and has identified alternative suppliers where
needed, should failures occur.
The most likely worst case scenario for the Company would involve the loss
of data feeds from external sources. If such were to occur the Company would
have to switch to alternate data suppliers which may result in certain
disruptions to its service and potential revenue losses as a result.
The future costs estimated to be required to resolve Year 2000 issues amount
to $20,000 of internal resources relating to a number of planned projects. The
further findings of this committee will be disclosed in due course.
No assurance can be given that any of the Company's or third party systems
is or will be Year 2000 compliant. Neither can assurance be given that the
eventual costs required to address remaining unresolved Year 2000 issues 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, 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.
-13-
<PAGE>
Item 7. Financial Statements.
INDEX TO FINANCIAL STATEMENTS
- -----------------------------
Independent Auditors' Report............................................. 15
Consolidated Balance Sheets at December 31, 1998 and 1997................ 16-17
Consolidated Statements of Operations for the years ended December 31,
1998 and 1997......................................................... 18
Consolidated Statements of Cash Flows for the years ended December 31,
1998 and 1997......................................................... 19
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1998 and 1997...................................... 21
Notes to Consolidated Financial Statements.............................. 23-35
-14-
<PAGE>
Report of Independent Auditors
To the Board of Directors and Shareholders
Virtual Telecom, Inc., Delaware
We have audited the accompanying consolidated balance sheets of Virtual Telecom,
Inc. and its subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years 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.
We conducted our audit in accordance with generally accepted auditing standards
in the United States. 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
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Virtual
Telecom, Inc. and its subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States.
ARTHUR ANDERSEN LLP
Geneva
March 30, 1999
-15-
<PAGE>
VIRTUAL TELECOM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets as of December 31, 1998 and 1997
(Currency - U.S. dollars)
ASSETS
------
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 229,450 $ 569,264
Trade accounts receivable, net 191,229 65,931
Subscriptions receivable from stockholders -- 2,000,000
Prepaid expenses and other receivables 62,108 138,107
---------- ----------
Total current assets 482,787 2,773,302
---------- ----------
NON-CURRENT ASSETS
Property and equipment, net 1,130,563 1,186,773
Other assets 28,487 25,874
---------- ----------
Total non-current assets 1,159,050 1,212,647
---------- ----------
Total Assets $1,641,837 $3,985,949
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-16-
<PAGE>
VIRTUAL TELECOM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets as of December 31, 1998 and 1997
(Currency - U.S. dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Trade accounts payable $ 658,700 $ 194,934
Accrued liabilities 102,274 179,448
Current portion of capital lease obligations 146,481 189,526
Advances/convertible loans from stockholders/related parties 1,000,000 315,672
Deferred income 170,808 33,756
----------- -----------
Total current liabilities 2,078,263 913,336
----------- -----------
LONG TERM CAPITAL LEASE OBLIGATIONS
Capital lease obligation, net of current portion 166,621 199,114
----------- -----------
COMMITMENTS (Notes 6, 9 and 12)
STOCKHOLDERS' EQUITY
Preferred Stock
10,000,000 shares authorized;
Class A: 68,500 and 147,938 shares issued and outstanding,
liquidation preference of $239,750 and $517,783 as of
December 31, 1998 and 1997, respectively 69 148
Class B: 1,923,716 shares issued and outstanding,
liquidation preference of $6,733,006 as of December 31,
1998 and 1997 ($10,003,323 after December 31, 1999) 1,924 1,924
Common Stock, $0.001 par value,
20,000,000 shares authorized; 5,781,309 and 5,375,272 shares
issued and outstanding in 1998 and 1997, respectively 5,781 5,375
Additional paid-in capital 6,381,315 6,156,642
Cumulative translation adjustment (148,610) 131,707
Accumulated deficit (6,843,526) (3,422,297)
----------- -----------
Total stockholders' (deficit) / equity (603,047) 2,873,499
----------- -----------
Total Liabilities and Shareholders' (Deficit) / Equity $ 1,641,837 $ 3,985,949
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-17-
<PAGE>
VIRTUAL TELECOM, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For The Years Ended December 31, 1998 and 1997
(Currency - U.S. Dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
INCOME $ 534,715 $ 112,446
EXPENSES
Selling & Market Development Expenses 1,430,597 664,591
General & Administrative Expenses 2,861,662 1,654,436
----------- -----------
4,292,259 2,319,027
----------- -----------
OPERATING RESULT (3,757,544) (2,206,581)
OTHER INCOME AND EXPENSES
Interest Expense (3,441) (52,394)
Foreign Exchange Gain / (Loss), net 339,756 (100,234)
----------- -----------
336,315 (152,628)
----------- -----------
NET LOSS $(3,421,229) $(2,359,209)
=========== ===========
Basic and diluted weighted average number of
common shares 5,781,309 4,465,486
=========== ===========
Basic and diluted net loss per common share $ (0.59) $ (0.53)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-18-
<PAGE>
VIRTUAL TELECOM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For The Years Ended December 31, 1998 and 1997
(Currency - U.S. Dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(3,421,229) $(2,359,209)
Adjustments to reconcile net loss to net cash used in
operating activities:
Exchange (gain) / loss (339,756) 100,234
Depreciation and amortization 520,421 184,794
Provision for doubtful debtors 15,840 --
Interest accrued on loans payable 5,417 39,309
Capitalization of interest -- (6,656)
Stock and stock options issued as compensation cost -- 72,400
Increase / decrease resulting from changes in:
Trade accounts receivable (141,138) (65,931)
Prepaid expenses and other receivables 75,999 (114,271)
Trade accounts payable 463,766 125,125
Accrued liabilities and provisions (77,174) 142,277
Deferred income 137,052 33,756
----------- -----------
Net cash used-in operating activities (2,760,802) (1,848,172)
CASH USED IN INVESTING ACTIVITIES:
Purchase of equipment (464,211) (332,982)
Other non-current asset expenditures (2,613) --
----------- -----------
Net cash used-in investing activities (466,824) (332,982)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Issuance of stock -- 2,848,600
Stock-related expenses -- 102,902
Commission on issuance of stock -- (63,500)
Collection of stock subscriptions receivable 2,000,000 --
Advances from stockholders and related parties 1,000,000 --
Payment to stockholder and related party -- (51,397)
Reimbursements of advances from stockholders and
related parties (96,089) (78,000)
Reimbursements of advances to related parties -- 66,180
Payment of capital lease obligations (75,537) (275,230)
----------- -----------
Net cash provided by financing activities 2,828,374 2,549,555
Effect of Exchange Rate Changes on Cash and cash equivalents 59,438 (18,276)
NET (DECREASE) / INCREASE IN CASH AND CASH EQUIVALENTS (339,814) 350,125
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 569,264 219,139
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 229,450 $ 569,264
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-19-
<PAGE>
VIRTUAL TELECOM, INC. AND SUBSIDIARIES
Consolidated Statements Of Changes in Stockholders' Equity
For The Years Ended December 31, 1998 and 1997
(Currency - U.S. Dollars)
<TABLE>
<CAPTION>
Class A Class B
Common Stock Preferred stock Preferred stock Additional
------------------ ----------------- ----------------- paid-in
Shares Amount Shares Amount Shares Amount capital
--------- ------ -------- ------ --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996
Issuance of common stock in consideration
for consultancy fees 3,940,190 3,940 283,781 284 -- -- 994,465
--------- ----- -------- ---- --------- ----- ---------
Issuance of common stock through private
placement offering 80,000 80 19,920
Issuance of common stock through private
placement offering 534,063 534 872,466
Issuance of common stock to repay
the bridging loan 408,000 408 1,019,592
Issuance of common stock in consideration
for administrative fees 133,333 133 199,867
Issuance of common stock through private
placement offering 8,000 8 7,992
Conversion of preferred to common stock 1,923,716 1,924 2,998,076
Compensation cost related to stock option (136)
Net loss 44,400
Translation gain
--------- ----- -------- ---- --------- ----- ---------
Balance at December 31, 1997 5,375,272 5,375 147,938 148 1,923,176 1,924 6,156,642
Issuance of common stock to repay
convertible loan 145,161 145 224,855
Conversion of preferred to common stock 158,876 159 (79,438) (79) (80)
Issuance of common stock as a result of
price reset on private placement units 102,000 102 (102)
Net loss
Translation gain
--------- ----- -------- ---- --------- ----- ---------
Balance at December 31, 1998 5,781,309 5,781 68,500 69 1,923,716 1,924 6,381,315
========= ===== ======== ==== ========= ===== =========
<CAPTION>
Cumulative Total
translation Accumulated stockholders' Comprehensive
adjustment deficit equity loss
----------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 65,460 (1,063,088) 1,061 (997,628)
Issuance of common stock in consideration
for consultancy fees 20,000
Issuance of common stock through private
placement offering 873,000
Issuance of common stock through private
placement offering 1,020,000
Issuance of common stock to repay
the bridging loan 200,000
Issuance of common stock in consideration
for administrative fees 8,000
Issuance of common stock through private
placement offering 3,000,000
Conversion of preferred to common stock --
Compensation cost related to stock option 44,400
Net loss (2,359,209) (2,359,209) (2,359,209)
Translation gain 66,247 66,247 66,247
----------- ----------- ------------- --------------
Balance at December 31, 1997 131,707 (3,422,297) 2,873,499 (3,290,590)
Issuance of common stock to repay
convertible loan 225,000
Conversion of preferred to common stock --
Issuance of common stock as a result of
price reset on private placement units --
Net loss (3,421,229) (3,421,229) (3,421,229)
Translation gain (280,317) (280,317) (280,317)
----------- ----------- ------------- --------------
Balance at December 31, 1998 (148,610) (6,843,526) (603,047) (6,992,136)
===========
</TABLE>
-20-
<PAGE>
VIRTUAL TELECOM, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
As of December 31, 1998 and 1997
1. Description of the Company and its subsidiaries
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 Company include
its wholly-owned subsidiaries, Virtual Telecom SA, a Swiss corporation, as
well as FirstQuote Limited, an English corporation founded in December 1997.
The Company is engaged in the business of developing and marketing a range
of real-time market data and online dealing services over the Internet and
providing related supporting network connectivity services. Its principal
markets are currently Switzerland, Germany and France. During 1996 and early
1997, the Company acquired and implemented the necessary infrastructure,
comprising data feed handlers, data servers and telecommunication networks.
The Company commenced pilot commercial operations during the latter part of
1997. The Company commenced active marketing of its services during the
second quarter of 1998 and has concentrated on growing its client base as
well as offering additional service content (in the form of additional
exchange data, news as well as online dealing capabilities) during the
second half of 1998.
The Company has incurred operating losses and negative cash flows since
inception. As of December 31, 1998 the Company had a working capital deficit
of $1,595,476 including an amount of $1,000,000 due to a related party,
which was converted to Series C Preferred Stock in January 1999. In January
1999, the Company sold 3,783,784 shares of Series C Preferred Stock for a
total consideration of $7,000,000, including the conversion of $1,000,000
due to the related party. The plan of operations for 1999 and thereafter
will require increases in expenditures above those incurred to date. The
ability of the Company to continue operations as planned will be dependent
on the ability of the Company to generate increased revenues, produce
positive margins through the control of expenditures and/or raise additional
finance.
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 in the United States 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 subsidiary develops, installs, and maintains systems that
allow its clients to access the financial information and market data
services that it provides over an Internet connection as well as to
access the Internet at large. The Company therefore derives both single
installation and recurring revenues.
Installation revenues and related costs are recognized upon completion
of installation. Where installation revenues exceed installation costs,
then installation revenues are recognized over the service period and
not at installation.
-21-
<PAGE>
Recurring revenues for financial data services and network services are
normally invoiced in advance. The resulting amount of unearned income
not attributable to the period of invoicing is reflected under current
liabilities as deferred revenue, and recognized in the profit and loss
account according to the month of applicability of the underlying
services.
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
transaction and outstanding balances are revalued at the year-end rate
with the resulting exchange gain or loss being included in the statement
of operations.
The functional currency of the Company's main operating subsidiary
Virtual Telecom SA, is the Swiss Franc (CHF). The functional currency of
Virtual Telecom, Inc. and FirstQuote Limited is US dollars.
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.
f) Property and equipment
Property and equipment is stated at cost and depreciated using the
straight-line method over their estimated useful lives, ranging 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 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. 123, "Accounting for
stock-based compensation" ("SFAS No. 123") was effective for fiscal
years beginning after December 15, 1996. This statement
-22-
<PAGE>
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 the continued application of 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 has elected to continue with the accounting method
prescribed by APB Opinion No. 25 and presented the required pro forma
disclosures of SFAS 123 in Note 11.d).
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) Segment Reporting
Statement No. 131, Disclosures about Segments of an Enterprise and
Related Information (Issue Date 6/97) requires the reconciliation of
total segment information presented to the corresponding amounts in the
consolidated financial statements, and establishes standards for related
disclosure about products and services, geographic areas and major
customers. The Company adopted SFAS 131 in 1998 and manages its
activities as one segment under the guidelines of the standards.
k) Advertising expenditure
Advertising is expensed as incurred.
l) Net loss per common share
Net loss per common share is based on the 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 antidilutive.
m) Comprehensive Income
Statement No. 130, Reporting Comprehensive Income (Issue Date 6/97)
requires companies to report all changes in equity during a period,
except those resulting from investment by owners and distribution to
owners. SFAS No. 130 was effective for periods beginning July 1, 1998
and the Company has disclosed Comprehensive Income / (Loss), which
encompasses net income and foreign currency translation adjustments, in
the Consolidated Statement of Changes in Shareholders' Equity.
-23-
<PAGE>
n) Recent Accounting Pronouncements
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities (Issue Date 6/98) establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair
value. The Statement requires that changes in the derivative's fair
value be recognized in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that
receive hedge accounting. Statement No. 133 is effective for fiscal
years beginning after June 15, 1999and must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired, or substantively modified after
December 31, 1997. The Company has not yet quantified the impact of
adopting Statement No. 133.
Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" provides guidance on
accounting for the costs of computer software developed or obtained for
internal use. This SOP requires computer software costs that are
incurred in the preliminary project stage to be expensed as incurred.
Once the capitalization criteria of the SOP have been met, directly
attributable development costs should be capitalized. It also provides
guidance on the treatment of upgrade and maintenance expenditures. SOP
98-1 is effective for fiscal years beginning after December 15, 1998.
Costs incurred prior to initial application of this SOP, whether
capitalized or not, should not be adjusted to the amounts that would
have been capitalized had this SOP been in effect when those costs were
incurred. The Company has not determined the impact that this SOP will
have on its consolidated financial statements.
Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" (Issued 4/98), requires that costs for start-up activities
and organization costs should be expensed as incurred. SOP 98-5 is
effective for fiscal years beginning after December 15, 1998 and initial
adoption is required to be reflected as a cumulative effect of
accounting change. The Company has not determined the impact that this
SOP will have on its consolidated financial statements.
o) Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform to the current year's presentation.
3. Trade Receivables
December 31,
----------------------
1998 1997
--------- --------
Trade accounts receivable $ 205,764 $ 75,622
Less: Allowance for doubtful (14,535) (9,691)
--------- --------
Trade accounts receivable, net $ 191,229 $ 65,931
========= ========
Deferred income of $170,808 and $33,756 is included in trade accounts
receivable as of December 31, 1998 and 1997 respectively.
4. Subscriptions receivable from shareholders
The subscriptions receivable from shareholders of $2,000,000 as at December
31, 1997 arose on the issue of $3,000,000 of series "B" Preferred Stock in
December 1997 and was paid in March 1998. (See Note 11).
-24-
<PAGE>
5. Property and Equipment
Property and equipment consists of the following:
December 31,
------------------------
1998 1997
---------- ----------
Software $ 23,761 $ 3,960
Computer equipment 773,837 401,924
Computer equipment under capital lease 48,393 45,766
Furniture and fixtures 112,387 86,295
Vehicles under capital lease 61,065 34,381
Network equipment under capital lease 878,085 830,409
---------- ----------
1,897,528 1,402,735
Less: Accumulated Depreciation (766,965) (215,962)
---------- ----------
$1,130,563 $1,186,773
---------- ----------
Depreciation amounted to $520,421 and $184,794, including $301,828 and
$84,833 in depreciation of assets under capital leases, for the years ended
December 31, 1998 and 1997 respectively.
Capitalized interest expense incurred during the installation of the network
amounted to $6,656 for the year ended December 31, 1997. The network
equipment was used in operations with effect 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 Swiss subsidiary is obligated under capital leases (network,
computer and cars) and operating leases (offices) expiring at various dates
through September 2002.
Minimum lease payments for leases that have initial or remaining non-
cancelable terms in excess of one year are:
Operating Leases Captial Leases
---------------- --------------
Future minimum lease payments
1999 $ 151,114 $ 159,695
2000 -- 159,695
2001 -- 12,406
2002 -- 4,892
--------- ---------
Minimum lease payments $ 151,114 $ 336,688
---------
Less: Amount representing interest 23,586
---------
313,102
---------
Less: Current maturities 146,481
---------
Long term capital lease obligations $ 166,621
=========
-25-
<PAGE>
7. Advances and convertible loans from stockholders and related parties
Advances and loans from stockholders and related parties consist of the
following:
December 31, 1998 December 31, 1997
----------------- -----------------
Bridge loan from related party $ - $ 315,672
Advances from stockholder 1,000,000 -
----------------- -----------------
$ 1,000,000 $ 315,672
================= =================
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. In
April 1998, the Company converted $225,000 of the principal to 145,161
shares of Common Stock, and repaid $25,000 of principal and $71,089 of
accrued interest in cash.
As at December 31, 1998 the Company owed $1,000,000 in respect of a loan
convertible into preferred stock of the Company upon the conclusion of
additional equity financing, or redeemable, at the option of the lender. In
January 1999, the loan was converted into 540,541 shares of Series C
Preferred Stock (see Note 11.b)
8. Related party transactions
a) Software Solution provider
In January 1997 the Company entered into a 3-year software distributor
agreement with a financial software solution provider as disclosed in
Note 9.c)
b) Employment agreements
Commencing May 1, 1996, the Company entered into five-year term
employment agreements with two stockholders. Both agreements provide for
compensation of at least approximately $5,600 per month plus monthly car
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 amounted to $144,480 during both 1998 and 1997.
c) Administrative assistance
In May 1996, the Company entered into an agreement with a related party
for the provision of certain administrative services to the U.S. holding
corporation. Amounts paid under this agreement amounted to $24,000 and
$48,000 during 1998 and 1997 respectively.
In addition to this fee, the related party received a total of 8,000
shares of Common Stock during 1997.
d) Office lease
The Company entered into a month to month sublease agreement with a
company affiliated with a stockholder, whereby the Company recovers
certain costs for the use of its premises, utilities and computer
systems usage. Amounts charged to the affiliate amounted to
approximately $9,000 per annum during both 1998 and 1997.
-26-
<PAGE>
9. Major agreements
a) 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 apply if the Company
terminates the agreement before the end of the four-year term of the
agreement, ranging from approximately $480,000 to $100,000.
During December 1998, the Company concluded negotiations to take over
certain operations and maintenance elements envisaged within the
agreement for a reduction in the amount of ongoing payments.
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.
b) 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. According to the default terms of the
agreement, a twelve-month renewal period commenced in February 1999.
c) Financial software solution provider
In January 1997 the Company entered into a 3-year software distributor
agreement with a financial software solution provider based in the USA
controlled by a director of the Company. Under the agreement, the
Company is required to pay royalties based on the number of its clients
using the software. After the initial term, the agreement is renewable
on a 12 monthly basis. A 90-day cancellation period applies throughout
the contract.
In December 1998 the Company extended the scope of this agreement
whereby the software provider agreed not to undertake any new licensing
agreements for Switzerland, Germany, France, and the Benelux countries
until December 31, 2001. Under the terms of the agreement, the Company
was committed to paying a single amount of $500,000 ($250,000 of which
was settled in February 1999 in cash and the remainder in March 1999
through the issuance of 135,000 common shares), and is further committed
to minimum royalty payments of $50,000 per month from July 1, 1999,
$100,000 per month from January 1, 2000 and $150,000 per month from July
1, 2000.
While there are other providers of related 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 incurred losses for the years
ended December 31, 1998 and 1997. For US tax reporting purposes the Company
has a net operating loss carry forward of approximately
-27-
<PAGE>
$1,034,443 (1997: $656,260) to offset federal income taxes which expire at
different dates through the year 2013. These net operating losses could be
restricted due to a change in ownership. Its Swiss subsidiary has a net
operating loss carry forward of $5,826,944 (1997: $2,676,718) to offset
future income taxes in Switzerland which expires between the years 2002 and
2005.
Temporary differences that give rise to deferred income tax assets and
liabilities are:
December 31,
--------------------------
1998 1997
----------- -----------
Net operating loss carry forward $ 1,760,666 $ 967,030
Less: Valuation allowance (1,760,666) (967,030)
----------- -----------
Net deferred tax asset $ -- $ --
----------- -----------
A valuation allowance is used to reduce the deferred tax asset to a level
which, more likely than not, will be realized. A valuation allowance for the
full amount of deferred tax assets has been recorded since certain doubts
exist regarding the use of the tax losses carried forward to offset future
taxable income. It is at least reasonably possible that the Company's
estimate of the valuation allowance may change in the near term and result
in a partial or total reversal of the allowance during 1999.
11. Stockholders' equity
a) Common Stock
The Company is authorized to issue 20,000,000 shares of Common Stock,
$.001 par value ("Common Stock"). As of December 31, 1998, 5,781,309
shares were issued and outstanding and held by approximately 328
stockholders of record.
As of December 31, 1998, 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.
During January to March 1997, the Company issued 534,063 shares of
Common Stock 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 in consideration
for consulting services rendered on behalf of the Company.
-28-
<PAGE>
In May 1997, the Company issued 50,000 shares of Common Stock to settle
a liability of $12,500 resulting from consultancy services provided to
the Company.
In June 1997, the Company conducted a further private placement of
204,000 units, each consisting of two shares of Common Stock plus one
Common Stock warrant, at a price of $5.00 per unit. In February 1998,
the Company reduced the price per Unit to $4.00 and consequently issued
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 below).
In December 1997, the Company issued 133,333 shares in repayment of a
bridge loan to stockholders and other related parties amounting to
$200,000.
During 1997, the Company issued a further 8,000 shares of its Common
Stock for various administrative services (see Note 8.c).
In April 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
(see Note 7).
Subsequent to December 31, 1998, the Company issued 135,000 shares in
settlement of half of the amount due to the financial software solution
provider as reflected in Note 9.c).
b) 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 designated an initial series of
Preferred Stock as "Series A Preferred Stock" consisting of 750,000
authorized shares with a par value of $0.001 and a liquidation
preference of $3.50. In November 1997 the conversion price of the Series
A Preferred Stock was reset to $1.75 per share, which allows converting
one Series A Preferred Stock into two shares of Common Stock. The Series
A Preferred Stock does not carry dividend rights or any other rights
senior to the Common Stock and has equal voting rights with the Common
Stock. 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 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.
During 1996, the Company issued 283,781 units of its securities
("Units"), each Unit consisting of one share of Series A Preferred stock
and one Common Stock purchase warrant ("Unit Warrant") 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
Units. The shares were 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.
As at December 31, 1998, 215,281 shares of Series A Preferred Stock have
been converted into 430,562 Common Shares, and 68,500 shares of Series A
Preferred Stock remained outstanding. In March 1999, a further 50,000
shares of Series A Preferred Stock were converted.
-29-
<PAGE>
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 authorized shares with a par value of $0.001. On
December 30, 1997, the Company sold 1,923,716 shares of its Series B
Preferred Stock to three affiliated Alta-Berkeley venture capital funds
(collectively referred to as "Alta-Berkeley") for $3,000,000 of which
$1,000,000 was received in December 1997 and $2,000,000 in March 1998.
Subsequent to December 31, 1998, the Board of Directors of the Company
designated a third series of preferred shares as "Series C Preferred
Stock" consisting of 3,783,784 authorized shares with a par value of
$0.001. On January 25, 1999, the Company sold 3,783,784 shares of its
Series C Preferred Stock to five parties, including Alta-Berkeley, two
other venture capital funds, a bank and a private investor, for a total
consideration of $7,000,000.
Concurrent with the issuance of the Series B Preferred Stock, the
Company and Alta-Berkeley entered into an Investors' Rights Agreement,
which has been amended to include the holders of the Series C Preferred
Stock. Pursuant to the terms of this agreement, the Company increased
the authorized number of its directors to nine. Holders of the shares of
both the Series B Preferred Stock as a class, and the Series C Preferred
Stock as a class, are each entitled to elect two members of the
Company's Board (four in total). In addition, the Company has granted
the holders of the Series B Preferred Stock and the Series C Preferred
Stock (the "Holders") the right of first refusal to purchase a pro rata
share of any new equity securities which the Company may issue. The
right of first refusal expires on January 24, 2006. The Investors'
Rights Agreement also grants the Holders registration rights in certain
circumstances as well as certain approval and disclosure rights over
certain management and strategic matters.
The shares of both the Series B Preferred Stock and the Series C
Preferred Stock have a liquidation preference of the greater of (i)
$3.50 per share if the event of liquidation, dissolution or winding up
occurs on or before December 31, 2000 and thereafter of $5.20 per share
and (ii) $1.85 plus a pro-rata share of any excess liquidation proceeds
accruing to the common shareholders. The shares are all 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.
c) Warrant Issues
During 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").
During 1997, the Company issued a further 204,000 units ("Units") of its
securities, each Unit consisting of two Common Shares and one 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.
d) Stock Option Plan
During 1997, the Company adopted a Stock Option Plan (the "Plan"). As at
December 31, 1998 a total of 750,000 common shares may be issued under
the Plan and have been reserved by the Directors for that purpose.
Pursuant to the issuance of the Series C Preferred Stock an additional
400,000 shares were reserved for the Plan. The Board of Directors
determines the terms and exercise prices of all options to be granted.
Officers and directors of the Company, as well as consultants,
independent contractors or other service providers are eligible for
"Non-qualified Options". Only employees of the Company or its
subsidiaries (including officers and directors) are eligible to receive
grants of "Incentive Stock
-30-
<PAGE>
Options". No option may be granted under the Plan after March 19, 2008,
but options granted before that date may be exercisable after that date.
Options granted under the Plan are subject to a minimum vesting period
of one year.
Pro forma information concerning the Company's net loss and earnings per
share had compensation cost on all options granted been determined
consistent with SFAS No. 123, is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net loss, as reported $ 3,421,229 $ 2,359,209
Net loss, pro forma 3,470,629 2,510,409
Basic and diluted loss per share, as reported $ 0.59 $ 0.53
Basic and diluted loss per share, pro forma 0.60 0.56
</TABLE>
The effects of applying SFAS No. 123 in this pro-forma disclosure are
not indicative of future amounts.
The following additional information has been used in determining the
above disclosures regarding the Plan:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Weighted-average assumptive information used:
Risk-free rate 5.00% 5.75%
Expected life (days) 1,113 1,186
Expected volatility 57% 69%
Expected dividends $ -- $ --
Weighted-average grant-date fair value of
options $ 0.13 $ 0.63
Options granted during the year:
Directors and employees 380,000 240,000
Consultants -- 70,000
Fair value of options granted during the year:
Directors and employees $ 49,400 $ 151,200
Consultants $ -- $ 44,400
</TABLE>
A summary of the status of the Company's stock option plan as of
December 31, 1998 and 1997 is presented below:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------------
1998 1997
----------------------------- -----------------------------
Weighted- Weighted-
Number of Average Number of Average
Options Exercise Price Options Exercise Price
--------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Outstanding at the beginning of the year 310,000 $ 3.33 -- --
Add: Granted during the year 380,000 2.00 310,000 $ 3.33
Less: Exercised during the year -- -- -- --
Forfeited during the year 35,000 2.00 -- --
Expired during the year -- -- -- --
--------- -------------- --------- --------------
Options outstanding at the end of the year 655,000 $ 2.00 310,000 $ 3.33
Weighted-average remaining contractual life 910 days 954 days
Options exercisable at the end of the year 200,000 $ 2.00 190,000 $ 3.50
</TABLE>
-31-
<PAGE>
In March 1998, the strike price applicable to all of the options
existing at that time was reset to $2.00. Since the revised fair value
of the options based on the reset strike price was lower than the amount
originally recorded as compensation cost, no adjustment was made as a
result of the reset.
12. Retirement plans
All of the Company's Swiss-based employees, including its executive
officers, are required to participate in the pension or retirement plans
required by law in Switzerland, which are similar to defined contribution
plans.
The Assurance Vieillesse et Survivants ("AVS") is a state-administered plan,
under which the Company and the employee each contribute an amount of 5.05%
of salary to the AVS fund. The Prevoyance Professionnelle plan ("LPP") is
administered by an independent insurance company whereby amounts of between
5% and 15% of each employee's compensation are contributed to the LPP fund.
The Company and employees each contribute 50% of this cost. In addition to
the legally required plans, the Company undertakes supplemental LPP programs
for its management.
The Company has no pension or retirement liability other than its obligation
to make employer and employee contributions to the AVS and LPP funds.
Amounts charged to income in respect of the AVS and LPP plans (including
supplemental programs) for executive officers and other employees was
approximately $176,561 and $59,586 for the years ended December 31, 1998 and
1997 respectively.
The Company does not maintain any plans for other post-employment or post-
retirement employee benefits.
13. Subsequent events
Subsequent to December 31, 1998, the Board of Directors of the Company
designated a third series of preferred shares as "Series C Preferred Stock"
and on January 25, 1999, the Company sold 3,783,784 shares of its Series C
Preferred Stock for a total consideration of $7,000,000, as disclosed in
Note 11.b).
14. Supplementary disclosure to cash flow statement
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Cash paid during the year for:
Interest $ 5,417 $ 1,268
Income taxes - -
Non-cash investing and financing transactions:
Capitalization of interest - 6,656
Capital leases relating to finance equipment 197,545 532,500
Common stock issued in consideration for
consultancy fees - 20,000
Common stock issued to repay a bridging loan 225,000 200,000
Common stock issued in consideration for
administrative fees - 8,000
</TABLE>
-32-
<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
- --------------------------------
Sets forth below are the directors and officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Neil Gibbons 50 Chairman of the Board, Chief Executive Officer and President
Daniel Huber 31 Vice President, Chief Operating Officer, Secretary and Director
Mark Benn 35 Chief Financial Officer
William Cordeiro 53 Director
Stuart Townsend 52 Director
Bryan Wood 53 Director
Frank Verschoor 38 Director
Paul Goossens 43 Director
</TABLE>
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 an
independent investment manager and marketing consultant in the financial
services. Mr. Gibbons holds an MBA (Cum Laude) from IMO, Lausanne, Switzerland.
Mr. Huber co-founded Virtual Telecom SA in 1994 and has served as Vice
President, Chief Operating 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. Huber holds a degree in portfolio management and financial
analysis.
Mr. Benn has served as Chief Financial Officer of the Company since April
1998. From January 1994 to March 1998 he was finance manager for Radcliffes
Trustee Company S.A., an international financial services company. Mr. Benn
holds a B.Com (Hons) in Information Systems and is a qualified Chartered
Accountant.
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. 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.
Mr. Verschoor has served as a director of the Company since February 1999.
Since February 1998, he has served as the Investment Director of the NeSBIC CTE
Fund. From January 1997 to January 1998, he was managing partner of FMR
International BV, a Dutch information technology consulting firm. From 1994 to
December 1996, Mr. Verschoor held several positions in USoft UK Ltd., a
development tools software company. Mr. Verschoor holds an MBA from Rotterdam
School of Management/Erasmus University.
-33-
<PAGE>
Mr. Goossens has served as a director of the Company since February 1999. He
is currently a Senior Investment Manager and was previously a portfolio manager
with GIMV, having commenced there in September 1996. From September 1995 to
August 1996 he completed a MBA at Nijenrode University in the Netherlands.
Previously, since 1994, he worked in the field of high-tech services to the oil
industry. Mr. Goossens also holds a degree in Electromechanical engineering from
Leuven University in Belgium.
Those required to make filings under Section 16(a) have done so on a timely
basis.
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, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
--------------------------------------------- -------------------------------------
Common Shares All Other
Restricted Stock Underlying Options Compensation
Name & Position Year Salary Bonus Other Awards Granted (Shares) (\\1\\)
- ----------------------------------------------------------------------------------------------------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Neil Gibbons, CEO 1998 CHF 120,000 -- -- -- 40,000 CHF 7,200
1997 CHF 96,000 -- -- -- 50,000 CHF 7,200
1996 CHF 62,000 -- -- -- -- --
Daniel Huber, COO 1998 CHF 120,000 -- -- -- 40,000 CHF 7,200
1997 CHF 96,000 -- -- -- 50,000 CHF 7,200
1996 CHF 64,000 -- -- -- -- --
Mark Benn, CFO (\\2\\) 1998 CHF 81,000 -- -- -- 95,000 --
(\\1\\) Represents an allowance of CHF 600 per month
(\\2\\) Commenced April 1998
</TABLE>
The following table sets forth the options granted by the Company to its
executive officers for services rendered during the current fiscal year:
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
Individual Grants
- -------------------------------------------------------------------------------------------------------------------
% of Total Options
Number of Securities /SARs Granted to
Underlying Options Employees in Fiscal Exercise or Base
Name /SARs Granted (#) Year Price ($/Share) Expiration Date
- -------------------- -------------------- ------------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Neil Gibbons, CEO 40,000 11% 2.00 12/31/2001
Daniel Huber, COO 40,000 11% 2.00 12/31/2001
Mark Benn, CFO 95,000 25% 2.00 12/31/2001
</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.
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, 1999 by (i) each person
who is known by the Company to be the beneficial owner of more than
-34-
<PAGE>
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) 23.8%
Daniel Huber (1) 1,146,770 (2) 18.9%
William Cordeiro (3) 10,000 (4) (5)
Stuart Townsend (6) 185,000 (7) 3.0%
Bryan Wood (8) 2,464,257 (9) 29.1%
Frank Verschoor (10) 1,351,351 (11) 18.3%
Paul Goossens (12) 1,081,081 (13) 15.2%
Alta-Berkeley (8) 2,464,257 (9) 29.1%
NeSBIC CTE Fund (10) 1,351,351 (11) 18.3%
GIMV (12) 1,081,081 (13) 15.2%
Directors and executive officers as a group 7,685,229 69.5%
</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) Includes 50,000 shares of Common Stock underlying immediately exercisable
options, and 135,000 shares of Common Stock held by Townsend Analytics,
Ltd. of which Mr. Townsend is President and owner.
(8) Address is Alta-Berkeley Associates, 9 Saville Row, London, England W1X
IAF.
(9) Represents shares of Common Stock issuable upon conversion of Series B and
C 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
manager of the three funds.
(10) Address is NeSBIC CTE Fund, Savannahweg 17, 3542 AW, RM Utrecht,
Netherlands
(11) Represents shares of Common Stock issuable upon conversion of Series C
Preferred Stock held by the NeSBIC CTE Fund. Mr. Frank Verschoor is the
investment director of the NeSBIC CTE Fund.
(12) Address is GIMV, Karel Oomsstraat 37, B-2018 Antwerp, Belgium
(13) Represents shares of Common Stock issuable upon conversion of Series C
Preferred Stock held by the GIMV. Mr. Paul Goossens is an investment
manager of the GIMV.
Item 12. Certain Relationships And Related Transactions.
Profilinvest: The Company's Chief Operating 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.
Townsend Analytics, Ltd.: Mr. Stuart Townsend, a director of the Company, is
the founder and president of Townsend Analytics, Ltd., the provider of the
financial software used extensively by the Company. In December 1998 the Company
extended the scope its agreement with Townsend Analytics, Ltd. whereby the
latter agreed not to undertake any new licensing agreements for Switzerland,
Germany, France, and the Benelux countries until December
-35-
<PAGE>
31, 2001. Pursuant to this, the Company was committed to paying a single amount
of $500,000 ($250,000 of which was settled in February 1999 in cash and the
remainder in March 1999 through the issuance of 135,000 common shares), and is
further committed to minimum royalty payments of $50,000 per month from July 1,
1999, $100,000 per month from January 1, 2000 and $150,000 per month from
July 1, 2000.
Alta-Berkeley Associates: As At December 31, 1998 the Company owed
$1,000,000 to Alta-Berkeley Associates, holders of the Series B Preferred Stock.
This amount was converted into Series C Preferred Stock in January 1999.
Item 13. Exhibits And Reports On Form 8-K.
<TABLE>
<CAPTION>
(a) Index To Exhibits
- --- -----------------
<C> <S>
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 (4) 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 (3) Series B Preferred Stock Purchase Agreement dated December 18, 1997
10.12 (3) Investor Rights Agreement dated December 18, 1997
10.13 (3) Software License Agreement between the Company and IQ Net
10.14 (4) Series C Preferred Stock Purchase Agreement dated January 25, 1999
10.15 (4) Amended and Restated Investor Rights Agreement dated January 25, 1999
16.1 (2) Letter from Raimondo, Pettit & Glassman regarding Change of Independent Public Accountant
</TABLE>
-36-
<PAGE>
<TABLE>
<C> <S>
21.1 The Company has two subsidiaries, Virtual Telecom SA, a Swiss corporation and FirstQuote Limited,
an English corporation
27.1 Financial Data Schedule
</TABLE>
- -----------------------
(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.
(3) Previously filed as part of annual report on Form 10-KSB (SEC File No. 0-
22351) filed with the Securities and Exchange Commission on March 31, 1998.
(4) Previously filed as part of annual report on Form 10-KSB (SEC File No. 0-
22351) filed with the Securities and Exchange Commission on March 31,
1998.
(b) Reports On Form 8-K
-------------------
None.
-37-
<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, 1999 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, 1999
- -----------------------
Neil Gibbons
/s/ Daniel Huber Chief Operating Officer March 30, 1999
- -----------------------
Daniel Huber
/s/ Mark Benn Chief Financial Officer March 30, 1999
- -----------------------
Mark Benn
Director
- -----------------------
William Cordeiro
/s/ Stuart Townsend Director March 30, 1999
- -----------------------
Stuart Townsend
/s/ Bryan Wood Director March 30, 1999
- -----------------------
Bryan Wood
Director
- -----------------------
Frank Verschoor
/s/ Paul Goossens Director March 30, 1999
- -----------------------
Paul Goossens
-38-
