<PAGE>
Filed pursuant to
Rule 424(b)(3)
Registration Statement
No.: 333-89593
Prospectus Supplement No. 2, dated April 10, 2000
(To the Prospectus dated January 14, 2000)
VIRTUAL COMMUNITIES, INC
1,794,335 shares of common stock
500,000 Units consisting of one share of common stock and one class B warrant
500,000 shares of Common stock
120,000 Units consisting of one share of common stock,
one class A warrant and one class B warrant
120,000 Units consisting of one share of common stock
and one class B warrant
240,000 shares of Common stock
On February 18, 2000 Virtual Communities, Inc. (the "Company") reported on Form
8-K the acquisition of a majority stake in Cortext Ltd. effective as of February
10, 2000. The Company amended such Form 8-K on April 10, 2000, pursuant to an
undertaking made by the Company under paragraph (4) of Item 7(a) of Form 8-K,
with respect to the disclosure of pro forma financial statements reflecting such
acquisition. Such pro forma financial statements are attached hereto.
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Introduction to Pro Forma Financial Statements (Unaudited)
The accompanying unaudited pro forma balance sheet presents the financial
position of VCI and Cortext as of December 31, 1999, assuming the acquisition of
a majority of Cortext's shares has been completed as of the balance sheet date.
The pro forma statements of operations for the year ended December 31, 1999
reflects the acquisition, as if the acquisition had occurred on the first day of
the fiscal year presented, taking into effect certain events that occurred
subsequent to the periods presented. The acquisition was consummated subsequent
to the balance sheet date, on February 10, 2000.
In February 2000, VCI entered into a Share Purchase Agreement ("SPA") with
Cortext Ltd. Cortext, a corporation registered under the laws of the State of
Israel, and the principal shareholders of Cortext, to acquire a majority
interest in the equity of Cortext. Cortext was established in 1996 and is
engaged in the development and licensing of content management software for web
publishers. VCI currently utilizes Cortext's Magazine Software pursuant to a
License Agreement with Cortext dated July 18, 1999 to manage content on several
of the ethnic communities published by VCI and as a central component of its
Community Management Solution (CMS) turnkey solution which it markets and
licenses to third party web publishers.
Pursuant to the terms of the SPA, VCI was issued shares of Cortext so that it
holds approximately 54% of the outstanding shares of Cortext following the
payment of certain funds to and on behalf of Cortext. Depending upon Cortext's
completion of certain software development milestones set forth in the SPA and
additional payments by VCI, up to 60% of the equity of Cortext could be acquired
by VCI by August 2000.
Simultaneously with execution of the SPA, VCI and Cortext entered into an
Assignment Agreement with Planet Communications Ltd. ("Planet"), an Israel-based
unaffiliated third party holder of 50% of the rights in Cortext's Magazine
Software whereby Planet agreed to irrevocably assign all of its rights, title
and interest in the Magazine Software to Cortext in consideration of VCI's
payment of a portion of the transaction consideration on behalf of Cortext and
subject to such third party's retaining the right to sell up to ten Magazine
Software End User licenses. Cortext agreed to provide Planet with certain
upgrades and technical support services in connection with such End User
licenses if and when the same are granted. The majority of the payments to
Planet have been made and its assignment of its rights to the Magazine Software
has been effectuated. A portion of the payments to such third party are to be
paid in installments over a period of six months period from the date of the
Assignment Agreement and the SPA. Following the assignment of the rights by
Planet, Cortext holds 100% of the rights in and to the Magazine Software.
Concurrently with the execution of the SPA, Cortext also entered into long-term
employment agreements with its C.E.O. and C.T.O. and amended its By Laws.
Pursuant to the SPA, VCI has the right to name two members to Cortext's Board
and to name a majority of the Board upon the completion of its payments and
acquisition of shares in August 2000.
Pursuant to the SPA and the Assignment Agreement, the total amount of payments
to be made by VCI to and on behalf of Cortext for the full purchase of up to 60%
of equity in Cortext, including repayment of certain Cortext loans is expected
in the aggregate to be $760,000 for the entire transaction. As of December 31,
1999, total payments of $90,000 were made.
The transaction was accounted for as a purchase. The purchase method of
accounting allocates the aggregate purchase price to the assets acquired and
liabilities assumed based upon their respective fair values. The excess of the
purchase price over the fair value of assets and liabilities acquired of
approximately $398,000 was allocated to goodwill.
Additionally, VCI currently utilizes Cortext's Magazine Software pursuant to a
License Agreement with Cortext dated July 18, 1999 to manage content on several
of the ethnic communities published by VCI and as a central component of its
Community Management Solution (CMS) turnkey solution which it markets and
licenses to third party web publishers. In consideration for an unlimited
license, VCI is expected to pay a total of $50,000 to Cortext, of which $30,000
had been paid as of December 31, 1999.
The pro forma financial information does not purport to be indicative of the
results which would have actually been obtained had such transactions been
completed as of the assumed date or which may be obtained in the future.
(Pro Forma Financial Statements (Unaudited) continue on the following page).
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VIRTUAL COMMUNITIES, INC. (VCI) AND
CORTEXT LTD. (CORTEXT)
PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 1999
(U.S. Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
VCI Cortext Pro Forma
(Unaudited) (Audited) Combined Adjustments Pro Forma
ASSETS
Current Assets
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents 469 23 492 (395) (d) 97
Trade receivables 191 9 200 200
Other receivables 128 128 128
--------------------------------- --------
Total current assets 788 32 820 425
--------------------------------- --------
Fixed Assets, Net 1,150 1 1,151 1,151
--------------------------------- --------
Severance Pay Deposits 83 83 83
--------------------------------- --------
Other Assets
Investment in Cortext 90 90 (90) (a)
Other 253 30 283 (30) (b) 648
395 (d)
Goodwill 398 (a) 398
--------------------------------- --------
343 30 373 1,046
--------------------------------- --------
Total assets 2,364 63 2,427 2,705
================================= ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
(DEFICIENCY)
Current Liabilities
Short-term bank borrowings 731 1 732 732
Shareholders' loans/related party 150 31 181 181
Payables and accrued expenses 1,511 52 1,563 1,563
--------------------------------- --------
Total current liabilities 2,392 84 2,476 2,476
--------------------------------- --------
Long-Term Liabilities
Long-term loan 167 167 167
Accrued severance pay 329 45 374 374
--------------------------------- --------
Total long-term liabilities 496 45 541 541
--------------------------------- --------
Total liabilities 2,888 129 3,017 3,017
--------------------------------- --------
(242) (a)
Minority Interest 42 (c) 200
--------------------------------- --------
Shareholders' Equity (Deficiency)
Share capital 146 146 146
Receipt on account of shares 90 90 90 (a)
Additional paid-in capital 8,186 8,186 8,186
Accumulated deficit (8,856) (156) (9,012) (156) (a) (8,844)
--------------------------------- --------
(12) (b,c)
Total shareholders' (524) (66) (590) (512)
--------------------------------- --------
Equity (deficiency)
Total liabilities and 2,364 63 2,427 2,705
================================= ========
Shareholders' equity (deficiency)
</TABLE>
The accompanying notes form an integral part of the pro forma financial
statements.
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VIRTUAL COMMUNITIES, INC. (VCI) AND
CORTEXT LTD. (CORTEXT)
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(U.S. Dollars in thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
VCI Cortext Pro Forma
(Unaudited) (Audited) Adjustments Pro Forma
<S> <C> <C> <C> <C>
REVENUES 857 80 (30) (b) 907
------ ----- ------ ----------
COST AND EXPENSES
Cost of revenues 1,816 46 1,862
Research and development 78 78
Selling and marketing
Expenses 1,583 27 1,610
General and administrative
Expenses 2,222 2,222
Financing expenses
(income), net 109 4 113
Participation of
Minority of (42) (42)
Cortex Loss
Expenses of merger 1,057 1,057
------ ----- ------ ----------
6,787 155 (42) 6,900
------ ----- ------ ----------
Net loss (5,930) (75) 12 (5,993)
====== ==== ====== ==========
Net Loss per share (0.57)
==========
Weighted average number
of shares outstanding 10,532,530
------ ----- ------ ----------
The accompanying notes form an integral part of the pro forma financial statements.
</TABLE>
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1) Basis of Presentation
The pro forma balance sheet combines the balance sheets of VCI and Cortext as of
December 31, 1999, assuming the acquisition has been completed as of the balance
sheet date. The pro forma statements of operations for the year ended December
31, 1999 for VCI and Cortext, reflect the acquisition, as if the acquisition had
occurred on the first day of the fiscal year presented, taking into effect
certain events that occurred subsequent to the periods presented. The
acquisition was actually consummated subsequently on February 10, 2000.
The historical balance sheets used in the presentation of the pro forma
financial statements have been derived from VCI's unaudited and Cortext's
audited financial statements as of December 31, 1999.
2) Unaudited Pro Forma Adjustments
Descriptions of the adjustments included in the unaudited pro forma financial
statements are as follows:
a) Reflects the acquisition of Cortext by VCI and the consolidation of the
two entities.
b) Reflects the elimination of the intercompany revenue generated by the
payment of VCI to Cortext for the licensing Cortext's Magazine
Software.
c) Reflects the recording of the minority interest's portion in Cortext's
results.
d) Reflects the purchase of 50% of the rights in Cortext's Magazine
Software from third party.
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