<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended: July 31, 1999
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
---------------- ----------------
Commission file number: 000-25397
VIRTUAL TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1639011
(State or other jurisdiction (IRS Employer
of Incorporation) Identification Number)
3100 WEST LAKE STREET
SUITE 400
MINNEAPOLIS, MN 55416
(Address of Principal Executive Offices)
(612) 915-1122
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such that the registrant was required to file
such reports), and (2) has shorter period been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of September 9, 1999, the latest practicable date: 30,528,674
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
PART I
FINANCIAL INFORMATION
<S> <C>
ITEM 1. FINANCIAL STATEMENTS....................................................................... 2
Condensed Consolidated Balance Sheets (unaudited) at July 31, 1999
and January 31, 1999............................................................................. 2
Condensed Consolidated Statements of Operations (unaudited) for the three and six months
ended July 31, 1999 and 1998..................................................................... 4
Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended
July 31, 1999 and 1998........................................................................... 6
Notes to Condensed Consolidated Financial Statements (unaudited)................................. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................................................ 13
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.......................................................................... 21
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.................................................. 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS........................................................................................ 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................... 23
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
July 31, January 31,
ASSETS 1999 1999
------------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 519,212 $ 125,993
Accounts receivable, net 7,672,345 4,497,292
Stock subscription, subsequently collected - 2,676,436
Loan to related party 123,750 -
Inventories 2,844,279 5,236,292
Other current assets 3,115,714 2,761,670
------------- -----------
TOTAL CURRENT ASSETS 14,275,300 15,297,683
------------- -----------
FURNITURE AND EQUIPMENT 498,621 381,662
------------- -----------
OTHER ASSETS
Goodwill 8,136,663 8,345,295
Covenant not to compete 416,667 500,000
Consulting agreement 868,429 1,042,115
Prepaid investor relations services 88,800 103,600
Loan fees 2,776,899 50,250
Deposits 18,483 21,973
Investment in securities 200,000 -
------------- -----------
12,505,941 10,063,233
------------- -----------
$ 27,279,862 $25,742,578
============= ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements (Unaudited).
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<PAGE> 4
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
July 31, January 31,
1999 1999
------------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 7,768,567 $ 7,163,358
Accrued expenses and other current liabilities 2,013,205 1,884,983
Current amount of notes payable 821,502 7,295,673
Line of credit 4,041,925 -
Current amount of capital lease obligations 11,265 10,628
Loans from related parties - 45,000
------------- -----------
TOTAL CURRENT LIABILITIES 14,656,464 16,399,642
------------- -----------
OTHER LIABILITIES
Notes payable, net of current amount 250,000 -
Loans from related parties 30,000 371,543
Capital lease obligations, net of current amount 43,534 49,267
------------- -----------
323,534 420,810
------------- -----------
STOCKHOLDERS' EQUITY
Common stock - $.001 par value, no par value as of January 31, 1999;
100,000,000 shares authorized; shares issued and outstanding -
28,851,180 and 25,345,963, respectively 28,851 17,572,796
Additional paid in capital 33,907,382 -
Stock subscription receivable (925,000) (925,000)
Accumulated deficit (20,711,369) (7,725,670)
------------- -----------
12,299,864 8,922,126
------------- -----------
$ 27,279,862 $25,742,578
============= ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements (Unaudited).
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<PAGE> 5
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
July 31, 1999 July 31, 1998
------------- -------------
<S> <C> <C>
NET SALES $ 16,514,314 $ 952,211
COST OF GOODS SOLD 15,311,945 905,098
------------- -------------
GROSS MARGIN 1,202,369 47,113
------------- -------------
OPERATING EXPENSES
Sales and marketing 1,748,479 336,729
General and administrative 1,766,225 192,320
Consulting services 1,602,158 -
Amortization of intangibles 232,827 -
------------- -------------
5,349,689 529,049
------------- -------------
LOSS FROM OPERATIONS (4,147,320) (481,936)
------------- -------------
OTHER INCOME (EXPENSE)
Amortization of loan fees (277,690) -
Interest expense (108,045) (19,915)
Other (3,831) 63,828
------------- -------------
(389,566) 43,913
------------- -------------
NET LOSS $ (4,536,886) $ (438,023)
NET LOSS PER COMMON SHARE - BASIC AND
DILUTED $ (.16) $ (.03)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 28,937,317 15,796,036
</TABLE>
See Notes to Condensed Consolidated Financial Statements (Unaudited).
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<PAGE> 6
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
July 31, 1999 July 31, 1998
------------- -------------
<S> <C> <C>
NET SALES $ 33,897,077 $ 1,542,189
COST OF GOODS SOLD 31,481,947 1,615,138
------------- -------------
GROSS MARGIN 2,415,130 (72,949)
------------- -------------
OPERATING EXPENSES
Sales and marketing 3,065,281 485,317
General and administrative 3,159,389 374,651
Consulting services 4,106,947 -
Amortization of intangibles 465,653 -
------------- -------------
10,797,270 859,968
------------- -------------
LOSS FROM OPERATIONS (8,382,140) (932,917)
------------- -------------
OTHER INCOME (EXPENSE)
Warrant in lieu of stock registration (3,705,000) -
Amortization of loan fees (555,379) -
Interest expense (286,383) (39,748)
Other (56,797) 63,828
------------- -------------
(4,603,559) 24,080
------------- -------------
NET LOSS $ (12,985,699) $ (908,837)
============= =============
NET LOSS PER COMMON SHARE - BASIC AND
DILUTED $ (0.47) $ (0.07)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 27,812,866 12,915,468
</TABLE>
See Notes to Condensed Consolidated Financial Statements (Unaudited).
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<PAGE> 7
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
July 31, 1999 July 31, 1998
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (12,985,699) $ (908,837)
Adjustments to reconcile net loss to net cash
used by operating activities
Stock issued for services 4,248,263 246,937
Amortization 1,021,030 -
Warrant in lieu of stock registration 3,705,000 -
Depreciation 62,430 5,079
Changes in operating assets and liabilities
Accounts and other receivables (3,175,053) (500,205)
Inventory 2,392,013 8,287
Other current assets (333,621) (74,664)
Security deposits 3,490 -
Accounts payable 605,209 232,093
Accrued liabilities 128,222 (107,955)
------------- -------------
Net cash used by operating activities (4,328,716) (1,099,265)
------------- -------------
INVESTING ACTIVITIES
Purchases of furniture and equipment (179,389) (4,762)
Loan to related party (123,750) -
Investment in securities (200,000) -
------------- -------------
Net cash used by investing activities (503,139) (4,762)
------------- -------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements (Unaudited).
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<PAGE> 8
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued)
<TABLE>
<CAPTION>
Six Months Ended
July 31, 1999 July 31, 1998
------------- -------------
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from line of credit 4,041,925 -
Proceeds from note payable 500,000 121,056
Payments on notes payable (6,724,171) -
Payments on capital leases (5,096) (586)
Loans from (payments to) related parties (386,543) 15,000
Loan fees (207,027) -
Proceeds from options and warrants exercised 854,500 -
Proceeds from issuance of common stock 4,475,050 1,275,391
Subscription received 2,676,436 -
------------- -------------
Net cash provided by financing activities 5,225,074 1,410,861
------------- -------------
NET INCREASE IN CASH 393,219 306,834
CASH
Beginning of period 125,993 3,649
------------- -------------
End of period $ 519,212 $ 310,483
============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements (Unaudited).
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<PAGE> 9
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Basis of Presentation-
The accompanying unaudited condensed consolidated financial statements
of Virtual Technology Corporation and Subsidiaries (the "Company" or "VTC") do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair statement of results for the periods have been included.
Operating results for the three and six months ended July 31, 1999 are not
necessarily indicative of the results that may be expected for the year ended
January 31, 2000. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended January 31, 1999.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of
Virtual Technology Corporation and its wholly owned subsidiaries, GTI
Acquisition Corporation ("GTI") and Virtual Technology (UK) Ltd. ("VTL").
All significant intercompany accounts and transactions have been eliminated.
2. The Company-
VTC is an internet retailer of high performance computer hardware,
software and peripheral products to sophisticated computer and internet users.
GTI is a leading distributor of computer peripheral equipment to wholesale and
retail outlets throughout the United States and Canada.
VTL, formerly known as Ashmount Research Ltd., is located in the United
Kingdom. VTL was dormant during fiscal 1999 and the first quarter of fiscal 2000
but began new operations during the second quarter of fiscal 2000 as a European
electronic commerce business.
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<PAGE> 10
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
3. Other Current Assets -
Other current assets consist of the following:
<TABLE>
<CAPTION>
July 31, January 31,
1999 1999
----------- -----------
<S> <C> <C>
Prepaid consulting and service agreements $ 2,765,388 $ 2,546,630
Credit card company holdbacks 174,000 174,000
Other 176,326 41,040
----------- -----------
$ 3,115,714 $ 2,761,670
=========== ===========
</TABLE>
During the first six months of fiscal 2000, the Company entered into
consulting and service agreements whereby the Company is receiving investment
banking, legal and other services, generally over a period of one year or less
as specified in the agreements. As consideration for these agreements, the
Company paid cash, issued common stock and/or issued warrants to purchase common
stock, or a combination thereof. The Company valued the equity consideration
based on the quoted market price of the Company's common stock. The cost of the
agreements is being amortized over the contract service period.
4. Loan Fees -
In February 1999, the Company entered into a three-year credit
agreement (the "Coast Agreement") with Coast Business Credit, a division of
Southern Pacific Bank ("Coast"), to provide financing of up to $10,000,000,
based upon eligible receivables and inventory (See Note 5 below, "Line of
Credit"). In connection with setting up the Coast Agreement, the Company
incurred certain fees and expenses paid for with a combination of cash, common
stock and warrants to purchase the Company's common stock. The loan fees are
being amortized over the term of the Coast Agreement. The loan fees and
accumulated amortization are as follows:
<TABLE>
<CAPTION>
July 31, January 31,
1999 1999
----------- -----------
<S> <C> <C>
Loan fees $ 3,332,278 $ 50,250
Less: accumulated amortization (555,379) -
----------- -----------
$ 2,776,899 $ 50,250
=========== ===========
</TABLE>
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<PAGE> 11
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
5. Line of Credit-
In February 1999, the Company entered into the Coast Agreement to
provide financing of up to $10,000,000, based upon eligible receivables and
inventory. The loan bears interest at the prime rate plus 1.5% and expires
March 31, 2002. As part of the Coast Agreement, the Company may also borrow up
to $250,000 for capital expenditures at the bank's reference rate plus 2.0%, not
subject to eligible receivables and inventory. In addition, the Company may
borrow up to $500,000 at the bank's reference rate plus 2%, payable in 24 equal
monthly installments, also not based on eligible receivables and inventory. The
notes are collateralized by all of the assets of the Company. As of July 31,
1999, the Company had borrowed $4,041,925 on the line of credit. At that date,
the Company had approximately $2,700,000 of additional borrowing under the Coast
Agreement.
6. Notes Payable -
Notes payable consist of the following:
<TABLE>
<CAPTION>
July 31, January 31,
1999 1999
----------- -----------
<S> <C> <C>
Payable to Herold Marketing, interest imputed at 9.75%:
Due February 27, 1999 $ - $ 3,967,936
Due April 28, 1999 571,502 3,220,664
8% notes payable to former stockholder of
VTL in settlement of litigation - 93,129
Note payable to Coast Business Credit at the bank's reference
rate plus 2.0%, payable in 24 equal monthly
installments 500,000 -
Less long term portion (250,000) -
Other notes - 13,944
----------- -----------
$ 821,502 $ 7,295,673
=========== ===========
</TABLE>
7. Stockholders' Equity -
In June 1999, the stockholders of the Company approved an amendment to
the Articles of Incorporation to increase the authorized number of
shares of capital stock from 55,000,000 to 100,000,000 shares, to eliminate the
distinction between authorized common stock and authorized preferred stock and
to change the par value from no par value to $.001 per share. As a result of
this action, $33,907,382 was reclassified from the common stock account to
additional paid in capital.
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<PAGE> 12
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
8. Operating Segments and Related Information -
Prior to January 28, 1999, the Company operated in one segment,
e-commerce sales. In connection with the acquisition of GTI, the Company now
operates in two segments, e-commerce sales and distribution sales to retail and
wholesale outlets. Identifiable assets and operating data as of and for the
three and six months ended July 31, 1999 are as follows:
<TABLE>
<CAPTION>
As of and for the As of and for the
Three Months Ended Six Months Ended
July 31, 1999 July 31, 1999
e-commerce Distribution e-commerce Distribution
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total assets $ 8,522,842 $ 18,757,020 $ 8,522,842 $ 18,757,020
=========== ============ ============ ============
Net sales to external customers $ 3,093,578 $ 13,420,736 $ 4,972,358 $ 28,924,719
Net sales to internal customers - 683,501 89,016 1,037,506
Intersegment net sales - (683,501) (89,016) (1,037,506)
----------- ------------ ------------ ------------
3,093,578 13,420,736 4,972,358 28,924,719
Cost of goods sold 2,940,407 12,371,538 4,766,882 26,715,065
----------- ------------ ------------ ------------
Gross margin $ 153,171 $ 1,049,198 $ 205,476 $ 2,209,654
=========== ============ ============ ============
</TABLE>
9. Supplemental Disclosures of Cash Flow Information -
<TABLE>
<CAPTION>
Three Months Ended
July 31, July 31,
1999 1998
----------- -----------
<S> <C> <C>
Cash paid for interest $ 269,550 $ 103
Non-cash investing and financing activities:
Warrants issued (canceled) for prepaid
consulting and service agreements (1,480,000) 21,000
Stock issued (canceled) for consulting
services (423,113) 171,562
</TABLE>
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<PAGE> 13
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
9. Supplemental Disclosures of Cash Flow Information (continued)-
<TABLE>
<CAPTION>
Six Months Ended
July 31, July 31,
1999 1998
------------ -----------
<S> <C> <C>
Cash paid for interest $ 380,450 $ 346
Non-cash investing and financing activities:
Warrants issued for prepaid
consulting and service agreements 5,582,000 -
Stock issued for consulting services 5,451,887 21,000
Stock issued in lieu of compensation - 225,937
</TABLE>
10. Legal Proceedings -
In June 1999, Lenhoff Capital Partners, Inc., ("LCP") commenced suit
against the Company. LCP alleges that the Company failed to pay $120,000 of a
"success fee" and to issue stock purchase warrants to LCP as consideration for
introductions to Coast. The suit also alleges that the Company failed to pay LCP
an additional fee after the Company, without LCP's assistance, obtained private
equity funding in January 1999. LCP seeks monetary damages and the issuance of a
stock purchase warrant. The Company is vigorously defending against the suit. As
of July 31, 1999, the Company has not provided any reserves related to such
lawsuit in its financial statements.
11. Subsequent Events -
In August 1999, the Company issued 1,515,000 shares of common stock in
exchange for consulting and financial services agreements.
In August 1999, the Company filed an S-8 Registration Statement to
register 162,500 shares of common stock thereafter issued for various employment
and consulting services.
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<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH THE COMPANY'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND
NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT AND "RISK FACTORS" INCLUDED IN
THE COMPANY'S FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 31, 1999. EXCEPT FOR
THE HISTORICAL INFORMATION CONTAINED HEREIN, THE DISCUSSION IN THIS REPORT
CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS, AS PERMITTED AND COVERED BY THE PRIVATE SECURITIES
LITIGATION REFORM ACT. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON THE CURRENT
EXPECTATIONS OF THE COMPANY, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE
THIS INFORMATION. THE CAUTIONARY STATEMENTS MADE IN THIS REPORT SHOULD BE READ
AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY
APPEAR IN THIS REPORT. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE DISCUSSED HERE.
OVERVIEW
Virtual Technology Corporation ("VTC" or the "Company") is the parent
of two complementary business units: Virtual-world.com and Graphics
Technologies, Inc. ("GTI"). Both units provide computer manufacturers with
channels to deliver their products to the end consumer. Virtual-world.com
provides products to the end user by purchasing products directly from
manufacturers or from distribution partners. GTI provides manufacturers with a
distribution channel to sell their products to dealers, resellers, value-added
resellers ("VARs") and integrators who then sell them to the end user. VTC's
management directs the overall business and provides integration and leadership
to the two business units.
Virtual-world.com is an Internet retailer of high performance computer
hardware, software and peripheral products to sophisticated computer and
Internet users. Through its e-commerce web site at www.virtual-world.com (the
Company disclaims the inclusion of this web site in this Form 10-Q),
Virtual-world.com offers more than 42,000 units of selective high-performance,
brand name computer equipment. Virtual-world.com offers an online specialized
store that is intended to provide one-stop shopping for its targeted domestic
and international customers, 24 hours a day, seven days a week.
Virtual-world.com's online store features a fun, easy to navigate interface,
competitive pricing, extensive product information and powerful search
capabilities.
Virtual-world.com began online marketing of a proprietary email and
newsgroup software in January 1997. In October 1997, Virtual-world.com launched
its e-commerce site offering a range of selective high-performance brand names
for computer equipment and software programs. To facilitate its expansion,
Virtual-world.com formed alliances with GTI, Ingram Micro ("Ingram") and Tech
Data Corporation ("Tech Data") to provide the Company with a "virtual inventory"
of hardware and software products. These three entities provide order
fulfillment, shipping, and post sale customer support.
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<PAGE> 15
Virtual-world.com derives its revenue primarily from sales of
third-party computer hardware, software and accessories. Revenues from the sale
of computer products, net of estimated returns, are recognized upon shipment of
the physical product to the end-user. The amount payable to the supplier is
reported as cost of sales. A majority of Virtual-world.com's sales are through
credit cards. Virtual-world.com uses a credit card screening service to mitigate
the risk of credit card fraud, thereby reducing the credit risk involved with
accepting credit cards. Virtual-world.com bears full credit risk on non-credit
card sales. Virtual-world.com, through its network of suppliers, maintains a
supply of certain computer products to meet the delivery requirements of its
customers.
In January 1999, the Company acquired substantially all of GTI's
assets. The Company plans to leverage GTI's buying power to improve gross
margins in the sale of computer products on Virtual-world.com's website, but
there is no assurance that such buying efficiencies can or will be achieved.
GTI is a leading distributor of computer peripheral equipment to
wholesale and retail outlets throughout the United States and Canada. GTI
specializes in high performance computer equipment, computer integrated systems
design and the assembly and sale of complete computer systems. GTI purchases
products directly from more than 40 manufacturers of computer related products,
and maintains an inventory stock of approximately 1,600 products.
GTI derives its revenue primarily from sales of third-party computer
hardware and accessories. Revenues from the sale of computer products, net of
estimated returns, are recognized upon shipment of the physical product to the
customer. The amount payable to the supplier is reported as cost of sales. GTI
bears full credit risk with respect to substantially all sales.
The Company has a limited operating history upon which investors may
evaluate its business and prospects. At February 7, 1996, the Company was
essentially a shell corporation without any products or revenues. Since such
date, the Company has incurred significant losses, and as of July 31, 1999 had
an accumulated deficit of approximately $20.7 million. The Company intends to
continue to expend significant financial and management resources on the
development of additional services, sales and marketing, improved technology,
acquisitions and expanded operations. As a result, the Company expects to incur
substantial additional losses and continued negative cash flow from operations
for the foreseeable future, and management anticipates that such losses will
increase substantially from current levels.
There can be no assurance that the Company's sales will increase or
even continue at their current level or that the Company will achieve or
maintain profitability or generate cash from operations in future periods. The
Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stages of
development, particularly companies in new and rapidly evolving markets such as
e-commerce.
To address these risks, the Company must, among other things, maintain
existing and develop new relationships with hardware, software and accessories
manufacturers, implement and successfully execute its business and marketing
strategy, continue to develop and upgrade its technology, provide superior
customer service and order fulfillment, respond to competitive developments and
attract, retain and motivate qualified personnel. There can be no assurance that
the Company will be successful in
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<PAGE> 16
addressing such risks, and the failure to do so would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company's current and future expense levels are based largely on
its planned operations and estimates of future sales. Sales and operating
results generally depend on the volume and timing of orders received, which are
difficult to forecast. The Company may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. Accordingly, any
significant shortfall in sales would immediately and adversely affect the
Company's business, financial condition and results of operations. In view of
the rapidly evolving nature of the Company's business and its limited operating
history, the Company is unable to accurately forecast its sales and believes
that period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
RESULTS OF OPERATIONS
The following table sets forth statement of operations data for the
periods indicated as a percentage of revenues:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
1999 1998 1999 1998
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Sales ............................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold .................. 92.7 95.0 92.9 104.7
-------- ------- -------- -------
Gross margin ........................ 7.3 5.0 7.1 (4.7)
Operating expenses .................. 32.4 55.6 31.8 55.8
-------- ------- -------- -------
Loss from operations ................ (25.1) (50.6) (24.7) (60.5)
Other income (expense), net.......... (2.4) 4.6 (13.6) 1.6
-------- ------- -------- -------
Net loss ............................ (27.5) (46.0) (38.3) (58.9)
======== ======= ======== =======
</TABLE>
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<PAGE> 17
Three Months Ended July 31, 1999 as Compared to the Three Months Ended
July 31, 1998
NET SALES. The Company derives its revenue primarily from sales of
third-party computer hardware, software and accessories. The Company recognizes
revenue from the sale of computer products upon shipment of the physical product
to the customer. Net sales are comprised of the gross selling price of products
sold by the Company, net of estimated returns. The Company bears credit risk
with respect to a majority of its sales. The Company's net sales increased to
$16.5 million for the three months ended July 31, 1999, from $952,000 for the
three months ended July 31, 1998, reflecting an increase of $15.5 million or
1635%. This sales increase represented a $2.1 million, or 225%, increase for
Virtual-world.com (e-commerce) sales and a $14.1 million increase for GTI
(distribution) sales as a result of the GTI acquisition, offset by the
elimination of intercompany sales. The Virtual-world.com increase was primarily
the result of the growth of Internet sales through the Company's web-site. The
Company acquired GTI on January 28, 1999, and therefore did not report net sales
from GTI prior to that date.
COST OF GOODS SOLD. Cost of goods sold consists primarily of computer
products sold to the end user and related shipping and distribution costs. Cost
of goods sold during the three months ended July 31, 1999 was $15.3 million, or
92.7% of net sales, reflecting an increase of $14.4 million or 1592%. The cost
of goods sold increase includes a $2.0 million, or 225%, increase for
Virtual-world.com cost of goods sold and a $13.1 million increase for GTI's cost
of goods sold as a result of the GTI acquisition, offset by the elimination of
intercompany cost of goods sold. The Virtual-world.com increase was primarily
the result of the increase in sales. Prior to January 28, 1999, the Company did
not report cost of goods sold for GTI.
OPERATING EXPENSES. Operating expenses consist principally of sales and
marketing, general and administrative, consulting services and amortization of
intangibles. Sales and marketing expenses, which include sales and marketing
personnel expenses and advertising and promotional expenses, increased to $1.7
million during the three months ended July 31, 1999 from $337,000 for the three
months ended July 31, 1998. The primary components of the increase were an
increase in advertising and promotion expenditures of $919,000 and an increase
in sales and marketing personnel expenses of $483,000. As a percentage of net
sales, sales and marketing expenses were 10.6% for the three months ended July
31, 1999, as compared to 35.4% for the three months ended July 31, 1998. The
Company expects that sales and marketing expenses will continue to increase in
absolute dollars as the Company continues to build its sales and marketing
infrastructure and to develop marketing programs.
General and administrative expenses consist principally of executive,
accounting and administrative personnel expenses, legal, and accounting
expenses, occupancy and bad debt expense. General and administrative expenses
increased to $1.8 million for the three months ended July 31, 1999 from $192,000
for the three months ended July 31, 1998. The 1999 increase over the 1998 period
was primarily due to an increase in personnel expenses of $787,000 and legal,
accounting and other professional services of $367,000. As a percentage of net
sales, general and administrative expenses were 10.7% during the three months
ended July 31, 1999, as compared to 20.2% for the three months ended July 31,
1998.
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<PAGE> 18
Consulting services consist primarily of financial and other service
contracts paid with cash, common stock and warrants to purchase common stock or
a combination thereof. For the three months ended July 31, 1999, the Company
recognized $1.6 million of non-cash consulting expenses from a combination of
previous agreements and new agreements, generally written for a term of one
year. There were no consulting expenses for the three months ended July 31,
1998. The Company will continue to recognize the cost of existing noncash
consulting agreements over the course of fiscal 2000, with the total charges
expected to exceed $12 million for the entire fiscal year. There may be
substantial additional charges if the Company enters into additional agreements.
Amortization of intangibles consists of goodwill, a covenant not to
compete and a consulting agreement, all associated with the acquisition of GTI.
Amortization totaled $233,000 for the three months ended July 31, 1999, compared
with no amortization for the three months ended July 31, 1998.
OTHER INCOME (EXPENSE). Other expense for the three months ended July
31, 1999 consisted primarily of $278,000 for amortization of loan fees and
interest expense of $108,000. The loan fee expense and $121,000 of the interest
expense relate to a collateralized three-year $10 million line of credit
agreement (the "Coast Agreement") with Coast Business Credit, a division of
Southern Pacific Bank ("Coast").
Six Months Ended July 31, 1999 as Compared to the Six Months Ended July 31, 1998
NET SALES. The Company's net sales increased to $33.9 million for the
six months ended July 31, 1999, from $1.5 million for the six months ended July
31, 1998, reflecting an increase of $32.4 million or 2,098%. This sales increase
represented a $3.5 million, or 228%, increase for Virtual-world.com (e-commerce)
sales and a $30.0 million increase for GTI (distribution) sales as a result of
the GTI acquisition, offset by the elimination of intercompany sales. The
Virtual-world.com increase was primarily the result of the growth of Internet
sales through the Company's web-site. The Company acquired GTI on January 28,
1999, and therefore did not report net sales from GTI prior to that date.
COST OF GOODS SOLD. Cost of goods sold during the six months ended July
31, 1999 was $31.5 million, or 92.9% of net sales, reflecting an increase of
$29.9 million or 1,849%. The cost of goods sold increase includes a $3.2
million, or 201%, increase for Virtual-world.com cost of goods sold and a $27.8
million increase for GTI's cost of goods sold as a result of the GTI
acquisition, offset by the elimination of intercompany cost of goods sold. The
Virtual-world.com increase was primarily the result of the increase in sales.
Prior to January 28, 1999, the Company did not report cost of goods sold for
GTI.
OPERATING EXPENSES. Sales and marketing expenses increased to $3.1
million during the six months ended July 31, 1999 from $485,000 for the six
months ended July 31, 1998. The primary components of the increase were an
increase in advertising and promotion expenditures of $1.6 million and an
increase in sales and marketing personnel expenses of $938,000. As a percentage
of net sales, sales and marketing expenses were 9.0% for the six months ended
July 31, 1999, as compared to 31.5% for the six months ended July 31, 1998. The
Company expects that sales and marketing expenses will continue to increase in
absolute dollars as the Company continues to build its sales and marketing
infrastructure and to develop marketing programs.
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<PAGE> 19
General and administrative expenses increased to $3.2 million for the
six months ended July 31, 1999 from $375,000 for the six months ended July 31,
1998. The 1999 increase over the 1998 period was primarily due to an increase in
personnel expenses of $1.4 million and legal, accounting and other professional
services of $669,000. As a percentage of net sales, general and administrative
expenses were 9.3% during the six months ended July 31, 1999, as compared to
24.3% for the six months ended July 31, 1998.
For the six months ended July 31, 1999, the Company recognized $4.1
million of non-cash consulting expenses from a combination of previous
agreements and new agreements, generally written for a term of one year. There
were $12,000 in consulting expenses for the six months ended July 31, 1998. The
Company will continue to recognize the cost of existing noncash consulting
agreements over the course of fiscal 2000, with the total charges expected to
exceed $12 million for the entire fiscal year. There may be substantial
additional charges if the Company enters into additional agreements.
Amortization totaled $466,000 for the six months ended July 31, 1999,
compared with no amortization for the six months ended July 31, 1998.
OTHER INCOME (EXPENSE). Other expense for the six months ended
July 31, 1999 consisted primarily of a $3.7 million charge for warrants issued
in April 1999 in lieu of the registration of certain shares of common stock as
required by a November 1998 consulting agreement. The Company used the
Black-Scholes option model and the quoted market price of the Company's common
stock to value the warrants. Additional other expenses during the 1999 fiscal
period included $555,000 for amortization of loan fees and interest expense of
$286,000. The loan fee expense and $195,000 of the interest expense relate to
the Coast Agreement. The balance of the interest is primarily related to a
$111,000 discount on the notes payable to Herold Marketing as a result of the
acquisition of GTI.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its operations primarily through
the private placement of equity and debt securities. Primary uses of cash have
been to fund the operation of the Company through its development stage, the
acquisition of subsidiary businesses and increases in inventory and accounts
receivable. If the Company is successful in achieving continued revenue growth,
its working capital requirements are likely to increase.
Cash provided by financing activities was $5.2 million for the six
months ended July 31, 1999, as compared to cash provided by financing activities
of $1.4 million for the six months ended July 31, 1998. During the six months
ended July 31, 1999, the Company received $8.0 million from issuance of equity
securities and the collection of a $2.7 million stock subscription receivable.
In addition, the Company during this period borrowed $4.5 million under the
Coast Agreement. Proceeds from these financing activities were used to retire a
$4.0 million note payable to Herold Marketing in connection with the Company's
acquisition of GTI. The Company also used the proceeds to retire $386,000 of
loans from related parties and paid $207,000 in loan fees to establish the Coast
Agreement.
Net cash used by operating activities for the Company during the six
months ended July 31, 1999, was $4.3 million as compared to $1.1 for the six
months ended July 31, 1998. Net cash used by
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<PAGE> 20
operating activities for the Company during the six months ended July 31, 1999
was primarily the result of net operating losses and increases in accounts
receivables, offset in part by decreases in inventory and non-cash expenses, and
increases in accounts payable. Net cash used by operating activities for the
Company during the six months ended July 31, 1998 was primarily the result of
net operating losses and increases in receivables offset by increases in
accounts payable and non-cash expenses.
For the six months ended July 31, 1999, the Company used $179,000 for
purchases of furniture and equipment , $200,000 for an investment in securities,
and $124,000 for loans to a related party for the development of a TV
infomercial business.
On January 28, 1999, the Company acquired substantially all of the
assets of GTI and assumed certain of GTI's liabilities. The purchase price was
$10.1 million, $1.0 million of which the Company paid at closing primarily out
of funds generated from the sale of its equity securities during the three
months ended January 31, 1999. Under the terms of the acquisition agreement, the
Company paid an additional $4.0 million of the purchase price in February 1999
by repayment of a promissory note.
The Company acquired the funds to retire such note from borrowings
under the Coast Agreement. Under the Coast Agreement, the Company may borrow up
to $10.0 million based upon eligible receivables and inventory at an interest
rate equal to 1.5% in excess of the bank's reference rate. As part of the
overall credit facility, the Company may borrow up to $250,000 for capital
expenditure purchases at an interest rate equal to 2% in excess to the bank's
reference rate, not subject to eligible receivables and inventory. Further, the
Company may borrow up to $500,000 at an interest rate equal to 2% in excess of
the bank's reference rate, payable in 24 equal monthly installments, also not
based on eligible receivables and inventory. In May 1999, the Company paid an
additional $2.7 million of the remaining $3.3 million promissory note under the
acquisition agreement. The payment differential is due to certain post-closing
adjustments still under negotiation between the Company and Herold Marketing.
The Company believes these post-closing adjustments will be finalized this
fiscal year. The Company made the payment on such note out of cash from the
private placement of the Company's securities and from additional advances under
the Coast Agreement.
Although the Company, as consolidated with GTI, has no material
commitments for capital expenditures, the Company anticipates that it will
expend up to $300,000 over the balance of fiscal 2000 on additional computer
hardware resources, including e-commerce servers, Year 2000 compliance issues
and expansion of the Company's principal executive offices. The Company's
capital expenditures could be materially different if the Company's operating
plans are altered.
GTI's payables to several of its major vendors have historically been
guaranteed by an insurance company. In July 1999, the insurance company
discontinued its coverage, citing the Company's reduction in net tangible assets
and recent large losses. As a result, the GTI vendors increasingly are shipping
orders only against the Company's immediate cash payment. If the Company cannot
replace the lost insurance or otherwise obtain credit from GTI's major vendors,
its operating and business results likely will be materially adversely affected.
In July 1999, the Company signed non-binding letters of intent to
acquire certain of the operating assets of Tech Squared, Inc. and Softdisk, Inc.
for a combination of cash and stock, subject to successful completion of due
diligence reviews. While there is no assurance that the Company will
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<PAGE> 21
complete either of these transactions, the total cash requirement to complete
both transactions is approximately $3.4 million.
As of July 31, 1999, the Company, as consolidated with GTI, had cash of
approximately $519,000. At such date, the Company owed $4.5 million under the
Coast Agreement and estimates that it had additional borrowing capacity
thereunder of approximately $2.7 million. Based upon management's current plans,
including the above acquisitions and capital expenditures, the Company, as
consolidated with GTI, believes it will need to raise up to $10 million in a
combination of equity and debt, in order to complete the acquisitions and carry
out its operating plan for fiscal 2000. There is no assurance that such funds
will be available to the Company on terms acceptable to it, or at all. If the
Company is unable to raise such financing, it may be required to curtail some of
its operating plans, including its proposed acquisitions.
YEAR 2000 COMPLIANCE.
Like many other companies, the Company faces risks associated with Year
2000 computer issues. If the Company's internal management information systems
and external electronic commerce information systems do not correctly recognize
and process date information beyond the year 1999, it could have a significant
adverse impact on the Company's ability to process client and end-user
transactions, which could create significant potential liability for the
Company. To address potential Year 2000 issues with its internal and external
systems, the Company has evaluated such systems. The evaluation determined that
the Virtual-world.com software platform is Year 2000 compliant. However, it was
also determined that GTI's internal information systems, including sales and
purchase order processing, inventory management, accounts payable and receivable
and general ledger, are not Year 2000 Compliant. Remediation is proceeding, and
the Company currently plans to have changes to these systems completed and
tested by September 30, 1999. These activities are intended to encompass all
major categories of systems used by the Company, including electronic commerce,
sales processing, sales and financial systems. The initial assessment indicated
that certain internal systems should be upgraded or replaced as part of a
solution to the Year 2000 problem.
The Company has tested the potential of using Virtual-world.com's
software platform for GTI's business operations and does not believe that an
appropriate conversion can be timely effected. Accordingly, the Company is now
in the process of implementing the newer version of GTI's existing software,
which is Year 2000 compliant. The Company converted to the new software in
September 1999. Any expenditures related to ensuring Year 2000 compliance do not
include potential costs related to any customer or other claims or the cost of
internal software and hardware replaced in the normal course of business.
The Company is also working with key suppliers of products and services
to determine that their operations and products are Year 2000 compliant or to
monitor their progress toward Year 2000 compliance, as appropriate. The failure
of a major supplier to become Year 2000 compliant on a timely basis, or any
system conversion by a supplier that is incompatible with the Company's systems,
could have a material adverse effect on the Company's business, financial
condition and operating results. In addition, the Company's business, financial
condition and operating results may be materially adversely affected to the
extent that its end-users are unable to use their credit cards due to the Year
2000 issues that are not rectified by their credit card vendors.
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<PAGE> 22
In addition, the Company has begun internal discussions concerning
contingency planning to address potential problem areas with internal systems
and with suppliers and other third parties. Management expects that assessment,
remediation and contingency planning activities will be on-going throughout
calendar year 1999 with the goal of appropriately resolving all material
internal and external systems and third party issues. In the event of a Year
2000 failure of GTI's internal systems, management believes that GTI could
temporarily continue operations by manually processing transactions, although on
a less efficient and more costly basis.
As used by the Company, "Year 2000 Compliant" means software that can
individually, and in combination and in conjunction with all other systems,
products or processes with which they are required or designed to interface,
continue to be used normally and to operate successfully (both in functionality
and performance in all material respects) over the transition into the
twenty-first century when used in accordance with the documentation relating to
such software, including being able to, before, on and after January 1, 2000
substantially conform to the following: (i) use logic pertaining to dates which
allow users to identify and/or use the century portion of any date fields
without special processing; (ii) respond to all date elements and date input so
as to resolve any ambiguity as to century in a disclosed, defined and
pre-determined manner; and (iii) provide date information in ways which are
unambiguous as to century. This may be achieved by permitting or requiring the
century to be specified or where the data element is represented without a
century, the correct century is unambiguous for all manipulations involving that
element.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 1999, Lenhoff Capital Partners, Inc. ("LCP") commenced suit
against the Company in the U.S. District Court for the Northern District of
Illinois, Eastern Division. LCP alleges that the Company failed to pay $120,000
of a "success fee" and to issue stock purchase warrants to LCP as consideration
for introductions to Coast Business Credit. The suit also alleges that the
Company failed to pay LCP an additional fee after the Company, without LCP's
assistance, obtained private equity funding in January 1999. LCP seeks monetary
damages and the issuance of a stock purchase warrant. The Company is vigorously
defending against the suit.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None
(b) None
(c) Recent Sales of Unregistered Securities.
(1) Sales for cash consideration to accredited investors only
pursuant to Rule 506 of Regulation D and/or Section 4(2) of the Securities Act
of 1933, as amended (the "Act"):
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<PAGE> 23
Between May 1 and July 31, 1999, the Company issued 757,576 shares of
its Common Stock and 200,000 Common Stock purchase warrants for $2,250,000 to
one investor.
(2) Issuance of options and warrants involving no sale of
securities:
Between May 1 and July 31, 1999, the Company granted to thirteen
individuals an aggregate of 1,027,500 options to purchase shares of the
Company's Common Stock, exercisable at $4.75 per share.
(d) None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) VTC held its annual meeting of shareholders on June 9, 1999.
(b) All management nominees were elected to the Board of
Directors, as follows: Kenneth M. Israel, Gregory A. Appelhof, Jeffrey Maynard,
Philip Lacerte, Maceo K. Sloan, and James P. Secord.
(c) The following matters were voted upon at the annual meeting of
shareholders (the Company tallied no broker non-votes on any matter):
(i) Electing Directors:
<TABLE>
<CAPTION>
Name of Director Votes For Votes Against Votes Withheld/Absentions
<S> <C> <C> <C>
Kenneth Israel 16,316,396 --- 106
Gregory Appelhof 16,316,396 --- 106
Jeffrey Maynard 16,316,396 --- 106
Philip Lacerte 16,316,396 --- 106
Maceo Sloan 16,316,396 --- 106
James Secord 16,316,396 --- 106
</TABLE>
(ii) Amending and restating the Company's Articles of
Incorporation to increase the authorized number of shares of capital stock from
55,000,000 to 100,000,000 shares and for certain other matters:
Votes For Votes Against Votes Withheld/Absentions
15,965,949 12,733 3,820
(iii) Adopting the 1999 Incentive Compensation Plan:
Votes For Votes Against Votes Withheld/Absentions
15,964,035 16,447 2,020
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<PAGE> 24
(iv) Ratifying the selection of Lurie, Besikof, Lapidus &
Co., LLP as the Company's independent public accountants:
Votes For Votes Against Votes Withheld/Absentions
15,979,429 1,000 1,981
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) All schedules and exhibits not included are not applicable, not
required or would contain information which is shown in the financial statements
or notes thereto.
EXHIBITS
3.1 Amended and Restated Articles of Incorporation of the Company
3.2 By-Laws of the Company, as amended*
4.1 Form of Stock Certificate, form of Stock Purchase Warrant and Stock
Option Agreement*
10.1 Loan and Security Agreement dated February 11, 1999, by and among
Virtual Technology Corporation, GTI Acquisition Corporation and Coast Business
Credit*
10.6 Employment Agreement with Gregory Appelhof**
10.7 Employment Agreement with John Harvatine**
10.8 Letter agreement dated July 20, 1999, terminating Fontenelle, LLC
Consulting Agreement
10.9 Fontenelle, LLC Consulting Agreement dated August 11, 1999
10.10 Agreement with Sherman Dreiseszun
27 Financial Data Schedule
99.1 Consulting Agreement with Donna Miller***
(b) Reports on Form 8-K. The Company did not file any current reports
on Form 8-K during the first three months ended April 30, 1999.
* Incorporated by reference from the Company's Form 10-SB, filed with the SEC on
February 12, 1999, SEC file #000-25397
** Incorporated by reference from the Company's Form 10-K, filed with the SEC on
May 6, 1999, SEC file #333-72849
*** Incorporated by reference from the Company S-8, filed with the SEC on
May 17, 1999. SEC file #333-78619
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<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Virtual Technology Corporation
By: /s/ Kenneth Israel
-----------------------------------
Its: Chairman
By: /s/ John Harvatine
-----------------------------------
Its: Chief Financial Officer
Dated: September 13, 1999
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<PAGE> 1
EXHIBIT 3.1
Amended and Restated Articles of Incorporation
AMENDED AND RESTATED
ARTICLES OF INCORPORATION OF
VIRTUAL TECHNOLOGY CORPORATION
The undersigned, being the Secretary of Virtual Technology Corporation, a
Minnesota corporation (the "Company"), subject to the provisions of Chapter 302A
of the Minnesota Statutes, known as the Minnesota Business Corporation Act, does
hereby certify that the following resolution was adopted by action of the
members of the Board of Directors dated June 8, 1999, and the holders of a
majority of the issued and outstanding shares of capital stock of the Company
who were present in person or by proxy at a meeting of the shareholders of the
Company held on June 9, 1999:
RESOLVED, that the Articles of Incorporation of the Company be, and the
same hereby are, amended and restated, and the following Amended and Restated
Articles of Incorporation take the place of and supersede the existing Articles
of Incorporation and all amendments thereto, pursuant to Minnesota Statutes
Section 302A.135, as follows:
ARTICLE I
The name of this corporation is Virtual Technology Corporation.
ARTICLE II
The registered office of the corporation is located at 3100 West Lake
Street, Suite 400, Minneapolis, Minnesota 55416.
ARTICLE III
3.01. The aggregate number of shares which this corporation shall have the
authority to issue is 100,000,000 shares of capital stock, each having $.001 par
value.
3.02. The Board of Directors may, from time to time, establish by
resolution different classes or series of shares and may fix the relative rights
and preferences of said shares in any class or series, including the par value
thereof.
3.03. The Board of Directors shall have the authority to issue shares of a
class or series to holders of shares of another class or series to effectuate
share dividends, splits, or conversion of its outstanding shares.
3.04. No shareholder of the corporation shall have any preemptive rights.
3.05. No shareholder shall be entitled to any cumulative voting rights.
<PAGE> 2
3.06. The shareholders shall take action by the affirmative vote of the
holders of a majority of the voting power of all voting shares represented at a
duly held meeting of the shareholders, except where a larger proportion is
required by law, these Articles, or a shareholder control agreement.
ARTICLE IV
Except as to those matters requiring shareholder approval, any action
required or permitted to be taken by the Board of Directors of this corporation
may be taken by written action signed by a majority of the directors then
holding office.
ARTICLE V
A director of the corporation shall not be personally liable to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, except for (i) liability based on a breach of the duty of
loyalty to the corporation or the shareholders; (ii) liability for acts or
omissions not in good faith or that involved intentional misconduct or a knowing
violation of law; (iii) liability based on an improper distribution under
Minnesota Statutes Section 302A.559 or on violations of state securities laws
under Minnesota Statutes Section 80A.23; (iv) liability for any transaction from
which the director derived an improper personal benefit; or (v) liability for
any act or omission occurring prior to the date this Article becomes effective.
If Minnesota Statutes Chapter 302A hereafter is amended to authorize the further
elimination or limitation of the liability of directors or officers, then the
liability of a director or officer of the corporation, in addition to the
limitation on personal liability provided herein for directors, shall be limited
to the fullest extent permitted by such amendment. Any repeal or modification of
this Article by the shareholders of the corporation shall be prospective only
and shall not adversely affect any limitation on the personal liability of a
director or officer of the corporation existing at the time of such repeal or
modification.
IN WITNESS WHEREOF, I have subscribed my name to these Amended and Restated
Articles of Incorporation this 17th day of June, 1999.
/s/ Jeffrey C. Robbins
-----------------------------------
Jeffrey C. Robbins, Secretary
<PAGE> 1
EXHIBIT 10.8
Letter agreement terminating Fontenelle, LLC Consulting Agreement
VIRTUAL TECHNOLOGY CORPORATION
3100 West Lake Street, Suite 400
Minneapolis, Minnesota 55416
July 20, 1999
Fontenelle, LLC
Attn: Mr. Steven Antebi
345 North Maple Drive, Suite 358
Beverly Hills, CA 90210
Re: Termination of VTC/Fontenelle, LLC Consulting Agreement
Dear Mr. Antebi:
This confirms our recent discussions and serves as the mutual written agreement
of Virtual Technology Corporation ("VTC") and Fontenelle, LLC ("Fontenelle") to
terminate the Consulting Agreement ("Agreement") entered into between VTC and
Fontenelle on February 23, 1999.
VTC and Fontenelle mutually agree to terminate the Agreement effective July 20,
1999. In consideration for services rendered through July 20, 1999, Fontenelle
accepts 333,300 shares of VTC's common stock in full satisfaction of its rights
pursuant to the Agreement. Fontenelle releases VTC from any further obligations
under the Agreement and forever waives and releases any further claims of any
nature whatsoever under the Agreement.
Please contact Christy Prediger at our office to arrange the cancellation and
exchange of the previously issued stock certificate as required under the
Agreement. Please also sign below at the appropriate signature block and return
the executed correspondence to my attention to confirm Fontenelle's receipt and
understanding of this Agreement.
Yours truly,
VIRTUAL TECHNOLOGY CORPORATION
/s/ Kenneth Israel
Kenneth Israel, Chairman
ACKNOWLEDGED AND AGREED:
By: /s/ Steven Antebi
Steven Antebi, Authorized Officer
Fontenelle, LLC
<PAGE> 1
EXHIBIT 10.9
Fontenelle, LLC Consulting Agreement dated August 11, 1999
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (this "Agreement") is entered into as of August
11, 1999 by and between Virtual Technology Corporation ("VTC"), a Minnesota
corporation and Fontenelle, LLC ("Consultant"), a Nevada limited liability
company.
RECITALS
A. VTC is a public company whose Common Stock, no par value, is quoted on
the OTC Bulletin Board. VTC is in the business of selling computers and
computer-related equipment on the Internet.
B. Consultant is experienced in raising funds for growing businesses and
has significant contacts with possible financing sources.
C. VTC wishes to engage the Consultant on a nonexclusive basis as an
independent contractor to utilize Consultant's services to help VTC in raising
funds.
AGREEMENT
NOW, THEREFORE, it is mutually agreed by and between the Parties as
follows:
1. ENGAGEMENT. VTC hereby retains and engages Consultant to assist it in
developing a financing strategy and in identifying potential investors and as
described in more detail in paragraph 2 below (the "Consulting Services"), and
Consultant agrees to perform the Consulting Services subject to the terms and
conditions of this Agreement.
2. CONSULTING SERVICES. The Consulting Services contemplated by this
Agreement shall consist of:
a. Reviewing and evaluating VTC's current business plan and
remaining knowledgeable about the contents thereof;
b. Working with VTC's management to develop a financing strategy;
and
c. Introducing VTC potential investors and other sources of
financing.
3. CONSIDERATION. In consideration of the performance by Consultant of
the Consulting Services, VTC will issue to Consultant 1,200,000 shares of VTC's
Common Stock (the "Shares") valued at $1.37 per share (closing price Aug. 5,
1999), for a total consideration of $1,644,000, and an additional 300,000 shares
of VTC's Common Stock valued at $411,000, as more fully described in paragraph 4
below. In the event that Consultant does not completely perform the Consulting
Services (for any reason including the death or incapacity of Consultant), then
for each month that Consultant does not perform the Consulting Services, one
sixth (1/6) of the Shares (as
<PAGE> 2
adjusted for stock splits, reverse stock splits, stock dividends or
distributions or other reclassifications of VTC's common stock) shall be
returned to VTC and canceled. Consultant agrees to purchase shares in the open
market, if necessary, to fulfill such obligation to return shares to VTC.
The Shares will be issued as soon as practicable following execution of
this Agreement and will be "restricted securities" as defined in Rule 144(a)(3).
4. ADDITIONAL SHARES. In partial consideration of Consultant performing
the Consulting Services, VTC hereby grants the 1995 Antebi Childrens Insurance
and Other Trust and the 1997 Antebi Childrens Insurance and Other Trust each
150,000 shares of VTC's Common Stock valued at $1.37 per share.
5. EXPENSES. Consultant shall bear his out-of-pocket costs and expenses
incident to performing the Consulting Services, without a right of reimbursement
by VTC.
6. TERM. The term of this Agreement is one year, commencing August 11,
1999 and ending August 11, 2000 (the "Term"). This Agreement may be terminated
prior to the end of the Term upon the mutual written agreement of the Parties.
7. CONSULTANT'S LIABILITY. In the absence of gross negligence or willful
misconduct on the part of the Consultant or the Consultant's breach of any term
of this Agreement, the Consultant shall not be liable to the Company or to any
officer, director, employee, shareholder or creditor of the Company, for any act
or omission in the course of or in connection with the rendering or providing of
services hereunder. Except in those cases where gross negligence or willful
misconduct of the Consultant or the breach by the Consultant of any terms of
this Agreement is alleged and proven, the Company agrees to defend, indemnify,
and hold the Consultant harmless from and against any and all reasonable costs,
expenses and liability (including reasonable attorney's fees paid in the defense
of the Consultant) which may in any way result from services rendered by the
Consultant pursuant to or in connection with this Agreement. This
indemnification expressly excludes any and all damages as a result of any
actions or statements, on behalf of the Company, made by the Consultant without
the prior approval or authorization of the Company.
8. COMPANY'S LIABILITY. The Consultant agrees to defend, indemnify, and
hold the Company harmless from and against any and all reasonable costs,
expenses and liability (including reasonable attorney's fees paid in defense of
the Company) which may in any way result pursuant to its gross negligence or
willful misconduct or in any connection with any actions taken or statements
made, on behalf of the Company, without the prior approval or authorization of
the Company or which are otherwise in violation of applicable law.
9. CONSULTANT'S REPRESENTATIONS. The Consultant makes the following
representations:
(a) Consultant has no prior or existing legally binding obligations
that are in conflict with its entering into this Agreement;
<PAGE> 3
(b) Consultant shall not offer or make payment of any consideration
to brokers, dealers, or others for purposes of inducing the purchase,
making of a market or recommendation for the purchase of the Company's
securities;
(c) Consultant is not currently the subject of an investigation or
inquiry by the Securities and Exchange Commission, the NASD, or any state
securities commission;
(d) Consultants activities and operations fully comply with now and
will comply with in the future all applicable state and federal securities
laws and regulations;
(e) Consultant is either properly registered as, or exempt from
registration, a broker-dealer or an investment advisor;
(f) Consultant understands that, as a result of its services, it may
come to possess material non-public information about the Company, and that
it has implemented internal control procedures designed to reasonably to
insure that none of its employees, agents, consultants or affiliates, trade
in the securities of client companies while in possession of material
non-public information;
(g) During the Term of this Agreement and for a period of two years
thereafter, the Consultant shall treat as the Company's confidential trade
secrets all data, information, ideas, knowledge and papers pertaining to
the affairs of the Company. Without limiting the generality of the
foregoing such trade secrets shall include: the identity of the Company's
customers, suppliers and prospective customers and suppliers; the identity
of the Company's creditors and other sources of financing, the Company's
estimating and costing procedure and the cost and gross prices charged by
the Company for its products; the prices or other consideration charged to
or required of the Company by any of the suppliers or potential suppliers;
the Company's sales and promotional policies; and all information relating
to entertainment programs or properties being produced or otherwise
developed by the Company. The Consultant shall not reveal said trade
secrets to others except in the proper exercise of its duties for the
Company, or use their knowledge thereof in any way that would be
detrimental to the interest of the Company unless compelled to disclose
such information by judicial or administrative process; provided, however,
that the divulging of information shall not be a breach of this Agreement
to the extent that such information was (i) previously known by the party
to which it is divulged, (ii) already in the public domain, all through no
fault of the Consultant, or (iii) required to be disclosed by Consultant
pursuant to judicial or governmental order. The Consultant shall also treat
all information pertaining tot he affairs of the Company's suppliers and
customers and prospective customers and suppliers as confidential trade
secrets of such customers and suppliers and prospective customers and
suppliers;
(h) Consultant agrees to notify the Company immediately if, at any
time, any of the representations and warranties made by the Consultant
herein are no longer true and correct or if a breach of any of the
representations and warranties made by the Consultant herein occurs; and
<PAGE> 4
(i) Consultant is an "accredited investor", as that term is defined in
Rule 501(a) of regulation D promulgated under the Securities Act of 1933
(the Securities Act") and has the capacity to protect its own interests
with respect to an investment in the securities issued and issueable
hereunder (the "Securities"). Consultant and, as assignees of the
Consultant, the trusts identified in paragraph 4 above, are acquiring, or
will acquire, the Securities for investment for their own account, not as a
nominee or agent, and not with the view to, or for resale in connection
with, any distribution thereof. Consultant understands that the Securities
have not been registered under the Securities Act and that there is no
current plan to so register the Securities. Consultant acknowledges that
the Securities must be held indefinitely unless subsequently registered
under the Securities Act or unless an exemption from such registration is
available. Consultant further acknowledges that the certificate(s)
evidencing the Securities will be imprinted with a standard restrictive
legend prohibiting the transfer of the Securities in the absence of an
opinion of counsel or an exemption from the registration and prospectus
delivery requirements of the Securities Act and that a stop transfer
notation will be made on VTC's stock transfer records.
10. COMPANY REPRESENTATION'S. The Company makes the following
representations:
(a) The Company is not currently the subject of an investigation or
inquiry by the Securities and Exchange Commission, the NASD, or any state
securities commission.
(b) The Company is in good standing in the state of incorporation,
Minnesota.
(c) The Company and its senior management are not aware of any
materially adverse events not previously disclosed in the Company's annual
and quarterly reports with the Securities and Exchange Commission.
11. ENTIRETY OF AGREEMENT. This Agreement sets forth the entire
understanding of the Parties with respect to the matters contemplated hereby.
Any and all previous agreements and understandings between or among the Parties
regarding the subject matter hereof, whether written or oral, are superseded by
this Agreement. This Agreement shall not be amended or modified except by
written instrument duly executed by each of the Parties.
12. ASSIGNMENT AND BINDING EFFECT. This Agreement may not be assigned
without the prior written consent of the other Party.
13. WAIVER. Any term or provision of this Agreement may be waived at any
time by the Party entitled to the benefit thereof by a written instrument duly
executed by such Party.
14. NOTICES. Any notice, request, demand, waiver, consent, approval or
other communication which is required or permitted hereunder shall be in writing
and shall be deemed given only if delivered personally or sent by facsimile, or
by registered or certified mail, postage prepaid, as follows:
<PAGE> 5
If to VTC to:
Virtual Technology Corporation
3100 West Lake Street
Minneapolis, MN 55416
If to Consultant, to:
Fontenelle, LLC
Attn: Mr. Steven Antebi
345 North Maple Drive, Suite 358
Beverly Hills, California 90210
or to such other address as the addressee may have specified in a notice duly
given to the sender as provided herein. Such notice, request, demand, waiver,
consent, approval or other communications will be deemed to have been given as
of the date so delivered, telephoned or mailed.
15. GOVERNING LAW. This Agreement shall be governed by and interpreted and
enforced in accordance with the laws of the State of Minnesota.
16. NO BENEFIT TO OTHERS. The representations, warranties, covenants and
agreements contained in this Agreement are for the sole benefit of the Parties
hereto.
17. SEVERABILITY. Any provision of this Agreement that is invalid or
unenforceable in any jurisdiction shall be ineffective to the extent of such
invalidity or unenforceability in such jurisdiction without invalidating or
rendering unenforceable the remaining provisions hereof, and any such invalidity
or unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
18. HEADINGS. The headings of this Agreement are inserted solely for the
convenience of reference and are not part of, and are not intended to govern,
limit or aid in the construction of any term or provision hereof.
19. FURTHER ACTS. Each party agrees to perform any further acts and
execute and deliver any further documents that may be reasonably necessary to
carry out the provisions and intent of this Agreement.
20. ACKNOWLEDGMENT CONCERNING COUNSEL. Each party acknowledges that it had
the opportunity to employ separate and independent counsel of its own choosing
in connection with this Agreement.
21. INDEPENDENT CONTRACTOR STATUS. There is no relationship, partnership,
agency, employment, franchise or joint venture between the parties. The parties
have no authority to bind the other or incur any obligations on their behalf.
<PAGE> 6
22. COUNTERPARTS. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on
the date first above written.
VIRTUAL TECHNOLOGY CORPORATION
a Minnesota corporation
By: /s/ Kenneth Israel
----------------------------------------
Name: Kenneth Israel, Chairman
FONTENELLE, LLC
a Nevada Limited Liability Company
By: /s/ Steven Antebi
----------------------------------------
Name: Steven Antebi - Authorized Officer
<PAGE> 1
EXHIBIT 10.10
Agreement with Sherman Dreiseszun
VIRTUAL TECHNOLOGY CORPORATION
Common Stock and Common Stock Purchase Warrants
SUBSCRIPTION AND INVESTMENT REPRESENTATION AGREEMENT
This Agreement is made and entered into between Virtual Technology
Corporation, a Minnesota corporation, (the "Company"), and Sherman Dreiseszun
(the "Subscriber").
This Agreement is entered into by the Company and the Subscriber in
connection with the Subscriber's desire to acquire securities of the Company and
as a condition of the issuance by the Company of such securities. The Subscriber
understands that the payment made to the Company in connection herewith will be
placed in the Company's general banking account for immediate use by the Company
without escrow of any kind.
1. AGREEMENT OF PURCHASE AND SALE; PAYMENT OF PURCHASE PRICE.
The Company agrees to sell the subscription to the Subscriber, and the
Subscriber agrees to purchase from the Company, 757,576 shares (the "Shares") of
Common Stock of the Company (the "Common Stock"), together with two-year
warrants to purchase up to an additional 200,000 shares of Common Stock at an
exercise price of $9.00 per share (the "Warrants"), for the purchase price of
$2,500,000 in the aggregate. The Warrants will be in the form attached hereto as
Exhibit A. Concurrently with the delivery of this Agreement, the Subscriber will
deliver to the Company a cashier's, certified or business check in the amount of
$2,500,000 made payable to the Company, or other cash equivalent representing
cash payment in full for payment of the Shares and Warrants.
2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY.
In consideration of the Subscriber's subscription for the Shares and
Warrants, the Company represents, warrants and covenants to Subscriber as
follows:
(a) ORGANIZATION. The Company is duly organized, validly existing and in
good standing under the laws of the State of Minnesota.
(b) CORPORATE AUTHORIZATION. The execution and delivery of this Agreement,
and the consummation of all of the transactions contemplated hereby, have been
duly authorized by proper corporate action of the Company.
(c) REGISTRATION OF CERTAIN OF THE SHARES. The Company will use its best
efforts within six months of the date of this Agreement to cause the
registration of 378,788 of the Shares for public resale under the Securities Act
of 1933, as amended (the "Act"), with the U.S. Securities and Exchange
Commission (the "Commission").
<PAGE> 2
(d) OUTSTANDING SHARES. As of May 1, 1999, the Company has 28,260,304
shares of Common Stock outstanding and has issued outstanding warrants, which if
fully executed would result in the issuance of an additional 6,901,352 shares of
Common Stock. As of May 1, 1999 and through the acceptance of this Agreement by
the Company, the Company has not issued and has not entered into an agreement,
contract or understanding to issue, any Common Stock or Warrant or other
convertible instrument convertible into Common Stock.
3. REPRESENTATIONS AND WARRANTIES OF THE SUBSCRIBER.
In consideration of the Company's offer to sell the Shares and the
Warrants, the Subscriber hereby represents and warrants to the Company and its
officers, directors, agents, employees, counsel and shareholders as follows:
(a) INFORMATION ABOUT THE COMPANY. The Subscriber has had the opportunity
to ask questions of, and receive adequate answers from, the Company, or an agent
or a representative of the Company, concerning the terms and conditions of the
investment and the business and affairs of the Company, and to obtain any
additional information necessary to verify such information, and the Subscriber
has received such additional information concerning the Company as the
Subscriber considers necessary or advisable in order to form a decision
concerning an investment in the Company. Without limiting the foregoing, the
Subscriber has received a copy of and has read the Company's Registration
Statement on Form 10-SB filed February 12, 1999 with the Commission.
(b) HIGH DEGREE OF RISK. The Subscriber realizes that the Shares and
Warrants involve a high degree of risk, including the risk of receiving no
return on the investment and of losing the Subscriber's entire investment in the
Company.
(c) ABILITY TO BEAR THE RISK. The Subscriber is able to bear the economic
risk of investment in the Shares and Warrants, including the total loss of such
investment.
(d) APPROPRIATE INVESTMENT. Subscriber believes, in light of the
information provided pursuant to Section 3(a) above, that subscribing for the
Shares and Warrants pursuant to the terms of this Agreement is an appropriate
and suitable investment for Subscriber.
(e) BUSINESS SOPHISTICATION. The Subscriber is experienced and
knowledgeable in financial and business matters and capable of assessing the
merits and risks of purchasing securities of the Company.
(f) STATE OF RESIDENCE. The Subscriber represents and warrants to the
Company that the Subscriber is a bona fide resident of the State of .
----------
4. INVESTMENT INTENT. The Subscriber represents and warrants to the Company as
follows:
(a) The Subscriber has been advised that (i) the sale of the Shares and
the Warrants to the Subscriber has not been registered under the Act or relevant
state laws but are being offered pursuant to exemptions from registration
provided under the Act and applicable state laws; (ii) reliance upon such
exemption or exemptions is predicated, in part, on the Subscriber's
representations and warranties that
<PAGE> 3
the Subscriber is acquiring such Shares and Warrants (and the shares of Common
Stock underlying the Warrants) for investment, for the Subscriber's own account,
and for long-term investment and not with the intent of reselling or otherwise
distributing the same, and the Subscriber alone shall have the full legal and
equitable right, title and interest in the Shares and Warrants;
(b) The Subscriber understands that the effect and intent of the
Subscriber's representations in subsection (a) above is that the Subscriber does
not presently contemplate the disposal of all, or any part of, the Shares or the
Warrants (or the shares of Common Stock underlying the Warrants), and that at
such time as the Subscriber desires or determines to dispose of all or any part
of the Shares or Warrants (or the shares of Common Stock underlying the
Warrants), the Subscriber understands that the Subscriber must first notify the
Company, and that the Company shall require an opinion of its attorney or of the
Subscriber's attorney, or both, that such disposition will not negate the
Subscriber's intent as expressed herein, and that, in view of the exemption
claimed, such disposition will be permissible;
(c) The Subscriber understands that, except for such Shares as are
registered and publicly sold as and to the extent provided by Section 2(c)
above, the subsequent transfer of the Shares or the Warrants (and the Common
Stock underlying the Warrants) will be restricted and that the effect of the
restrictions on the transfer of the Shares and the Warrants (and the Common
Stock underlying the Warrants) include the facts, among others, that: (i) the
Subscriber will be unable to sell, encumber or otherwise transfer the Shares or
the Warrants (or the Common Stock underlying the Warrants) unless there is an
effective registration statement concerning such disposition under the Act, and
effective registrations and qualifications under applicable state laws, or all
necessary exemptions from such registrations or qualifications under the Act and
state laws, as applicable;
(d) The Subscriber has a financial net worth, or anticipated income, such
that a sale of such Shares or Warrants (or the Common Stock underlying the
Warrants) need not be made in the foreseeable future to satisfy any financial
obligation of which the Subscriber is or contemplates the Subscriber will become
subject;
(e) The Subscriber understands that exemptions from the registration and
qualification requirements, as referred to above, may not be available to the
Subscriber, and the Company, and its agents and counsel, will be no obligation
to assist the Subscriber in registering or qualifying a disposition of the
Shares or the Warrants (or the shares of Common Stock underlying such Warrants)
or in obtaining or establishing an exemption from such registration or
qualification requirements, except for the Shares to the limited extent provided
by Section 2(c) above; and
(f) The Subscriber understands that any certificate representing the
Shares or the Warrants (or the shares of Common Stock underlying the Warrants)
will bear a legend stating, in effect, that the issuance or sale of the Shares
and the Warrants (and the future possible issuance of the shares of Common Stock
underlying such Warrants) have not been registered under the Act or any
applicable state securities laws, and such legend may refer to the restrictions
on transfers and sales contained in this Agreement and as set forth in Section 7
hereof.
6. COMPLIANCE WITH THE ACT. The Subscriber agrees that if the Shares, the
Warrants or the shares of Common Stock underlying the Warrants, or any part
thereof, are sold or distributed in the future,
<PAGE> 4
the Subscriber shall sell or distribute them pursuant to the requirements of the
Act and all applicable state securities laws. The Subscriber agrees that the
Subscriber will not transfer any part of such securities without: (i) obtaining
a "no action" letter from the Commission and all applicable state securities
officers; (ii) obtaining an opinion of counsel, in form and substance acceptable
to the Company, and its counsel, to the effect that such transfer is exempt from
the registration requirements of the Act and all applicable state securities
laws; or (iii) such registration under the Act.
7. RESTRICTIVE LEGEND. The Subscriber agrees that the Company shall place a
restrictive legend on all documents representing the Shares, the Warrants and
the Common Stock underlying the Warrants containing, substantially, the
following language:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended, (the "Act"), have
not been registered under any state securities laws and are subject to a
Subscription and Investment Representation Agreement. These securities may
not be sold, offered for sale, or transferred in the absence of an
effective registration statement under the Act and under all applicable
state securities laws, or receipt by the Company and its counsel of an
opinion of counsel acceptable to the Company and its counsel that such
transaction is exempt from registration under the Act and under all
applicable state securities laws."
8. STOCK TRANSFER ORDER. The Subscriber agrees that the Company may place a
stop transfer order with its registrar and stock transfer agent (if any)
concerning all certificates representing the Shares, the Warrants and the Common
Stock underlying the Warrants.
9. KNOWLEDGE OF RESTRICTIONS UPON TRANSFER OF SECURITIES. The Subscriber
understands that the Shares and the Warrants are not, and the shares of Common
Stock issuable upon exercise of the Warrants will not be, freely transferable
and may, in fact, be prohibited from sale for an extended period of time and
that the Subscriber may have extremely limited opportunities to dispose of any
of such securities. The Subscriber understands that Rule 144 of the Commission
permits the transfer of "restricted securities" of the type here involved only
under certain limited conditions, including a minimum one-year holding period
and the availability to the public of certain information concerning the
Company.
10. KNOWLEDGE AND EXPERIENCE. The Subscriber represents and warrants to the
Company as follows:
(a) The Subscriber believes the Subscriber has such knowledge and
experience in financial and business matters and that the Subscriber is capable
of evaluating the merits and risks of the prospective investment in the Shares,
the Warrants and the Common Stock underlying the Warrants.
(b) To the extent the Subscriber deems necessary, the Subscriber has
sought and obtained such personal and professional advice with respect to the
very high risks inherent in the investment in the securities offered hereby as
the Subscriber deems appropriate or necessary in light of the Subscriber's
personal financial condition and investment needs.
<PAGE> 5
(c) The Subscriber has been given access to full and complete information
regarding the Company and has utilized such access to the Subscriber's
satisfaction for the purpose of obtaining information in addition to, or
verifying information included herein or otherwise provided; and particularly,
the Subscriber has either attended, or been given reasonable opportunity to
attend, a meeting with officers or representatives of the Company for the
purpose of asking questions of, and receiving answers from, such representatives
concerning the terms and conditions of the placement of the securities offered
hereby and to obtain any additional information, to the extent reasonably
available, necessary to verify the accuracy of information provided herein or
otherwise.
11. BINDING EFFECT; NON-ASSIGNMENT. Neither this Agreement, nor any interest
herein, shall be assignable by the Subscriber without prior written consent of
the Company. The provisions of this Agreement shall be binding upon, and inure
to the benefit of, the parties hereto and their respective heirs, legal
representatives, successors and assigns.
12. REPRESENTATIONS TO SURVIVE DELIVERY. The representations, warranties, and
agreements of Company and of the Subscriber contained in this Agreement will
remain operative and in full force and effect and will survive the payment of
the purchase price pursuant to Section 1 hereof and the delivery of any
documents representing the Shares or the Warrants.
13. ACCREDITED STATUS. The Subscriber represents and warrants that the
Subscriber is an individual with a net worth, or a joint net worth together with
his or her spouse, in excess of $1,000,000.
14. ARBITRATION. It is agreed that all controversies that may arise between the
Subscriber, or any person having an interest in the Shares, the Warrants or the
Common Stock underlying such Warrants, or any part thereof, and the Company, or
any of its officers, directors, employees, attorneys, experts or affiliates,
concerning the Subscriber's purchase of the Shares, the Warrants or the Common
Stock underlying the Warrants, and any representation or omission in connection
with any aspect of the transactions contemplated hereby, the construction,
performance or breach of this or any other agreement pertaining to the
securities of the Company, or any related matter, shall be determined by
arbitration held in accordance with the Commercial Arbitration Rules of the
American Arbitration Association. Any arbitration under this Agreement shall be
held in Minneapolis, Minnesota. The award of the arbitrators, or the majority of
them shall be final, and judgment upon the award rendered may be entered in any
court having jurisdiction.
15. DILUTION. The Company agrees to limit dilution for twelve (12) months from
the date of this Agreement. In the event the Company issues or contracts to
issue shares in one or a series of private placements exceeding (i) one (1)
million shares in the aggregate (the first trigger amount) during the time
period from May 17, 1999 through and including six months from the date of
acceptance of this Agreement by the Company, or (ii) two million shares in the
aggregate (the second trigger amount) during the time period from May 17, 1999
through and including one year from the date of acceptance of this Agreement by
the Company, the Company agrees to grant Subscriber the option, exercisable
within sixty (60) days of receipt of notice by Subscriber from the Company of an
event which triggers the option, to re-purchase the "shares" from the subscriber
based upon the following table:
<PAGE> 6
If the first trigger amount occurs:
@$4 (per share) if in the first month
@$4.25 if in the second month
@$4.50 if in the third month
@$4.75 if in the fourth month
@$5.00 if in the fifth month or sixth month
If the second trigger amount occurs:
@$5.00 from months six through twelve
This does not include shares issued in support of strategic alliances or
public stock offerings, e.g., an underwritten or secondary offering. The Company
shall promptly notify subscriber of all private placement transactions from May
17, 1999 through and including one year from the date of acceptance of this
Agreement by the Company.
16. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota, exclusive of its conflict of
laws rules.
IN WITNESS WHEREOF, the undersigned have hereunto affixed their signatures.
/s/ Sherman Dreiseszun
--------------------------------
Sherman Dreiseszun
<PAGE> 7
VIRTUAL TECHNOLOGY CORPORATION EXHIBIT A
COMMON STOCK PURCHASE WARRANT
THE SECURITIES REPRESENTED BY THIS COMMON STOCK PURCHASE WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (THE "ACT"), HAVE
NOT BEEN REGISTERED UNDER ANY STATE SECURITIES LAWS AND ARE SUBJECT TO A
SUBSCRIPTION AND INVESTMENT REPRESENTATION AGREEMENT. THIS COMMON STOCK PURCHASE
WARRANT, AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF, MAY NOT BE SOLD,
OFFERED FOR SALE, OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT AND UNDER ALL APPLICABLE STATE SECURITIES LAWS, OR
RECEIPT BY THE COMPANY AND ITS COUNSEL OF AN OPINION OF COUNSEL ACCEPTABLE TO
THE COMPANY AND ITS COUNSEL THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION
UNDER THE ACT AND UNDER ALL APPLICABLE STATE SECURITIES LAWS.
Virtual Technology Corporation, a Minnesota corporation (the "Company"),
hereby agrees that, for value received, Sherman Dreiseszun is entitled, subject
to the terms set forth below, to purchase from the Company at any time or from
time to time after _________________, 1999, and before 5:00 p.m., Minneapolis,
Minnesota time, on _____________________, 2001, two hundred thousand (200,000)
shares of the Company's Common Stock at an exercise price of $9.00 per share
(the "Warrant Shares").
1. EXERCISE OF WARRANT. The purchase rights granted by this Warrant shall be
exercised (in minimum quantities of 100 Warrant Shares) by the holder
surrendering this Warrant with the form of exercise attached hereto duly
executed by such holder, to the Company at its principal office, accompanied by
payment, in cash or by cashier's check payable to the order of the Company, of
the purchase price payable in respect of the Warrant Shares being purchased. If
less than all of the Warrant Shares purchasable hereunder are purchased, the
Company will, upon such exercise, execute and deliver to the holder hereof a new
Warrant (dated the date hereof) evidencing the number of Warrant Shares not so
purchased. As soon as practicable after the exercise of this Warrant and payment
of the purchase price, the Company will cause to be issued in the name of and
delivered to the holder hereof, or as such holder may direct, a certificate or
certificates representing the Warrant Shares purchased upon such exercise. The
Company may require that such certificate or certificates contain on the face
thereof a legend substantially as follows:
"The transfer of the shares represented by this certificate is restricted
pursuant to the terms of a Common Stock Purchase Warrant dated
__________________, 1999, issued by Virtual Technology Corporation, a copy
of which is available for inspection at the offices of the Company.
Transfer may not be made except in accordance with the terms of the Common
Stock Purchase Warrant. In addition, no sale, offer to sell or transfer of
the shares represented by this certificate shall be made without (i) the
opinion of counsel satisfactory to the Company that such sale, offer, or
transfer may be made without registration or qualification under the
Securities Act of 1933, as amended, and applicable state securities laws or
(ii) such registration or qualification."
2. NEGOTIABILITY AND TRANSFER. In addition to the limitations on sale, offer
for sale, transfer or other disposition of this Warrant and the Warrant Shares
as provided in the opening paragraph of this Warrant, this Warrant is issued
upon the following terms, to which each holder hereof consents and agrees:
<PAGE> 8
(a) Until this Warrant is duly transferred on the books of the Company, the
Company may treat the registered holder of this Warrant as absolute owner hereof
for all purposes without being affected by any notice to the contrary.
(b) Each successive holder of this Warrant, or of any portion of the rights
represented thereby, shall be bound by the terms and conditions set forth
herein.
3. ANTIDILUTION ADJUSTMENTS. If the Company shall at any time hereafter
subdivide or combine its outstanding shares of Common Stock, or declare a
dividend payable in Common Stock, the exercise price in effect immediately prior
to the subdivision, combination, or record date for such dividend payable in
Common Stock shall forthwith be proportionately increased, in the case of
combination, or proportionately decreased, in the case of subdivision or
declaration of a dividend payable in Common Stock, and the number of Warrant
Shares purchasable upon exercise of this Warrant immediately preceding such
event, shall be changed to the number determined by dividing the then current
exercise price by the exercise price as adjusted after such subdivision,
combination, or dividend payable in Common Stock and multiplying the result of
such division against the number of Warrant Shares purchasable upon the exercise
of this Warrant immediately preceding such event, so as to achieve an exercise
price and number of Warrant Shares purchasable after such event proportional to
such exercise price and number of Warrant Shares purchasable immediately
preceding such event. All calculations hereunder shall be made to the nearest
cent or to the nearest one-hundredth of a share, as the case may be. No
fractional Warrant Shares are to be issued upon the exercise of this Warrant,
but the Company shall pay a cash adjustment in respect of any fraction of a
share which would otherwise be issuable in an amount equal to the same fraction
of the market price per share of Common Stock on the day of exercise as
determined in good faith by the Company. In case of any capital reorganization
or any reclassification of the shares of Common Stock of the Company, or in the
case of any consolidation with or merger of the Company into or with another
corporation, or the sale of all or substantially all of its assets to another
corporation, which is effected in such a manner that the holders of Common Stock
shall be entitled to receive stock, securities, or assets with respect to or in
exchange for Common Stock, then, as a part of such reorganization,
reclassification, consolidation, merger, or sale, as the case may be, lawful
provision shall be made so that the holder of the Warrant shall have the right
thereafter to receive, upon the exercise hereof, the kind and amount of shares
of stock or other securities or property which the holder would have been
entitled to receive if, immediately prior to such reorganization,
reclassification, consolidation, merger, or sale, the holder had held the number
of Warrant Shares which were then purchasable upon the exercise of the Warrant.
In any such case, appropriate adjustment (as determined in good faith by the
Board of Directors of the Company) shall be made in the application of the
provisions set forth herein with respect to the rights and interest thereafter
of the holder of the Warrant, to the end that the provisions set forth herein
(including provisions with respect to adjustments of the exercise price) shall
thereafter be applicable, as nearly as reasonably may be, in relation to any
shares of stock or other property thereafter deliverable upon the exercise of
the Warrant. When any adjustment is required to be made in the exercise price,
initial or adjusted, the Company shall forthwith determine the new exercise
price and (a) prepare and retain on file a statement describing in reasonable
detail the method used in arriving at the new exercise price and (b) cause a
copy of such statement to be mailed to the holder of the Warrant as of a date
within ten (10) days after the date when the circumstances giving rise to the
adjustment occurred.
<PAGE> 9
4. NOTICES. The Company shall mail to the registered holder of the Warrant, at
his or her last known post office address appearing on the books of the Company,
not less than fifteen (15) days prior to the date on which (a) a record will be
taken for the purpose of determining the holders of shares of Common Stock
entitled to dividends (other than cash dividends) or subscription rights or (b)
a record will be taken (or in lieu thereof, the transfer books will be closed)
for the purpose of determining the holders of common stock entitled to notice of
and to vote at a meeting of shareholders at which any capital reorganization,
reclassification of common stock, consolidation, merger, dissolution,
liquidation, winding up, or sale of substantially all of the Company's assets
shall be considered and acted upon.
5. RESERVATION OF COMMON STOCK. A number of shares of Common Stock sufficient
to provide for the exercise of the Warrant and the Warrant Shares included
therein upon the basis herein set forth shall at all times be reserved for the
exercise thereof.
6. MISCELLANEOUS. Whenever reference is made herein to the issue or sale of
shares of Common Stock, the term "Common Stock" shall include any stock of any
class of the Company other than preferred stock that has a fixed limit on
dividends or a payment preference in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company. The Company will not, by
amendment of its Articles of Incorporation or through reorganization,
consolidation, merger, dissolution, or sale of assets, or by any other voluntary
act or deed, avoid or seek to avoid the observance or performance of any of the
covenants, stipulations, or conditions to be observed or performed hereunder by
the Company, but will, at all times in good faith, assist, insofar as it is
able, in the carrying out of all provisions hereof and in the taking of all
other action which may be necessary in order to protect the rights of the holder
hereof against dilution. Upon written request of the holder of this Warrant, the
Company will promptly provide such holder with a then current written list of
the names and addresses of all holders of warrants originally issued under the
terms of, and concurrent with, this Warrant. The representations, warranties,
and agreements herein contained shall survive the exercise of this Warrant.
References to the "holder of" include the immediate holder of Warrant Shares
purchased on the exercise of this Warrant, and the word "holder" shall include
the plural thereof. This Common Stock Purchase Warrant shall be interpreted
under the laws of the State of Minnesota, exclusive of its conflict of laws
rules. All Warrant Shares or other securities issued upon the exercise of the
Warrant shall be validly issued, fully paid, and nonassessable, and the Company
will pay all taxes in respect of the issuer thereof. Notwithstanding anything
contained herein to the contrary, the holder of this Warrant shall not be deemed
a shareholder of the Company for any purpose whatsoever until and unless this
Warrant is duly exercised.
IN WITNESS WHEREOF, the undersigned has caused this Warrant to be signed by
its duly authorized officer this day of , 1999.
----- -------------------
VIRTUAL TECHNOLOGY CORPORATION
By
-----------------------------------
Its
---------------------------------
<PAGE> 10
WARRANT EXERCISE FORM
To be signed only upon exercise of Warrant.
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, _______________ of the Warrant Shares of Virtual Technology
Corporation to which such Warrant relates and herewith makes payment of
$____________ therefor in cash or by certified check, and requests that such
Warrant Shares be issued and be delivered to the address for which is set forth
below the signature of the undersigned.
Dated:
--------------------
--------------------------------------
(Taxpayer's I.D. Number)
--------------------------------------
(Signature)
--------------------------------------
(Address)
--------------------------------------
(City, State and Zip Code)
<PAGE> 11
ASSIGNMENT FORM
To be signed only upon authorized transfer of Warrant.
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto _______________________________ the right to purchase Warrant Shares of
Virtual Technology Corporation to which the within Warrant relates and appoints
_____________________________, attorney, to transfer said right on the books of
such corporation with full power of substitution in the premises.
Dated:
--------------------
--------------------------------------
(Taxpayer's I.D. Number)
--------------------------------------
(Signature)
--------------------------------------
(Address)
--------------------------------------
(City, State and Zip Code)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE THREE AND
SIX MONTHS ENDED JULY 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FORM 10-Q.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JAN-31-1999 JAN-31-1999
<PERIOD-START> MAY-01-1999 FEB-01-1999
<PERIOD-END> JUL-31-1999 JUL-31-1999
<CASH> 519,212 519,212
<SECURITIES> 0 0
<RECEIVABLES> 7,776,345 7,776,345
<ALLOWANCES> 104,000 104,000
<INVENTORY> 2,844,279 2,844,279
<CURRENT-ASSETS> 14,275,300 14,275,300
<PP&E> 703,887 703,887
<DEPRECIATION> 205,266 205,266
<TOTAL-ASSETS> 27,279,862 27,279,862
<CURRENT-LIABILITIES> 14,656,464 14,656,464
<BONDS> 0 0
0 0
0 0
<COMMON> 28,851 28,851
<OTHER-SE> 12,271,013 12,271,013
<TOTAL-LIABILITY-AND-EQUITY> 27,279,862 27,279,862
<SALES> 16,514,314 33,897,077
<TOTAL-REVENUES> 16,514,314 33,897,077
<CGS> 15,311,945 31,481,947
<TOTAL-COSTS> 15,311,945 31,481,947
<OTHER-EXPENSES> 389,566 4,603,559
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 108,045 286,383
<INCOME-PRETAX> (4,536,886) (12,985,699)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (4,536,886) (12,985,699)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,536,886) (12,985,699)
<EPS-BASIC> (.16) (.47)
<EPS-DILUTED> (.16) (.47)
</TABLE>
