<PAGE> 1
FORM 10-Q/A
AMENDMENT NUMBER 1 TO FORM 10Q
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
ITEM PAGE
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.............................................. 2
Condensed Consolidated Balance Sheets at July 31, 1999 (unaudited)
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS........................ 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................. 22
<PAGE> 3
Explanatory note: In November 1999, the Company, in consultation with its
independent accountants, determined that the method it was using to measure the
value of certain equity instruments issued to advisors and consultants and
recognize the subsequent related charges to operations, was not in accordance
with Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity
Instruments that are Issued to other than Employees for Acquiring, or in
Conjunction with Selling, Goods and Services." Accordingly, this Quarterly
Report on Form 10-Q/A is being filed as Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission
on September 14, 1999 for the purpose of restating financial information and
related disclosures for the three and six month periods ended July 31, 1999.
Only the financial statements and notes thereto and those other pages with
revised information are being filed. See Note 1 to the Condensed Consolidated
Financial Statements.
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, January 31,
ASSETS 1999 1999
----------- -----------
(Unaudited)
(As restated)
<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 1,220,640 2,761,670
---------- -----------
TOTAL CURRENT ASSETS 12,380,226 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
----------- -----------
TOTAL ASSETS $25,384,788 $25,742,578
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements (Unaudited).
2
<PAGE> 4
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
July 31, January 31,
1999 1999
------------- -----------
(Unaudited)
(As Restated)
<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 30,754,022 -
Stock subscription receivable (925,000) (925,000)
Accumulated deficit (19,453,083) (7,725,670)
----------- -----------
10,404,790 8,922,126
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $25,384,788 $25,742,578
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements (Unaudited).
3
<PAGE> 5
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
July 31, 1999 July 31, 1998
------------- -------------
(As restated)
<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 1,739,289 -
Amortization of intangibles 232,827 -
----------- -----------
TOTAL OPERATING EXPENSES 5,486,820 529,049
----------- -----------
LOSS FROM OPERATIONS (4,284,451) (481,936)
----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (385,735) (19,915)
Other (3,831) 63,828
----------- -----------
TOTAL OTHER INCOME (EXPENSE) (389,566) 43,913
----------- -----------
NET LOSS $(4,674,017) $ (438,023)
=========== ===========
NET LOSS PER COMMON SHARE - BASIC
AND DILUTED $ (.16) $ (.03)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 28,996,285 15,796,036
</TABLE>
See Notes to Condensed Consolidated Financial Statements (Unaudited).
4
<PAGE> 6
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
July 31, 1999 July 31, 1998
------------- -------------
(As restated)
<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 6,553,661 -
Amortization of intangibles 465,653 -
------------ -----------
TOTAL OPERATING EXPENSES 13,243,984 859,968
------------ -----------
LOSS FROM OPERATIONS (10,828,854) (932,917)
------------ -----------
OTHER INCOME (EXPENSE)
Interest expense (841,762) (39,748)
Other (56,797) 63,828
------------ -----------
TOTAL OTHER INCOME (EXPENSE) (898,559) 24,080
------------ ------------
NET LOSS $(11,727,413) $ (908,837)
============ ============
NET LOSS PER COMMON SHARE - BASIC
AND DILUTED $ (0.42) $ (0.07)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 27,842,838 12,915,468
</TABLE>
See Notes to Condensed Consolidated Financial Statements (Unaudited).
5
<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
------------- -------------
(As restated)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ..................................... $(11,727,413) $ (908,837)
Adjustments to reconcile net loss to net cash
used by operating activities
Stock issued for services .................. 6,694,977 246,937
Amortization ............................... 1,021,030 --
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).
6
<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
------------- -------------
(As Restated)
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from notes payable ...................... 29,582,356 -
Repayments on notes payable ...................... (31,764,602) 121,056
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).
7
<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.
During fiscal year 2000, the Company entered into certain consulting and service
agreements whereby, in exchange for common stock and/or warrants to purchase
common stock, the Company receives investment banking, strategic planning,
legal and other services (see Note 3). These services are generally to be
provided over a period of one year or less. In November 1999, the Company, in
consultation with its independent accountants, determined that the method it was
using to measure the value of these equity instruments and to recognize the
subsequent, related charges to operations, was not in accordance with EITF Issue
No. 96-18, "Accounting for Equity Instruments that are Issued to other than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services."
Accordingly, the Company has restated its consolidated financial statements for
the first and second quarters of fiscal year 2000. The effect of these
adjustments was to reduce current assets and stockholders equity as of July 31,
1999 by $1,895,074 and to reduce related charges to operations for the six
months ended July 31, 1999 by $1,258,286.
The Company has also reclassified certain previously reported expenses, as
follows: reclassified $3,705,000 from "warrants in lieu of stock registration"
to consulting services for the six months ended July 31, 1999 and also
reclassified $277,690 and $555,379 from "amortization of loan fees" to interest
expense for the three and six months ended July 31, 1999, respectively.
The restatement did not affect previously reported net cash flows for the
periods presented. The effect of this restatement on previously reported
condensed consolidated financial statements as of and for the six-month period
ended July 31, 1999 is as follows:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
July 31, 1999 July 31, 1999
(Unaudited) (Unaudited)
As Previously As As Previously As
Reported Restated Reported Restated
<S> <C> <C> <C> <C>
Consulting services .................... $ 4,106,947 $ 6,553,661 1,602,158 1,739,289
Total operating expenses ............... 10,797,270 13,243,984 5,349,689 5,486,820
Loss from operations ................... (8,382,140) (10,828,854) (4,147,320) (4,284,451)
Warrants in lieu of stock registration . (3,705,000) -0- -0- -0-
Amortization of loan fees .............. ( 555,379) -0- (277,690) -0-
Interest expense ....................... ( 286,383) ( 841,762) (108,045) (385,735)
Total other income (expense) ........... (4,603,559) ( 898,559) (389,566) (389,566)
Net loss ............................... (12,985,699) (11,727,413) (4,536,886) (4,674,017)
Net loss per common share - basic
and diluted .................. ($ .47) ($ .42) (.16) (.16)
</TABLE>
<TABLE>
<CAPTION>
July 31, 1999
(Unaudited)
As Previously As
Reported Restated
<S> <C> <C>
Other current assets $ 3,115,714 $ 1,220,640
Total current assets 14,275,300 12,380,226
Total assets 27,279,862 25,384,788
Additional paid in capital 33,907,382 30,754,022
Accumulated deficit (20,711,369) (19,453,083)
Total stockholders' equity 12,299,864 10,404,790
Total liabilities and stockholders'
equity $ 27,279,862 $ 25,384,788
</TABLE>
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.
8
<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
----------- -----------
(As restated)
<S> <C> <C>
Prepaid consulting and service agreements $ 870,314 $2,546,630
Credit card company holdbacks 174,000 174,000
Other 176,326 41,040
---------- ----------
$1,220,640 $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 accounts for such agreements
pursuant to the requirements of Statement of Financial Standards No. 123 and
Emerging Issues Task Force Issue No. 96-18.
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 and are charged to interest
expense. 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>
9
<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, $30,754,022 was reclassified from the common stock account to
additional paid in capital.
10
<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
----------- ------------ ------------ ------------
(As restated) (As restated) (As restated) (As restated)
<S> <C> <C> <C> <C>
Total assets $6,627,768 $18,757,020 $ 6,627,768 $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
----------- ---------
(As restated)
<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 (740,000) 148,000
Stock issued (canceled) for consulting
services 579,625 5,000
Stock issued in lieu of compensation - 7,875
</TABLE>
11
<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
------------ -----------
(As restated)
<S> <C> <C>
Cash paid for interest $ 380,450 $ 346
Non-cash investing and financing activities:
Warrants issued for
consulting and service agreements 6,322,000 148,000
Stock issued for consulting services 1,558,527 21,000
Stock issued in lieu of compensation - 185,375
</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.
12
<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.
13
<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 $19.5 million, as restated. 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
14
<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
-------- ------- -------- -------
(As restated) (As restated)
<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 .............. 33.2 55.6 39.1 55.8
-------- ------- -------- -------
Loss from operations ............ (25.9) (50.6) (32.0) (60.5)
Other income (expense), net...... (2.4) 4.6 ( 2.6) 1.6
-------- ------- -------- -------
Net loss ........................ (28.3) (46.0) (34.6) (58.9)
======== ======= ======== =======
</TABLE>
15
<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.
16
<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 $1.7 million, as restated, 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 of 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 $9 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, as restated, for the three
months ended July 31, 1999 consists primarily of $385,735 of interest expense.
This interest expense includes $278,000 of loan fee amortization relating to a
collateralized 3 year $10 million line of credit with Coast Business Credit
("Coast"). It also includes $108,000 of interest expense relating to that
agreement.
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.
17
<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 $6.6
million, as restated, 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 $9 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, as restated, for the six months
ended July 31, 1999 consists primarily of $841,762 of interest expense. This
interest expense includes $555,000 of loan fee amortization relating to a
collateralized 3 year $10 million line of credit with Coast Business Credit
("Coast"). It also includes $195,000 of interest expense relating to that
agreement.
The balance of the interest is primarily related to $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 $29.6 million under the
Coast Agreement and repaid a total of $31.8 million. 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
18
<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
19
<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.
20
<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.
21
<PAGE> 23
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(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"):
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) Sales in exchange for services rendered to accredited investors only
pursuant to Rule 506 of Regulation D and/or Section 4(2) of the Act:
Between May 1 and July 31, 1999, the Company issued 900,000 shares of its
Common Stock to five individuals and/or entities.
(3) 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 937,500 options to purchase shares of the Company's
Common Stock, exercisable at $4.75 per share.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
27 Financial Data Schedule
22
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused amendment no. 1 to this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Virtual Technology Corporation
By: /s/ Kenneth Israel
-----------------------------------
Its: Chairman
Dated: December 20, 1999
23
<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/A FOR THE THREE
AND SIX MONTHS ENDED JULY 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q/A.
</LEGEND>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JAN-31-2000 JAN-31-2000
<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> 12,380,266 12,380,266
<PP&E> 703,887 703,887
<DEPRECIATION> (205,266) (205,266)
<TOTAL-ASSETS> 25,384,788 25,384,788
<CURRENT-LIABILITIES> 14,656,464 14,656,464
<BONDS> 0 0
0 0
0 0
<COMMON> 28,851 28,851
<OTHER-SE> 10,375,939 10,375,939
<TOTAL-LIABILITY-AND-EQUITY> 25,384,788 25,384,788
<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> 389,566 898,559
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 385,735 841,762
<INCOME-PRETAX> (4,674,017) (11,727,413)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (4,674,017) (11,727,413)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,674,017) (11,727,413)
<EPS-BASIC> (.16) (.42)
<EPS-DILUTED> (.16) (.42)
</TABLE>
