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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE FISCAL YEAR ENDED JANUARY 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934. (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
Commission file number: 00025397
VIRTUAL TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MINNESOTA
(State or other jurisdiction 41-1639011
of incorporation) (IRS Employer Identification Number)
</TABLE>
6690 Shady Oak Road
Eden Prairie, Minnesota 55344
(Address of Principal Executive Offices)
(952) 259-4700
(Registrant's Telephone Number, Including Area Code)
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001
par value
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 shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
At May 10, 2000, the last practicable date, the aggregate market value of the
voting and non-voting common equity held by non-affiliates of the registrant
was: $12,643,583.
At May 10, 2000, the number of shares outstanding of each of the registrant's
classes of common stock was: 36,031,453.
Documents incorporated by reference:
(1) Not Applicable
(2) Not Applicable
(3) Not Applicable
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for particular forward-looking statements. This Report on Form 10-K
contains forward-looking statements, which reflect our views regarding future
events and our financial performance. The words "aim," "believe," "expect,"
"anticipate," "intend," "estimate" and other expressions which indicate future
events and trends identify forward-looking statements.
Our forward-looking statements are subject to risks and uncertainties that
could cause our actual results to differ materially from our historical results
or those we anticipate. These factors include our ability to:
- obtain substantial additional financing quickly on acceptable terms;
- evolve our business to our new model and profitably operate it;
- successfully and profitably integrate acquired businesses into our
operations;
- compete in the resale of computer products on and off of the Internet;
- attract and retain quality personnel; and
- maintain our vendor relationships.
We further discuss these and other risks of our business under "Risk
Factors" below beginning on page 9.
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PART I
ITEM 1. BUSINESS.
RECENT DEVELOPMENTS
During the past fiscal year, we focused our efforts on building our
netdirect.com business-to-consumer technology product sale website. We expended
substantial dollars to develop and market the website in late 1999, ultimately
with little tangible results. Although our net sales grew significantly during
the past fiscal year (from $4.9 million for the fiscal year ended January 31,
1999 to $81.3 million for the fiscal year ended January 31, 2000), this growth
was due primarily to our acquisitions of the operating assets comprising our GTI
and dtpdirect.com organizations. Our net loss increased from $4.4 million for
the fiscal year ended January 31, 1999 to $28.2 million for the fiscal year
ended January 31, 2000.
In light of our large losses, we have determined to focus our efforts on
furthering our private label and co-branded technology e-commerce model and on
our GTI and dtpdirect.com operations in order to reduce our dependence on our
netdirect.com operations. However, our ability to pursue this plan is contingent
on our ability to raise substantial additional financing in a very short period
of time. As of May 5, 2000, we had only $38,000 of cash and only $436,000 of
borrowing capacity under our line of credit. We are in default of the terms of
this line of credit and our lender may foreclose on our assets. We have a large,
negative working capital position that was approximately $8.6 million at May 5,
2000. In our GTI and dtpdirect.com businesses, we are not timely paying vendors
and several important vendors have placed us on credit hold, making shipment of
products to our customers difficult and adversely affecting our net sales.
We are attempting to reduce our cash outlay, which averaged approximately
$812,000 per month during our fiscal year ended January 31, 2000. We have
stopped our advertising and marketing expenditures for our netdirect.com
website. We have deferred the payment of accounts payable and have reduced
officer salaries and bonuses pending an improved cash position. We also intend
to downsize our workforce to reduce our payroll. We estimate that we have
reduced our monthly negative cash flow to approximately $300,000 (assuming that
we make no further payments to Cnet or Lycos). We believe that we may be able to
reduce this further (assuming we can maintain our current revenue and gross
profit levels).
We are seeking additional equity or debt financing, but cannot assure that
we will obtain financing on acceptable terms, or at all. We are also exploring
the potential to sell all or a part of our business. Although we are in
discussions on several potential transactions, we have reached no agreement on
any transaction. If we cannot reduce our cash expenditures and raise additional
capital, we may be unable to continue our operations.
Contingent on our ability to obtain financing, our plan of operations
follows.
OUR PLAN OF OPERATIONS
Contingent on obtaining financing, we plan to evolve to become a
business-to-business provider of online, private label technology-oriented
market exchanges under our brand name Community Techmart(TM). Through our
Community Techmart program, we will enable our clients to create trade
communities, where their users can freely buy and sell products and services. We
intend to:
- integrate sophisticated e-procurement software applications into our
clients' own web pages that we host using our proprietary architecture.
This will enable our clients to outsource their e-procurement web page
production and maintenance, and provide robust purchasing content and
capabilities to their users.
- use our GTI and dtpdirect.com organizations to fulfill product orders
placed by our clients and their users through the Community Techmart
websites we host for our clients. By leveraging our clients'
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own website marketing, we believe we can obtain new technology product
customers without our own expensive marketing programs.
- expand the products and services we offer our clients and their users. We
believe this will enable us to increase our gross margins through
reducing our dependence on lower margin computer technology products.
We recently developed and installed our Community Techmart solutions for
two enterprises, the University of Minnesota and Wizmo, Inc. However, we did not
charge these clients for this work in order to create demonstration sites for
our future marketing initiatives. We plan to target the small and medium
business, educational, government and other niche business-oriented markets.
We are a Minnesota corporation that originally was incorporated in March
1966 as MarSan Inc. In November 1999, we began doing business under the
tradename "Netdirect Corporation International." We intend to seek shareholder
approval at our next annual meeting to change our corporate name to this
business tradename. Since March 2000, our principal executive offices are
located at 6690 Shady Oak Road, Eden Prairie, Minnesota 55344. Our telephone
number is (952) 259-4700. Material found on our websites is not part of this
Report on Form 10-K. Community Techmart(TM), GTI(TM), dtpdirect.com(TM) and
netdirect.com(TM) are our trademarks used throughout this Report.
INDUSTRY BACKGROUND
The Growth of Business-to-Business E-commerce
The Internet is fundamentally changing the way businesses interact with
other businesses. According to International Data Corporation ("IDC"), by 2003
Internet users are expected to reach 510 million users, up from 159 million
users at the end of 1998. To capitalize on this potential opportunity, companies
of all sizes have adopted Internet strategies to drive revenue, increase
efficiencies and reduce costs. Forrester Research estimates that the U.S. based
business-to-business e-commerce market, which encompasses the conduct of
electronic transactions over Internet protocols between businesses and their
partners and suppliers, is expected to account for more than 90% of the dollar
value of e-commerce in the United States by 2003, growing to $1.3 trillion from
$109 billion in 1999.
The growth in business-to-business e-commerce is being fueled in large part
by the recurring nature of business needs and transactions, which offers
businesses the opportunity to create loyal and valuable long-term relationships
with other businesses. Business-to-business e-commerce solutions provide buyers
and suppliers with opportunities to increase revenue by reaching a broader
customer base and realize operating efficiencies by reducing the costs of
accessing information and streamlining complex purchasing and distribution
processes. These benefits have spurred the creation of electronic marketplaces,
or "e-marketplaces," that aggregate buyers and sellers in a centralized trading
environment. E-marketplaces are most well suited for large, highly fragmented
markets where buyers and sellers have limited access to information and high
procurement costs.
The Growth of Small Business E-Commerce
The small-business market is large and rapidly growing. IDC estimates that
by 2002, the North American small business market will grow to 38.5 million
businesses from 29.6 million today. Small businesses are increasingly relying on
the Internet to access information, communicate and transact commerce. According
to Access Media International, by the end of 2002, 75% of small businesses will
use the Internet, as compared to 52% at the end of 1999. In addition, IDC
estimates that small businesses will account for about $106.8 billion in
e-commerce in 2002, increasing from $6.2 billion at the end of 1998.
The Business to Business E-Commerce Educational Market
Many schools and local districts rely on time consuming, vendor driven,
postage service based, manual or semi-manual methods for processing purchase
orders. Current expenditures (fixed charges, energy costs, schoolbooks and
materials, student transportation and salaries of school personnel) of public
and private
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institutions of higher education are expected to reach $214 billion at the end
of the year 2000. By 2005, this is expected to grow to $244 billion according to
the National Center for Education Statistics. In public elementary and secondary
schools, current expenditures are expected to reach $294 billion by the end of
the year 2000 and grow to $314 billion by the end of the year 2003.
The Need to E-Automate Organizational Purchasing Processes
Today, most organizations buy operating resources through paper-based or
semi-automated processes. These processes are costly, time consuming and complex
and often involve re-entering information, long approval cycles and significant
involvement of financial and administrative personnel. We believe that the cost
per procurement transaction often exceeds the cost of the items being purchased.
In addition, these time consuming and expensive processes often result in
fulfillment delays to end-users, leading to productivity losses. In addition,
personnel do not often follow internal guidelines as to which suppliers to use
for operating resource purchases. Traditional procurement processes also result
in missed revenue opportunities and additional costs to suppliers. When buyers
are unable to channel purchases to preferred suppliers, these suppliers lose
revenue. Many suppliers dedicate significant resources to the manual entry of
information from faxed or phoned-in purchase orders and the manual processing of
paper checks, invoices and shipping notices. Suppliers also spend significant
amounts on customer acquisition and sales costs, including the production and
distribution of paper catalogs. Without fully automated and integrated
electronic commerce technologies, both buyers and suppliers incur substantial
extraneous costs in conducting commerce.
OUR SOLUTION
To address business demand and need for Internet-based technology product
purchasing capabilities, we intend to offer our clients and their users a menu
of products and services for e-purchase through our Community Techmart program.
We intend to seamlessly integrate our purchasing engine into our clients' sites
to provide a comprehensive solution for the purchase order component of their
Internet strategy. We intend to host these sites on behalf of our clients,
relieving them of the cost and expense of monitoring actively updated web
content. We will develop our web applications for each client to the "look and
feel" of a client's web site.
As part of our comprehensive solution, we also intend to offer web site
hosting, data center and product information content services. We already
maintain sophisticated communications, processing and storage capacity and
infrastructure for web pages at our facilities as a result of development and
operation of our own netdirect.com website and intend to leverage these
resources for our Community Techmart clients. As a result, we believe that we
can reduce our clients' day-to-day management requirements while at the same
time providing them and their users with actively updated product content and
order capabilities that they require.
OUR GROWTH STRATEGY
Our objective is to become a leading business-to-business provider of
online, private label technology-oriented market exchanges. Contingent on our
financing arrangements, key elements of our Community Techmart strategy include:
- Penetrate Vertical Markets. We intend to focus efforts to sell our
proprietary Community Techmart(TM) trade exchange solution to third
parties that have attractive demographic customer bases. We will work
with these third parties to identify key items of recurring expenditure
and additional items of a high-margin, recurring revenue nature and
integrate these items into our service offering. We plan to target the
small and medium business, educational, government and other niche
business-oriented markets.
- Develop Vendor Relationships. We intend to develop strategic alliances
with vendors and other third parties to address the key primary
purchasing requirements of the business-to-business
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marketplaces we target for our solutions. We believe this will enable us to
offer a more compelling rationale to our target clients for outsourcing of their
online purchasing functionality to us.
- Leverage Our Fulfillment Capabilities. We intend to use our GTI and
dtpdirect.com organizations to fulfill product orders for our clients and
their users whenever possible. By integrating this capability with our
Community Techmart solution, we believe that we can provide superior
customer service to our clients and their users. We believe that this
superior customer service will encourage our clients and their users to
repeatedly use our Community Techmart solution. We also gain the
opportunity to generate higher gross margins through controlling our
product sales.
- Use Technology to Leverage Our Growth. We intend to develop and market
innovative products and services to attract and retain clients. We will
design these new products and services to enhance the user experience for
our clients and their users.
COMMUNITY TECHMART(TM)
We have designed and developed a proprietary, web-based, integrated front-
and back-office system to integrate order fulfillment, merchant authorization,
warehousing and financial systems for our clients. We designed our system to
streamline the entire procurement process and reduce costs and purchase order
times significantly.
Our Community Techmart order and fulfillment solution platform has a number
of important capabilities, including:
- identifying a least expensive cost source for products among our vendors;
- real-time credit card authentication and approval;
- real-time inventory tracking to enhance the procurement experience;
- order tracking to increase user control;
- a dynamic interface with general ledger;
- customer intelligence features to gather data on preferences and purchase
patterns; and
- integration into electronic purchase order systems.
We have designed our Community Techmart platform to distribute workload across
multiple levels in order to increase system performance and scalability.
In January 2000, we entered into an electronic commerce agreement with the
University of Minnesota pursuant to which we developed and, in April 2000,
implemented a Community Techmart technology product procurement system. Under
the agreement, which expires in December 2001 unless extended by the parties, we
are a nonexclusive provider to the University and its departments, employees and
students of computer hardware and software and services we elect to offer. Our
system enables University departments to place electronic purchase orders
directly with us for fulfillment. We believe that this electronic purchase order
capability will offer us a competitive advantage over other University
technology suppliers.
In September 1999, we entered into a two year agreement with eSystems21
(now known as Wizmo, Inc.) to implement a Community Techmart application for the
benefit of Wizmo's customers and members. We implemented the application in
April 2000.
Because the University and Wizmo applications are our first demonstrations
of the Community Techmart application, we did not charge either client for
development of their website and also do not charge for ongoing website
maintenance. We have also agreed to pay the University and Wizmo marketing and
promotional fees based on products and services we sell to them on our system.
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GTI
Our GTI division is a national wholesale distributor of computer peripheral
equipment. GTI also integrates and assembles select computer systems at our
Phoenix, Arizona facility. GTI purchases products directly from more than 45
manufacturers, including ATI, KDS, Ezio, Hitachi, InFocus, Princeton, Matrox,
Pioneer, Okidata and Viewsonic. GTI maintains a stocking inventory of
approximately 1,600 products. We acquired the GTI division upon our purchase of
the operating assets of Herold Marketing Associates, Inc. in January 1999.
Assuming we raise adequate financing, we plan to continue use of GTI's
capabilities to perform order execution and fulfillment functions for our
Community Techmart division.
GTI currently has over 1,000 active customers, most of whom are corporate
and governmental agency resellers, value-added resellers and system integrators.
GTI's product offerings include monitors, printers, scanners, portables, CD-ROM
drives, power protection devices, video accelerators, graphic controllers, UPS
back-up, projectors, digital cameras and software.
Complementing its distribution business, GTI also offers its customers
value-added services, such as consultative and solution oriented selling,
compatibility testing, integration and configuration services, all of which are
provided on a pre-sales basis. We believe that GTI differentiates itself from
many competitors by promoting its value-added services through competitive
pricing and face-to-face selling.
GTI markets its products and services primarily through a sales force that
includes field account executives and telesales representatives. GTI also
advertises in major industry publications and uses direct marketing and various
other promotions to increase business opportunities.
GTI purchases products directly from more than 40 manufacturers, generally
on a nonexclusive basis. GTI's vendor agreements typically allow termination by
either party upon 60 days notice. Virtually none of GTI's supplier agreements
require it to sell a specified quantity of products or restrict GTI from selling
similar products manufactured by competitors. Consequently, GTI has the
flexibility to terminate or curtail sales of one product line in favor of
another product line as a result of technological change, pricing
considerations, product availability, customer demand and vendor distribution
policies.
As a result of our severe cash flow constraints, we have not timely paid
several of GTI's vendors and have been placed on credit hold with them or must
purchase products on a cash basis only. This has adversely affected GTI's sales
and backlog, as we are unable to timely fulfill orders for customers. If we do
not raise substantial additional financing in a very short period, we will
likely lose significant GTI vendors, customers and employees. No single customer
accounted for 10% or more of GTI's net sales during the fiscal years ended
January 31, 2000, 1999 or 1998, except CDW and Computer Resource Group, value
added resellers which accounted for 13% and 12% of GTI's net sales for the
fiscal year ended January 31, 2000 and Entex, a large value-added reseller,
which accounted for 24% and 33%, respectively, of GTI's net sales for the fiscal
year end January 31, 1999 and 1998.
DTPDIRECT.COM
Our dtpdirect.com division is a national business-to-business direct
marketer of computer hardware and software products primarily for users of Apple
Macintosh(R) personal computers. We acquired the division upon our purchase of
the operating assets of Tech Squared Inc. in December 1999. Assuming we raise
adequate financing, we plan to continue use of dtpdirect.com's capabilities to
perform order execution and fulfillment functions for our Community Techmart
division.
Dtpdirect.com targets desktop publishing, graphic arts and pre-press
industries through the dtpdirect.com catalog. Dtpdirect.com offers popular brand
name hardware, software and peripherals from leading vendors such as Adobe,
Apple, Epson, GCC, Hewlett-Packard, IBM, Iomega, Kodak, Minolta, Mitsubishi,
NEC, Quantum, Quark, Seagate, Sony, SyQuest and Umax Technologies.
Dtpdirect.com markets products through targeted mailings of the
dtpdirect.com catalog and through its recently launched e-commerce site
dtpdirect.com. We produce our catalog in-house six times per year. We
continuously attract new customers by selectively mailing catalogs to
prospective customers throughout
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the year. We obtain names of prospective customers from various sources,
including vendors, trade publications and list brokers. We continuously update
our mailing lists to maximize the response rate from each catalog delivered. Our
catalogs include detailed descriptions and full-color photographs of the
products sold by us. In 1999, dtpdirect.com mailed approximately 2.5 million
catalogs (although we owned the business only since mid-December 1999). To
attract and retain small and mid-sized business customers, dtpdirect.com also
uses a dedicated outbound teleserving sales force.
Most of dtpdirect.com's net sales fiscal 2000 were of Apple Macintosh and
related products. We believe that the expertise our sales force has developed in
Apple products contributes to our product sales. We also have an in-house
technical staff that integrates customer-selected hardware components on most
Apple computers that we sell and configures most of them with third-party
software. Consequently, a decline in sales of Apple Macintosh computers or a
decrease in the supply of or demand for software and peripherals for these
computers could have a material adverse impact on our dtpdirect.com business.
In fiscal 2000, dtpdirect.com had over 100,000 customers, an increase from
95,000 customers over its prior fiscal year. No single customer accounted for
10% or more of dtpdirect.com's business in fiscal 2000. As a result of our
current cash flow constraints, we have not timely paid some of dtpdirect.com's
vendors and some have placed us on credit hold. This has affected
dtpdirect.com's ability to fulfill customer orders. If we cannot remedy this
situation immediately, dtpdirect.com's sales will suffer further.
NETDIRECT.COM
Through our netdirect.com website, we continue to offer more than 60,000
stock keeping units of selective brand name computer equipment. We also link our
website to our downloadstore.com website, which enables our customers to
purchase and immediately download software products to their computers. As
indicated above, we have curtailed our advertising and marketing expenditures
for our netdirect.com website because we have not achieved the sales objectives
from it that we had anticipated. However, we believe the website offers us the
opportunity to demonstrate our creative and technical capabilities to target
clients of our Community Techmart division.
Our online product selection includes computer hardware such as PC desktops
and laptops, personal digital assistants ("PDAs"), printers, modems, memory and
accessories, packaged software for both office and home use, utilities and
games. We offer products from a wide range of manufacturers, including IBM,
Toshiba, Hewlett-Packard, 3Com, Connectix, Intel, Symantec, Epson, Electronic
Arts, Acer, Compaq and Broderbund.
We host our netdirect.com website at our headquarters in Eden Prairie,
Minnesota and use a secure server to process on-line orders. Once we receive and
authenticate the credit card information for an on-line product order, we
fulfill on an outsourced basis through relationships with Ingram Micro, Inc. and
Tech Data Corporation. For products that our GTI division stocks in inventory,
we fulfill product orders ourselves. We strive to have products shipped within
24 hours of the order receipt. We have integrated our transaction processing
with our accounting and financial systems to facilitate operational and
financial management.
Customers may track Federal Express or United Parcel Service shipments
directly through our web site or by a link to the shippers' own websites.
Our on-line customer base has grown from 4,500 in the fiscal year ended
January 31, 1999 to 40,000 in the fiscal year ended January 31, 2000. No single
customer accounted for 10% or more of our netdirect.com net sales during the
fiscal years ended January 31, 2000, 1999 or 1998. We expect this customer base
to drop substantially without sustained advertising and marketing expenditures.
SUPPLIERS
We purchase hardware and software products for resale through our divisions
from over 150 different suppliers. However, Ingram Micro, Inc. and Tech Data
Corporation represented 20% and 8%, respectively, of our product purchases
during the fiscal year ended January 31, 2000. We also use Ingram and Tech
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Data, together with our GTI division, to fulfill and ship orders placed by our
customers through our netdirect.com website. Our dtpdirect.com division acquires
its Apple Macintosh(R) products principally through Ingram Micro and Tech Data,
a large distributor. In addition, our GTI division is highly dependent upon
Hitachi and Viewsonic for supplying computer monitors. In the fiscal year ended
January 31, 2000, 57% of GTI's net sales were of computer monitors and of those
sales, 20% and 14%, respectively, were of Hitachi and Viewsonic products. Our
loss of any of these key vendors could materially and adversely affect our
business. Because of our working capital deficiency, several of our key vendors,
including some of those named above, have reduced our credit lines with them.
Other of our vendors currently require cash payment prior to shipping products
to us for our customers. This has severely affected our ability to serve our
customers. We further discuss our working capital deficiency in this Report
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operation" and recommend that you read that section carefully.
COMPETITION
We compete with both Internet-based as well as traditional providers of
business services and products. Competitors in the market for our Community
Techmart web based e-procurement solution include Ariba, Captura Software,
Clarus, Commerce One, Concur Technologies, Extensity, GE Information Services,
Intelysis, Netscape Communications, WebMethods, and TRADE'ex Electronic Commerce
Systems. We may also encounter competition from several major enterprise
software developers, such as Oracle, PeopleSoft and SAP. Other competitors
include Internet sites that target niche business markets including Verticalnet,
Onvia.com, AllBusiness.com, BizBuyer.com, Digitalwork.com and Works.com.
Additionally, the microcomputer products industry is highly competitive.
Our GTI and dtpdirect.com divisions compete with a large number and variety of
resellers of microcomputer hardware and software products as well as
manufacturers that sell directly to customers. Some of our customers and
suppliers compete against us, including Ingram Micro, Inc. and Tech Data
Corporation. In the hardware category, we compete with traditional microcomputer
retailers, computer superstores, consumer electronic and office supply
superstores, mass merchandisers, national direct marketers, other Internet
retailers, corporate resellers and value-added resellers. In the software and
accessories categories, we generally compete with these same resellers as well
as specialty retailers and resellers. In addition, as a result of improving
technology, some software manufacturers allow customers to download software
programs and packages directly onto their computer systems through the use of
the Internet, bypassing our sales channels.
Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than we do. If we cannot
successfully compete, our growth and operating margins could be negatively
impacted. In particular, on the Internet, technology increasingly has made it
easier for customers to identify the least expensive supplier of a product and
to purchase it from that business. As a result, our operating margins have
declined. We discuss this further in the "Management's Discussion and Analysis
of Financial Condition and Results of Operation" section of this Report and
recommend that you read that section.
TRADEMARKS
Although we own the website name "netdirect.com," we do not have federal or
state trademark registration of our "netdirect" corporate name or logo. In fact,
there are many companies throughout the United States that use the word
"netdirect" in their name. We are not currently seeking federal trademark
registration and we cannot assure that we will ever receive it. We own the
website name "dtpdirect.com" and hold a federal trademark registration on the
"dtpdirect.com" name. In all cases, we cannot assure that others will not
infringe our tradenames and other intellectual property rights or that third
parties will not claim that we infringe their rights.
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EMPLOYEES
As of May 5, 2000, we employed 124 full-time employees throughout our
organization. Due to our working capital deficiency, we expect to reduce our
workforce.
RISK FACTORS
In addition to the other information provided in this Report, we recommend
that you carefully consider the following risk factors in evaluating our
business.
WE MUST RAISE SUBSTANTIAL ADDITIONAL CAPITAL OR WE MAY NEED TO STOP DOING
BUSINESS.
For the fiscal year ended January 31, 2000, we used $6.0 million of cash in
our operations. At May 5, 2000, we had only $38,000 cash and had an estimated
negative working capital of $8.6 million. At that date, we had only $436,000 of
additional borrowing capacity under our line of credit with Coast Business
Credit. Our auditors have expressed their opinion that there is substantial
doubt as to our ability to continue business as a going concern. Several of our
vendors have placed us on credit hold and this is having a material adverse
effect on our ability to fulfill customer orders, particularly for our GTI and
dtpdirect.com divisions whose business customers are more dependent on prompt
delivery. Based upon our current plans, we believe that we must raise at least
$9.0 million of additional equity or debt financing in fiscal 2001 to support
our anticipated operations and growth plans for the fiscal year ending January
31, 2001 (assuming we make no further payments to Cnet or Lycos). We cannot
assure that we can raise these funds on terms acceptable to us, or at all.
WE HAVE NEVER MADE A PROFIT AND CANNOT PREDICT IF AND WHEN WE WILL DO SO.
We have never been profitable. For the fiscal year ended January 31, 2000,
we incurred a net loss of $28.2 million. As of January 31, 2000, we had an
accumulated deficit of $35.9 million. We expect to incur substantial continued
losses during the fiscal year ending January 31, 2001. We cannot assure that we
will ever achieve profitability.
WE ARE IN DEFAULT OF OUR DEBT COVENANTS AND OUR LENDER COULD FORECLOSE ON OUR
ASSETS.
Under our agreement with Coast Business Credit, we are required to comply
with particular financial covenants relating to our net tangible worth and other
matters. We currently do not meet these requirements. As of May 5, 2000, we owed
Coast Business Credit $6.0 million which is secured by all assets. We currently
do not have the funds available to repay this full amount. We cannot assure that
Coast Business Credit will not demand immediate repayment of this amount and
foreclose on our assets.
LAWSUITS AND OTHER CLAIMS AGAINST US MAY FORCE US TO SEEK FEDERAL BANKRUPTCY
PROTECTION.
In December 1999, Cnet, Inc. filed a lawsuit against us alleging that we
owe them over $1.5 million for Internet advertising services. In addition, in
April 2000, Lycos, Inc. demanded that we pay them $2.3 million for Internet
advertising services and also threatened to sue us for up to an additional $11.1
million under an agreement we entered into with Lycos in October 1999. Although
we are defending against the Cnet lawsuit and intend to defend against any
lawsuit that Lycos might commence, our current cash position may make it
difficult for us to defend these lawsuits and make it impossible to pay the
amounts demanded, even if we lost the lawsuits. If these or any other creditors
continue to press claims against us, we might be forced to seek protection under
federal bankruptcy laws. In this case, our business would suffer materially and
our stock price would likely fall dramatically.
OUR E-COMMERCE BUSINESS MODEL DID NOT WORK AND OUR NEW BUSINESS PLAN MAY NOT
SUCCEED.
During the fiscal year ended January 31, 2000, we expended approximately
$4.4 million in on-line sales and marketing activities primarily to attract
individual consumers to view and shop at our
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<PAGE> 11
netdirect.com website. We did not achieve our anticipated sales or profit
objectives using this model. We are now redefining our business to focus on our
new Community Techmart division. We cannot assure that we can successfully and
profitably implement this new strategy. While we are considering an expansion as
part of Community Techmart strategy to offer products with higher gross margin
potential, we have not yet identified these products and cannot assure that we
will do so or that we can profitably market them.
WE RELY ON KEY SUPPLIERS AND WOULD SUFFER IF THEY STOPPED DOING BUSINESS WITH
US.
We rely heavily on Ingram Micro, Inc. and Tech Data Corporation to fulfill
and ship orders we receive on our netdirect.com website and to supply products
sold by our Community Techmart and dtpdirect.com. For the fiscal year ended
January 31, 2000, these vendors accounted for 20% and 8%, respectively, of our
product purchases. We have no long-term contracts or arrangements with these or
any of our other vendors to guarantee the availability of merchandise, the
continuation of particular payment terms or the extension of credit limits. As a
result of our increasing working capital deficiency, both Ingram and Tech Data
have significantly reduced their credit limits with us.
Our dtpdirect.com division relies significantly on the supply of Apple
Macintosh(R) and related products. For the fiscal year ended January 31, 2000,
dtpdirect.com's purchases of Apple products represented approximately 32% of its
product purchases. We do not buy directly from Apple, but Apple grants us rights
to market their products. If Apple or its distributor terminated their
agreements with us, our dtpdirect.com operations would be adversely affected. In
addition, our GTI division relied on three vendors for approximately 49% of its
purchases in the fiscal year ended January 31, 2000. One of these vendors will
deliver products to GTI only against immediate payment, depleting our limited
working capital. The other two vendors will extend credit only when we make
payments against outstanding invoices, which is increasingly difficult for us to
do.
These credit arrangements make it difficult for us to maintain and grow our
business. We cannot assure that our vendors will continue to sell merchandise to
us on current terms or that we will or could establish new or extend current
vendor relationships to ensure acquisition of merchandise in a timely and
efficient manner and on acceptable commercial terms. If we cannot develop and
maintain relationships with vendors that allow us to obtain sufficient
quantities of merchandise on acceptable commercial terms, our business,
prospects, financial condition and results of operations would be materially
adversely affected.
WE DEPEND ON KEY MANAGERS AND WOULD SUFFER IF THEY TERMINATE EMPLOYMENT.
We depend upon the management services of our key managers. In particular,
we depend upon Gregory A. Appelhof, our President and Chief Executive Officer
and John L. Harvatine, our Chief Financial Officer. The loss of their services
or of other key managers could adversely affect our business, prospects,
financial condition and results of operations. Particularly in light of our
current financial position, we would likely have difficulty replacing any of our
key managers if they became unable to continue working for us or terminated
their employment. We do not have key person insurance on the life of any of our
employees.
WE RELY ON OUR INFORMATION TECHNOLOGY STAFF AND WOULD SUFFER IF ANY TERMINATE
EMPLOYMENT.
We are dependent on our information technology staff to maintain the
operability of our web sites, Community Techmart hosting facilities and internal
computer systems. Competition for qualified personnel is intense, and if any of
these employees terminate employment with us, we may have difficulty replacing
them. Our current financial position would only make it more difficult to
attract replacement personnel. If we cannot maintain the performance of our
technology systems, our business and stock price would likely suffer.
WE HAVE SIGNIFICANT COMPETITION.
The microcomputer products industry is highly competitive. We compete with
a large number and variety of resellers of microcomputer hardware and software
products as well as manufacturers that sell
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<PAGE> 12
directly to customers. Some of our customers and suppliers compete against us.
In the hardware category, we compete with traditional microcomputer retailers,
computer superstores, consumer electronic and office supply superstores, mass
merchandisers, national direct marketers, other Internet retailers, corporate
resellers and value-added resellers. In the software and accessories categories,
we generally compete with these same resellers as well as specialty retailers
and resellers. In addition, as a result of improving technology, some software
manufacturers allow customers to download software programs and packages
directly onto their computer systems through the use of the Internet, bypassing
our sales channels.
Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than we do. If we cannot
successfully compete, our growth and operating margins could be negatively
impacted. In particular, on the Internet, technology increasingly has made it
easier for customers to identify the least expensive supplier of a product and
to purchase it from that business. As a result, our operating margins have
declined. We cannot assure that we can successfully and profitably compete.
SYSTEM FAILURES, TO WHICH WE ARE PARTICULARLY VULNERABLE BECAUSE WE CURRENTLY
OPERATE ONLY ONE COMPUTER DATA CENTER, COULD ADVERSELY AFFECT OUR BUSINESS.
Our systems and operations are vulnerable to damage or interruption from a
variety of factors, including human error, natural disasters, power loss,
telecommunication failures, break-ins, sabotage (physical or electronic),
computer viruses, vandalism and similar unexpected adverse events. We currently
operate only one computer data center. This increases our vulnerability, since
localized problems at our Minnesota facility, such as storm damage or localized
telephone failure, could make us unable to provide our services. Any system
failure, including network, software or hardware failure, that causes an
interruption in our services or a decrease in responsiveness of our hosted web
sites could result in canceled client contracts, reduced revenue and harm to our
reputation, brand and our relations with our providers and could adversely
affect our business.
POTENTIAL FLUCTUATIONS IN OUR QUARTERLY FINANCIAL RESULTS MAKE FINANCIAL
FORECASTING DIFFICULT.
Our quarterly operating results may fluctuate significantly in the future
as a result of a variety of factors, many of which are outside our control.
These factors include:
- the number, size and timing of customer orders or Community Techmart
contracts sold;
- the character of any development services required by our clients;
- non-cash charges we incur in connection with the issuance of equity
securities in exchange for services rendered to us;
- the amount and timing of operating costs and capital expenditures
relating to expansion of our business, operations and infrastructure;
- our ability to develop, market and introduce new and enhanced products
and services on a timely basis; and
- actions taken by our competitors, including new product introductions and
enhancements and price reductions.
- actions taken by our vendors, including limiting available credit lines
under which we can buy product.
We believe that quarter-to-quarter comparisons of our operating results may
not be a good indication of our future performance. Investors should not rely on
our operating results for any particular quarter as an indication of our future
operating results.
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<PAGE> 13
OUR LARGE NON-CASH EXPENSES INCREASE OUR LOSSES AND MAY CAUSE OUR STOCK PRICE TO
FALL.
In fiscal 2000, we incurred approximately $17.1 million of stock-based
compensation and interest expense. We expect to report similar non-cash charges
in the amount of at least $4.8 million during fiscal 2001 as a result of
commitments made prior to and after January 31, 2000. There may be substantial
additional charges if we make additional commitments. These non-cash charges
will likely require us to report net losses for fiscal 2001 regardless of our
other operating results. The reporting of continued, large losses could
adversely affect the limited trading market for our stock and our efforts to
raise additional financing.
FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD HARM OUR ABILITY TO
COMPETE EFFECTIVELY.
We rely on a combination of trademark and copyright law, trade secret
protection, confidentiality agreements and other contractual arrangements to
protect our intellectual property rights. We do not rely on patented processes
or technologies. The protective steps we have taken may be inadequate to deter
misappropriation of our proprietary information. We may be unable to detect the
unauthorized use of, or take appropriate steps to enforce, our intellectual
property rights. We have no registered trademarks on our netdirect or GTI names
in the United States or elsewhere. Failure to adequately protect our
intellectual property could harm our brand, devalue our proprietary content and
affect our ability to compete effectively. Defending our intellectual property
rights could also result in the expenditure of significant financial and
managerial resources, which could materially adversely affect our business.
WE MAY HAVE TO DEFEND AGAINST INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS, WHICH
COULD CAUSE SIGNIFICANT EXPENDITURES.
Although we believe that our business activities do not infringe the
intellectual property rights of others, other parties may assert infringement
claims against us or claim that we have violated a patent or infringed a
copyright, trademark or other proprietary right belonging to them. Infringement
claims, even if not meritorious, could result in the expenditure of significant
financial and managerial resources, which could materially adversely affect our
business.
WE MAY NOT BE ABLE TO ADAPT AS INTERNET TECHNOLOGIES AND CLIENT DEMANDS EVOLVE.
To be successful, we must adapt to our rapidly changing market by
continually enhancing the technologies used in our products and services, and
introducing new technology to address the changing needs of our business and
consumers. If we are unable, for technical, legal, financial or other reasons,
to adapt in a timely manner to changing market conditions or business and client
requirements, our business could be materially adversely affected.
CONCERNS ABOUT THE SECURITY AND OPERATION OF OUR WEB SITE HOSTING SERVICES COULD
INCREASE OUR EXPENDITURES OR DECREASE OUR CLIENT BASE.
There have been several recent widely-publicized instances of "hackers"
compromising the integrity, security and operation of web sites. We may have to
incur significant costs to protect our web site or those of our clients or to
alleviate problems caused by "hacking" if there is any:
- perceived increase in "hacking" activity;
- perception that our web site or the web sites that we host are
particularly vulnerable to this kind of activity; or
- instance in which our web site or one of the web sites we host is
affected by this kind of activity.
In addition to increased costs, any of these occurrences may decrease our
ability to retain existing clients or attract new ones.
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<PAGE> 14
OUR ABILITY TO MAINTAIN AND INCREASE OUR CLIENT BASE DEPENDS ON THE CONTINUED
GROWTH IN USE AND EFFICIENT OPERATION OF THE INTERNET.
Our business would be materially adversely affected if Internet usage does
not continue to grow or grows slowly. Internet usage may be inhibited for a
number of reasons, such as:
- inadequate Internet infrastructure to support the demands placed on it as
usage grows;
- continued security and authentication concerns with respect to
transmission over the Internet of confidential information;
- privacy concerns, including those related to the placement by web sites
of information on a user's hard drive without the user's knowledge or
consent;
- any well-publicized compromise of web site or Internet transmission
security;
- inconsistent quality of Internet products and services;
- limited availability of cost-effective, high-speed access to the
Internet; and
- significant future Internet service provider delays or outages.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES RELATING TO THE INTERNET COULD
INCREASE OUR COSTS OF TRANSMITTING DATA AND LEGAL AND REGULATORY EXPENDITURES
AND DECREASE OUR CLIENT BASE.
Existing domestic and international laws or regulations specifically
regulate communications or commerce on the Internet. Laws and regulations that
address issues such as user privacy, pricing, online content regulation,
taxation and the characteristics and quality of online products and services are
under consideration by federal, state, local and foreign governments and
agencies. Several telecommunications companies have petitioned the Federal
Communications Commission to regulate Internet service providers and online
services providers in a manner similar to the regulation of long distance
telephone carriers and to impose access fees on such companies. This regulation,
if imposed, could increase the cost of transmitting data over the Internet. It
may take years to determine the extent to which existing laws relating to issues
such as intellectual property ownership and infringement, libel, obscenity and
personal privacy are applicable to the Internet. The Federal Trade Commission
and government agencies in some states have been investigating Internet
companies regarding their use of personal information. We could incur additional
expenses if any new regulations regarding the use of personal information are
introduced or if these agencies chose to investigate our privacy practices.
Further, due to the global nature of the Internet, it is possible that some
states, the United States or foreign countries might attempt to levy taxes on
our activities. Any new laws or regulations relating to the Internet, or adverse
application or interpretation of existing laws, could decrease the rate of
growth in the use of the Internet and the demand for our products and services.
WE COULD BE SUBJECT TO SALES AND SIMILAR TAXES THAT WE ARE NOT CURRENTLY
COLLECTING.
We do not currently collect sales or other similar taxes on shipments of
goods into states other than Minnesota, California and Massachusetts. However,
one or more states may seek to impose sales tax collection obligations on
out-of-state companies such as us which engage in online commerce. In addition,
any new operation in other states could subject shipments into those states to
state sales taxes under current or future laws. A successful assertion by one or
more states or any foreign country that we should collect sales or other taxes
on the sale of merchandise could have a material adverse effect on our business
and stock price.
OUR STOCK PRICE MAY FLUCTUATE WIDELY.
The price at which our common stock trades is subject to wide fluctuations
in response to changes in earnings estimates by analysts (if any) or other
events or factors, many of which are beyond our control. The stock market has
from time to time experienced extreme price and volume fluctuations that have
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<PAGE> 15
often been unrelated to the operating performance of the companies affected.
These fluctuations have particularly affected securities of Internet-related
companies. Investors may experience a material decline in the market price of
our common stock, regardless of our operating performance. In the past,
following periods of volatility in the market price of a particular company's
securities, securities class action litigation has often been brought against
that company. We may become involved in this type of litigation in the future.
Litigation of this type is often expensive and diverts management's attention
and resources.
WE HAVE SOLD SECURITIES WITHOUT REGISTRATION AND COULD BE RESPONSIBLE TO
REIMBURSE PURCHASERS IF THE SALES WERE NOT EXEMPT.
During the past several years, we have issued equity securities in various
transactions not registered under the Securities Act of 1933, as amended, or
applicable state laws. We made these sales in reliance upon exemptions from
these registration requirements. However, if these sales were not exempt, we
could be required to offer to rescind these sales and repurchase the securities
for the price originally paid, together with interest from the date of sale, and
possibly, attorneys' fees. If we were required to make any repurchases, it could
have a material adverse effect on our stock price and our ability to sell
additional securities.
SUBSTANTIAL SALES OF OUR COMMON STOCK, OR THE PERCEPTION THAT SUBSTANTIAL SALES
MAY OCCUR, COULD CAUSE OUR STOCK PRICE TO FALL AND MAKE IT DIFFICULT FOR US TO
SELL ADDITIONAL SECURITIES.
If our shareholders sell substantial amounts of our common stock in the
public market, the market price of our common stock could fall. These sales
might also make it more difficult for us to sell equity securities in the future
at a time and price that we deem appropriate. As of April 20, 2000, we had
36,031,453 shares of common stock outstanding. Of these shares, 16,151,079 are
available for public resale under Rule 144 under the Securities Act. Further, we
are contractually obliged to file a registration statement under the Securities
Act to register the public resale of 1,139,600 of the shares not currently
available for public resale and 5,225,000 of the shares that may be issued upon
exercise of outstanding options and warrants. We intend to file a registration
statement on Form S-8 immediately after the filing of this Report to register
the issuance of approximately 750,000 shares of our common stock for service
providers. All of the shares so registered will be available for immediate
public resale.
OUR ARTICLES OF INCORPORATION AND MINNESOTA LAW MAY DISCOURAGE A TAKEOVER OF US.
Provisions of our articles of incorporation, bylaws and Minnesota law could
make it more difficult for a third party to acquire us, even if doing so would
be beneficial to our shareholders.
THERE IS ONLY A LIMITED PUBLIC MARKET FOR OUR STOCK AND THIS MAY DEPRESS OUR
STOCK PRICE.
There is only a limited public market for our common stock on the OTC
Bulletin Board. We cannot assure that our stock will continue to trade on the
OTC Bulletin Board or on any other trading medium, that a more significant
trading market will develop or that investors will be able to resell their
shares at the price quoted on the OTC Bulletin Board, or at all. In addition, as
our common stock currently trades at a price substantially under $5.00 per
share, brokers and dealers trading in our stock are subject to "penny stock"
disclosure rules under the Securities and Exchange Act of 1934, as amended.
These rules require brokers and dealers to provide investors with information
relating to the risks and dangers associated with investing in penny stocks. The
disclosure of such information could have a material adverse effect on the price
of our stock.
WE HAVE NOT PAID DIVIDENDS AND DO NOT EXPECT TO DO SO.
We do not anticipate the payment of cash dividends on our Common Stock in
the foreseeable future. Investors who anticipate a need for immediate income
from their investment should not purchase shares of our stock.
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<PAGE> 16
ITEM 2. PROPERTIES.
In March 2000, we consolidated our principal executive offices,
dtpdirect.com's operations and the Minneapolis operations of GTI in a single
45,738 square foot facility located at 6690 Shady Oak Road, Eden Prairie,
Minnesota. We have a seven-year lease for this facility with average payments
over the term of the lease of approximately $41,000 per month, including taxes
and common area maintenance, expiring in February 2007. In addition, we lease
approximately 1,460 square feet of office space at 3100 West Lake Street,
Minneapolis, Minnesota under a five-year lease with average remaining payments
of approximately $2,800 per month. We are currently negotiating with a subtenant
to sublease this space.
GTI has an additional facility located at 4685 S. Ashe Avenue, Tempe,
Arizona. GTI's facility in Arizona is approximately 11,000 square feet with
average remaining payments of approximately $7,800 per month. The lease runs
through December 31, 2002. GTI also utilizes warehouse space of a vendor for a
nominal charge in San Francisco, California.
ITEM 3. LEGAL PROCEEDINGS.
In December 1999, Cnet, Inc. ("Cnet") filed a lawsuit against us in the
United States District Court for the District of Minnesota. Cnet alleges that we
owe them $1,570,674, plus interest, attorneys' fees and costs in connection with
advertising services provided to us. They allege that they permitted us to list
products on Cnet's Internet sites and to receive a link from the Cnet Internet
site to our own website in return for which Cnet was to receive "click through"
charges for each time that a user utilized a link to our website. We have
acknowledged that Cnet provided some services, but maintain that the value for
these services is overstated in the lawsuit. In February 2000, we asserted a
counterclaim for an accounting to clarify the amount being charged for website
links and other services alleged to have been provided by Cnet. We intend to
vigorously defend this claim. No discovery has been performed to date and no
trial date has been set.
In April 2000, Lycos, Inc. ("Lycos") demanded payment by us of $2,250,000
Lycos claims it is owed under an e-commerce agreement dated October 31, 1999.
Lycos asserted that if was not paid by May 12, 2000, it may seek damages of up
to $13,375,000. We did not pay any additional amounts to Lycos by that date, but
are continuing discussions with and intend to vigorously defend any future claim
by Lycos.
In connection with our January 1999 acquisition of the operating assets of
Herold Marketing Associates, Inc. dba Graphics Technologies, Inc. ("Herold"), we
escrowed $200,000 of funds for possible future payment to Herold upon a
post-closing purchase price reconciliation. Umax, Inc. has asserted a claim
against the escrowed funds based on a money judgment against Herold in a matter
unrelated to us. Herold and we authorized the payment into court of $85,000 of
the amount in escrow for determination by the court as to whether Umax may make
a claim for those funds. The matter has not been resolved to date.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We submitted no matters to a vote of security holders during the last
quarter of the fiscal year ended January 31, 2000.
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<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our Common Stock is traded on the OTC Bulletin Board under the symbol VTCO.
The following table sets forth, for the period indicated, the range of high
and low bid prices of our Common Stock as provided by quotecentral.com. The
prices represent quotations between dealers without adjustment for retail
markups, markdowns, or commissions and may not represent actual transactions.
FISCAL YEAR ENDED JANUARY 31, 2000
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C> <C> <C>
First Quarter (End April)................................... 7 7/16 4 3/4
Second Quarter (End July)................................... 5 3/16 2 1/16
Third Quarter (End October)................................. 2 5/8 1
Fourth Quarter (End January)................................ 2 9/16 1 5/8
</TABLE>
FISCAL YEAR ENDED JANUARY 31, 1999
<TABLE>
<CAPTION>
HIGH LOW
------- ---
<S> <C> <C> <C>
First Quarter (End April)................................... 1 9/32 1/2
Second Quarter (End July)................................... 2 7/32 13/32
Third Quarter (End October)................................. 1 31/32 13/16
Fourth Quarter (End January)................................ 10 13/16
</TABLE>
For the fiscal year ended January 31, 1998, we are unable to obtain
reliable information on the range of high and low bid prices of our Common Stock
due to the limited market for it prior to February 1, 1999.
We have never paid a cash dividend on our capital stock and do not expect
to pay a cash dividend in the foreseeable future.
As of May 10, 2000, we had 511 shareholders of record.
RECENT SALES OF UNREGISTERED SECURITIES
A. 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 "Securities Act"):
In fiscal 1998, we issued 1,553,800 shares of our Common Stock for
$243,250 to ten investors and $237,000 of convertible debentures to five
investors.
In fiscal 1999, we issued 13,299,832 shares of our Common Stock for
$8,554,549 to 39 investors.
In fiscal 2000, we issued 5,344,917 shares of our Common Stock for
$8,257,550 to 20 investors.
In fiscal 2000, we issued 5,800,000 redeemable warrants with an
exercise price of $.50 per share to six investors for $1,450,000. We
subsequently redeemed 2,900,000 of these warrants for $1,450,000.
In fiscal 2000, we issued 50,000 warrants with an exercise price of
$1.00 per share to one investor for $50. We granted the right to purchase
the warrants as a commission for raising money.
Between February 1 and May 10, 2000, we issued 1,389,050 shares of our
Common Stock to 11 investors for $1,118,947.
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<PAGE> 18
B. In December 1999, we issued 245,359 shares of our Common Stock to two
individuals and one entity in connection with the acquisition of some assets of
Softdisk, LLC. The issuance of such shares was exempt pursuant to Rule 506 of
Regulation D and/or Section 4(2) of the Securities Act.
C. In January 1999, we issued 373,571 shares to two accredited investors in
connection with the acquisition of GTI's assets and certain related consulting
services. The issuance of such shares was exempt pursuant to Rule 506 of
Regulation D and/or Section 4(2) of the Securities Act.
D. In fiscal 1999, the holders of convertible debentures we issued in
fiscal 1997 and 1998 converted their debentures (without payment of additional
consideration) into 1,173,091 shares of our Common Stock in reliance upon the
exemption contained in Section 3(a)(9) of the Securities Act.
E. Sales made solely in exchange for services rendered pursuant to Rule 504
of Regulation D and/or Section 4(2) of the Securities Act:
In fiscal 1998, we issued 144,039 shares of our Common Stock to seven
individuals and entities (two of whom were accredited investors) in
exchange for $99,746 of services rendered to us.
In fiscal 1999, we issued 2,069,532 shares of our Common Stock to 30
individuals and entities (eleven of whom were accredited investors) in
exchange for $961,625 of services rendered to us.
In fiscal 2000, we issued 1,605,000 shares of our Common Stock to
seven individuals and entities (all of whom were accredited investors) in
exchange for $3,019,025 of services rendered to us.
Between February 1, 2000 and May 10, 2000, we issued 500,000 shares of
our Common Stock to one accredited investor in exchange for $1,265,000 of
services rendered to us.
F. Issuance of options and warrants involving no sale of securities:
In fiscal 2000, we granted to 160 individuals or entities an aggregate
of 4,494,950 options and warrants to purchase shares of our Common Stock,
exercisable at prices ranging between $.05 and $6.29 per share.
Between February 1, 2000 and May 10, 2000, we granted to seven
individuals or entities an aggregate of 626,250 options and warrants to
purchase shares of our Common Stock, exercisable at $.70 per share.
G. In fiscal 2000, we paid offering costs in cash to the following firms in
connection with sales of our securities as described above:
<TABLE>
<S> <C>
Waterford Financial, Inc........................... $ 20,000
Janda & Garrington, LLC............................ $400,000
Winchester Investment Securities................... $250,000
</TABLE>
In addition, we granted Waterford Financial, Inc. a two-year warrant to purchase
20,000 shares of our Common Stock at $1.00 per share, and we granted Trautman
Kramer a three-year warrant to purchase 125,000 shares of our Common Stock for
$3.00 per share. We have included the issuance of these warrants above.
Between February 1, 2000 and May 10, 2000, we paid $20,250 cash in offering
costs to Waterford Financial, Inc. in connection with sales of our securities as
described above. In addition, we granted Winchester Investment Securities a
two-year warrant to purchase 75,758 shares of our Common Stock at $1.00 per
share. We have included the issuance of these warrants above.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following table contains selected consolidated financial data as of and
for each of the four fiscal years ended January 31, 2000. We derived this
selected consolidated financial data from our audited historical consolidated
financial statements. We have included our consolidated financial statements and
notes as of January 31, 2000 and 1999 and for each of the three fiscal years
ended January 31, 2000
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<PAGE> 19
elsewhere in this Report on Form 10-K. We recommend that you read this
information with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our historical consolidated financial statements
and related notes included elsewhere in this Report on Form 10-K. The table
below contains no selected financial data for the fiscal year ended January 31,
1996 because we did not conduct any operations in that period.
<TABLE>
<CAPTION>
FY00 FY99 FY98 FY97
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales................................. $ 81,318,775 $ 4,945,907 $ 174,669 $ 0
Net loss.................................. (28,166,026) (4,357,088) (2,539,161) (829,421)
Net loss per common share................. (0.95) (0.26) (0.36) (0.13)
Total current assets...................... 20,262,425 15,297,683 16,514 105,412
Total assets.............................. 34,666,783 25,742,578 59,409 1,023,828
Long term liabilities..................... 50,519 420,810 715,342 138,102
Total liabilities......................... 26,503,606 16,820,452 1,452,978 255,954
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
GENERAL
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Financial
Data" and our financial statements and notes thereto appearing elsewhere in this
annual report. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. Our actual results may differ
substantially from those anticipated in these forward-looking statements.
OVERVIEW
Historically, we have been an e-commerce provider of high performance
computer hardware, software and peripheral products to computer end-users and to
wholesale and retail customers throughout the United States and Canada. We have
been operating in two primary business segments in the computer products
industry: sales to end users through our netdirect.com website and dtpdirect.com
direct marketing business, and sales to wholesale and retail outlets through our
GTI wholesale distribution business. As described in "Recent Developments"
above, and contingent on financing, we intend to transition our business away
from dependence on our netdirect.com operations and toward our Community
Techmart division.
GTI, historically our largest business in terms of revenue, is a
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 from more than 40
manufacturers of computer related products, maintains a stocking inventory of
approximately 1,600 products and acts as a fulfillment business for our end-user
businesses. We acquired the assets of GTI from Herold Marketing Associates, Inc.
in January 1999 and accounted for the acquisition using the purchase method of
accounting.
Our dtpdirect.com division is a national business-to-business direct
marketer of computer hardware and software products primarily for users of Apple
Macintosh(R) personal computers. We acquired the division upon our purchase of
the operating assets of Tech Squared Inc. in December 1999. We also accounted
for this acquisition using the purchase method of accounting.
Netdirect.com is our website through which we offer computer-related
products. During fiscal 2000, we planned to build a loyal customer base by
attracting new customers through online advertising, competitive pricing and
free shipping. The results of this strategy were disappointing. Although we were
able to build significant revenue and customer base, our margins, net of
advertising costs, were too low to sustain a business. As a result, and
contingent on new financing, we intend to refocus our online efforts on our
Community Techmart division, a proprietary, web-based, integrated front- and
back-office system
18
<PAGE> 20
designed to integrate order fulfillment, merchant authorization, warehousing and
financial systems for our clients. Because we did not make our first significant
installation of our Techmart solution until April 2000, we have limited data
available to gauge the success of the Techmart business model and cannot assure
its success.
All of our businesses recognize revenue upon shipment of the physical
product to the customer and we record revenue net of estimated returns. We
report the amount payable to our suppliers as cost of goods. We historically
have maintained a supply of inventory that allows us to meet our customers'
delivery demands in a timely manner. However, our recent cash shortfall has
increasingly made this difficult and we are losing sales as a result of our
failure to timely deliver, or cause delivery of, products to our customers.
We have incurred significant losses during the past several years. As
discussed further below, our ability to continue as a going concern is dependent
on our ability to reduce our cash expenditures and raise substantial additional
funds.
RESULTS OF OPERATIONS
The following table sets forth statement of operations data for the periods
indicated as a percentage of net sales:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
--------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Cost of goods sold.......................................... 94.0 96.4
----- ----- --------
Gross profit.............................................. 6.0 3.6 100.0
Operating expenses:
Sales and marketing....................................... 8.7 36.2 315.3
General and administrative................................ 9.9 28.4 657.3
Consulting services, stock based.......................... 12.6 26.7
Amortization of intangibles............................... 1.1
Write-off of Virtual Technology (UK) Ltd. assets.......... 529.6
----- ----- --------
32.3 91.3 1,502.2
Loss from operations........................................ (26.3) (87.7) (1,402.2)
Other income (expense):
Interest expense.......................................... (8.1) (1.6) (33.4)
Other (expense) income, net............................... (0.2) 1.3 (18.1)
----- ----- --------
(8.3) (0.3) (51.5)
----- ----- --------
Net loss.................................................... (34.6)% (88.0)% (1,453.7)%
===== ===== ========
</TABLE>
FISCAL YEAR ENDED JANUARY 31, 2000 AS COMPARED TO THE FISCAL YEAR ENDED JANUARY
31, 1999
NET SALES. Our net sales increased to $81.3 million for the fiscal year
ended January 31, 2000, from $4.9 million for the fiscal year ended January 31,
1999, reflecting an increase of $76.4 million or 1,544%. Our sales increase
represented a $7.3 million, or 159%, increase for netdirect.com (internet
retail) sales and a $5.2 million increase and a $63.9 million increase for
dtpdirect.com (catalog retail) sales and GTI (distribution) sales, respectively,
as a result of the Tech Squared and GTI acquisitions. The netdirect.com increase
was primarily the result of the growth of Internet sales through our website. We
acquired GTI on January 28, 1999 and Tech Squared as of November 30, 1999 and
therefore did not report net sales from GTI and dtpdirect.com prior to those
dates.
COST OF GOODS SOLD. Cost of goods sold during the fiscal year ended January
31, 2000 was $76.4 million, or 94.0% of net sales, reflecting an increase of
$71.7 million or 1,502%. The cost of goods sold increase includes a $7.0
million, or 158%, increase for netdirect.com's cost of goods sold and a
19
<PAGE> 21
$4.6 million increase and a $60.1 million increase for dtpdirect.com's and GTI's
cost of goods sold, respectively, as a result of the Tech Squared and GTI
acquisitions. The netdirect.com increase was primarily the result of the
increase in sales. We did not include any cost of goods sold from GTI and
dtpdirect.com prior to our acquisition of those assets. The gross margin was
6.0% of net sales for fiscal year 2000 as compared to 3.6% of net sales for
fiscal year 1999. This increase reflects the impact of the acquisitions of GTI
and Tech Squared which generated gross margins of 5.9% and 12.8%, respectively
during fiscal 2000.
OPERATING EXPENSES. Our sales and marketing expenses increased to $7.1
million during the fiscal year ended January 31, 2000 from $1.8 million for the
fiscal year ended January 31, 1999. The primary components of the increase were
an increase in advertising and promotion expenditures of $3.0 million and an
increase in sales and marketing personnel expenses of $2.0 million. These
increases resulted from our expanded effort to add customers particularly in our
retail segment. As a percentage of net sales, sales and marketing expenses were
8.7% for the fiscal year ended January 31, 2000, as compared to 36.2% for the
fiscal year ended January 31, 1999.
General and administrative expenses increased to $8.0 million for the
fiscal year ended January 31, 2000 from $1.4 million for the fiscal year ended
January 31, 1999. The increase in fiscal 2000 over fiscal 1999 was primarily due
to an increase in personnel expenses of $2.8 million and legal, accounting and
other professional services of $1.5 million. These increases reflect the
expanded size of our operations resulting primarily from our January 1999
acquisition of GTI and our December 1999 acquisition of Tech Squared. As a
percentage of net sales, general and administrative expenses were 9.9% during
the fiscal year ended January 31, 2000, as compared to 28.4% for the fiscal year
ended January 31, 1999.
For the fiscal year ended January 31, 2000, we incurred $10.3 million of
non-cash charges for consulting services. In these transactions, we issued our
equity securities in exchange for services and generally incur expense over the
term of each agreement, often over a one-year period. We recognized $1.3 million
of these charges during the fiscal year ended January 31, 1999. We will incur
$4.8 million of stock-based consulting services expense in fiscal 2001,
resulting from existing consulting contracts.
Amortization of intangibles totaled $930,000 for the fiscal year ended
January 31, 2000, compared with no amortization for the fiscal year ended
January 31, 1999. Most of this expense was amortization of intangibles related
to our Tech Squared and GTI acquisitions.
OTHER EXPENSES. Interest expense was $6.6 million in fiscal 2000 as
compared to $80,000 for fiscal 1999. The increase in interest expense relates
principally to $500,000 of interest expense on borrowings under our credit
agreement with Coast executed in January 1999, $1.2 million of interest expense
due to amortization of stock-based debt issue costs associated with this credit
agreement and $4.8 million of interest costs related to issuance of redeemable
warrants in December 1999. For more detail, we suggest you see note 7 to our
consolidated financial statements.
Other expense of approximately $206,000 in fiscal year 2000 resulted
primarily from $150,000 paid to settle a lawsuit.
INCOME TAXES. We have never generated taxable income. Accordingly, we paid
no income taxes in fiscal year 2000 or 1999. As of January 31, 2000, we had
approximately $11.5 million of net operating loss carryforwards for federal
income tax purposes, which expire beginning in 2012. Due to the uncertainty of
our future profitability, we have recorded a valuation allowance to offset our
net deferred tax assets. Changes in our ownership resulting from our past and
future sales of Common Stock could limit the future annual realization of the
tax net operating loss carryforwards to a specified percentage under Section 382
of the Internal Revenue Code.
20
<PAGE> 22
FISCAL YEAR ENDED JANUARY 31, 1999 AS COMPARED TO THE FISCAL YEAR ENDED JANUARY
31, 1998
NET SALES. Our net sales increased to $4.9 million for fiscal 1999, from
$175,000 for fiscal 1998. The sales increases in fiscal 1999 were primarily a
result of a shift in our strategy to e-commerce from backup data storage
services.
COST OF GOODS SOLD. Cost of goods sold during fiscal 1999 was $4.8 million,
or 96.4% of net sales. During fiscal 1998, we had no significant direct cost of
service sales.
OPERATING EXPENSES. Sales and marketing expenses increased to $1.8 million
in fiscal 1999 from $551,000 for fiscal 1998. The primary component of the
increase in fiscal 1999 from 1998 was an increase in advertising and promotion
expenditures of $1.3 million. As a percentage of net sales, sales and marketing
expenses were 36.2% in fiscal 1999.
General and administrative expenses increased to $1.4 million for fiscal
1999 from $1.1 million for fiscal 1998. The fiscal 1999 increase over fiscal
1998 was primarily due to an increase in personnel expenses. As a percentage of
net sales, general and administrative expenses were 28.4% in fiscal 1999.
For the fiscal year ended January 31, 1999, we recognized $1.3 million of
non-cash charges for consulting services. In these transactions, we issued our
equity securities in exchange for services and generally incur expense over the
term of each agreement, often over a one-year period. We recognized $134,000 of
these charges during the fiscal year ended January 31, 1998.
WRITE-OFF OF VIRTUAL TECHNOLOGY (UK) LIMITED. In fiscal 1998, we recorded
$925,000 of non-recurring expense related to the write-off of the remaining
assets of the Virtual Technology (UK) Limited (formerly known as ARL)
operations.
QUARTERLY RESULTS
The following table sets forth our unaudited quarterly financial data for
each quarter of 1998 and 1999. In our opinion, this unaudited information has
been prepared on the same basis as the audited information and includes all
adjustments (including all normal recurring adjustments) necessary to present
fairly the information set forth below. The operating results for any quarter
are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------------------------------------------
FISCAL 1999 FISCAL 2000
------------------------------------- -----------------------------------------
APR 30 JUL 31 OCT 31 JAN 31 APR 30 JUL 30 OCT 31 JAN 31
------ ------ ------ ------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............. $ 590 $ 952 $1,551 $ 1,853 $17,383 $16,514 $20,069 $ 27,353
Gross profit (loss)... (120) 47 116 134 1,213 1,202 1,362 1,117
Loss from
operations.......... (451) (482) (722) (2,689) (6,544) (4,284) (4,422) (6,143)
Net loss.............. (471) (438) (737) (2,714) (7,053) (4,674) (4,994) (11,445)
Loss per share........ (0.05) (0.03) (0.04) (0.13) (0.27) (0.16) (0.16) (0.35)
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
CURRENT SITUATION. Our ability to continue as a going concern is in
jeopardy. Although between February 1 and April 30, 2000, we raised an
additional $1.1 million of cash through the sale of 1.4 million shares of our
Common Stock, as of May 5, 2000, we had only $38,000 of cash and only $436,000
of borrowing capacity under our line of credit. We are in default of the terms
of this line of credit and our lender may foreclose on our assets. We have a
large, negative working capital position that was approximately $8.6 million at
May 5, 2000. In our GTI and dtpdirect.com businesses, we are not timely paying
vendors and several important vendors have placed us on credit hold, making
shipment of products to our customers difficult and adversely affecting our net
sales.
21
<PAGE> 23
We are attempting to reduce our cash outlay, which averaged approximately
$812,000 per month during our fiscal year ended January 31, 2000. We have
stopped our advertising and marketing expenditures for our netdirect.com
website. We have deferred the payment of accounts payable and have reduced
officer salaries and bonuses pending an improved cash position. We also intend
to downsize our workforce to reduce our payroll. We estimate that we have
reduced our monthly negative cash flow to approximately $300,000 and believe
that we may be able to reduce this further (assuming we make no further payments
to Cnet or Lycos).
We are seeking additional equity or debt financing, but cannot assure that
we will obtain financing on acceptable terms, or at all. We are also exploring
the potential to sell all or a part of our business. Although we are in
discussions on several potential transactions, we have reached no agreement on
any transaction. If we cannot reduce our cash expenditures and raise additional
capital, we may be unable to continue our operations.
HISTORICAL SOURCES AND USES OF CASH. We historically have financed our
operations primarily through the private placement of equity and debt
securities. Primary uses of cash have been to fund our operation through the
development stage and the acquisition and integration of subsidiary businesses.
If we are successful in achieving future revenue growth, our working capital
requirement is likely to increase.
Net cash used by our operating activities during the fiscal year ended
January 31, 2000 was $6.0 million as compared to $3.6 million for the fiscal
year ended January 31, 1999 and $787,000 for the fiscal year ended January 31,
1998. Net cash used by us for operating activities during the 2000 fiscal year
was primarily the result of net losses and increases in accounts receivable,
offset in part by non-cash expenses decreases in inventories, and increases in
accounts payable and accrued expenses. Net cash used by our operating activities
during the 1999 fiscal year was primarily the result of net losses and increases
in accounts receivable, partially offset by non-cash expenses increases in
accrued expenses, and net cash used by our operating activities for 1998 fiscal
year was primarily a result of net losses, partially offset by non-cash expenses
and increases in accounts payable and accrued expenses.
We used cash of $4.5 million, $1.2 million and $19,200 in investing
activities in our fiscal years 2000, 1999 and 1998, respectively. During the
fiscal year ended January 31, 2000, we used $844,000 for purchases of furniture
and equipment, $185,000 for the purchase of marketable securities and $3.5
million for the purchase of the assets comprising our subsidiary operations. For
the fiscal year ended January 31, 1999, we used approximately $1.0 million of
net cash to acquire GTI's assets.
Cash provided by financing activities was $11.1 million for the fiscal year
ended January 31, 2000, as compared to cash provided by financing activities of
$4.9 million for the fiscal year ended January 31, 1999 and $783,000 for the
year ended January 31, 1998. During the fiscal year ended January 31, 2000, we
received net proceeds of $8.2 million from issuance of equity securities
including the exercise of options and warrants and $2.7 million from the
collection of a stock subscription receivable. In addition, during the 2000
fiscal year, we borrowed $68.1 million under our line of credit and repaid $61.2
million on it. Proceeds from these financing activities were used to fund our
working capital needs, and to retire $6.7 million of notes payable in connection
with our acquisition of GTI's assets. We also used the proceeds to retire
$186,000 of loans from related parties and to fund $245,000 in loan fees to
establish our line of credit.
GTI ACQUISITION, OTHER FINANCING ARRANGEMENTS AND RELATED COVENANT
VIOLATIONS. On January 28, 1999, we acquired substantially all of the assets of
GTI and assumed certain of GTI's liabilities. The purchase price was $17.1
million, $1.0 million of which we paid at closing primarily out of funds
generated from the sale of our equity securities in January 1999. Under the
terms of the acquisition agreement, we paid an additional $4.0 million of the
purchase price in February 1999 by repayment of a promissory note. In April
1999, we also deposited $200,000 with an escrow agent to be used for liabilities
arising after closing. In May 1999, we paid $2.7 million of the remaining $3.3
million note issued at closing. The payment differential is due to certain
post-closing adjustments still under negotiation. We expect to finalize these
post-closing adjustments during fiscal 2001.
22
<PAGE> 24
We acquired the funds to retire these notes from borrowings under our line
of credit and out of cash from the private placement of our securities. Under
the terms of our line of credit, we 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, we may
borrow up to $250,000 for capital expenditure purchases at an interest rate
equal to 2% in excess of the bank's reference rate, not subject to eligible
receivables and inventory. Further, we 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.
The line of credit agreement requires us to maintain a minimum level of
tangible net worth and contains a covenant that allows our lender to declare an
event of default in the event there is a material adverse change in our
financial position or results of operations. At January 31, 2000, we were in
violation of the tangible net worth covenant with our lender that we negotiated
in December 1999 and are also in violation of this covenant at the date of this
Report. Because of our covenant violations, our lender has the right to declare
us in default and to require repayment of all borrowings under the line of
credit agreement.
GTI's payables to several of its major vendors were historically insured by
an independent credit insurance company. In July 1999, the insurance company
discontinued its coverage, citing our reduction in net tangible assets and
recent large losses. As a result, GTI's vendors are increasingly shipping orders
only against our immediate cash payment. If we cannot replace the lost insurance
or otherwise obtain credit from GTI's major vendors, our operating and business
results likely will be materially adversely affected.
TECH SQUARED ACQUISITION FINANCING ARRANGEMENTS. In November 1999, we
entered into a definitive agreement to acquire most of the operating assets of
Tech Squared Inc. for $3.2 million in cash. On December 17, 1999, we closed on
the acquisition upon payment of $1.4 million in cash and issuance of a $2.1
million promissory note due on December 20, 1999. In anticipation of this
transaction, we entered into an amended line of credit agreement under which, on
December 20, 1999, our lender provided $2.1 million to us which we used to
retire the Tech Squared promissory note.
As a condition of its $2.1 million loan, our lender required that we obtain
a minimum of $1.0 million of additional equity funds prior to closing and
established a new covenant requiring us to raise a total of $2.0 million of
additional equity funds during December 1999, including the first $1.0 million.
On December 17, 1999, we satisfied the lender's $1.0 million requirement upon
receipt of $1.65 million of cash raised through a private placement. In the
private placement, we sold 400,000 shares of our Common Stock for $1.00 per
share.
In addition, we raised $500,000 in the private placement by the sale of
2,000,000 five-year warrants exercisable at $.50 per share to purchase our
Common Stock. Upon this investor's demand, we were obligated to redeem one-half
of the warrants for the original $500,000 purchase price. The investor made
demand for this redemption and we redeemed one half of the warrants for $500,000
on December 22, 1999. If we had failed to redeem the warrants by December 24,
1999, the investor could have foreclosed upon certain assets we pledged to the
investor. We also agreed to file a registration statement under the Securities
Act to register the shares underlying the warrants and any other of our
convertible securities owned by the investor at the time the registration
statement is filed. If we fail to obtain effectiveness of this registration
statement by May 31, 2000, the investor's warrants will automatically double (to
2,000,000 warrants since the redemption of 1,000,000 warrants has already
occurred). Because we have not yet filed the registration statement, we expect
that we will issue the additional warrants.
Three of our directors also purchased $750,000 of the securities we offered
in the private placement on the same terms as the $500,000 investment described
in the preceding paragraph, except that we pledged no collateral to these
investors to secure our redemption obligations. We similarly redeemed one-half
of their warrants in January 2000. Because we have not filed the required
registration statement, we also expect to issue them additional warrants.
23
<PAGE> 25
We satisfied our new lending covenant that required us to raise a total of
$2.0 million of equity funds in December 1999 by the sale of an additional
1,000,000 shares of our Common Stock for $1.00 per share. In addition, two of
our other directors each purchased $100,000 of the redeemable warrant securities
we describe above, except that we pledged no collateral to these investors to
secure our redemption obligations. We also redeemed one-half of their warrants
in January 2000. Because we have not filed the required registration statement,
we also expect to issue them additional warrants.
SOFTDISK ACQUISITION FINANCING ARRANGEMENTS. In December 1999, we entered
into a definitive agreement to acquire certain of the operating assets of
Softdisk, LLC for $752,000 in a combination of $150,000 of cash, $465,200 of our
Common stock and a promissory note of $104,000 payable in twelve monthly
payments of $9,150. We used $150,000 of the cash raised through our December
1999 private placement to complete the acquisition of these assets. We are
currently in default on payment of $9,150 under the promissory note.
ADDITIONAL ARRANGEMENTS WITH OUR PRINCIPAL LENDER. At September 30 and
October 31, 1999, we were in default on our tangible net worth covenant with our
lender. The lender waived these defaults in December 1999 in exchange for
issuance to it of a five-year warrant to purchase 50,000 shares of our Common
Stock at an exercise price of $2.04 per share, subject to certain adjustments.
As a further condition to amending our line of credit agreement in December 1999
in advance of the Tech Squared acquisition to allow inclusion of the Tech
Squared assets in our borrowing base, our lender required us to issue to it an
additional five-year warrant to purchase 200,000 shares of our Common Stock at
an exercise price of $2.04 per share, subject to certain adjustments. The
amended line of credit agreement also provides that in the event that we
terminate it before March 2003, we will continue to pay the lender, as a
termination fee, the minimum monthly interest that the lender would otherwise
have received under the agreement. We currently estimate this termination fee
would be approximately $33,000 per month.
LYCOS AGREEMENT. In October 1999, we entered into a three-year E-Commerce
Agreement with Lycos, Inc. for comprehensive Internet marketing activities,
including co-branding of one of our websites on the Lycos network. Under the
agreement, we paid Lycos $1.125 million and agreed to pay an additional $3.375
million by July 2000 including $2.25 million due by April 1, 2000 that we have
not paid. We also agreed to pay an additional $5.0 million to Lycos during each
of the second and third years of the agreement, subject to Lycos' right to
terminate the agreement unless we agree to pay $6.5 million in such years. Lycos
has threatened to sue us and we are currently negotiating with Lycos to
terminate the agreement.
NEW HEADQUARTERS LEASE. We entered into a new seven-year facilities lease
effective in March 2000 to house the combined operations of netdirect.com,
dtpdirect.com, our corporate administrative staff and GTI's Minneapolis
operations. The landlord required a $300,000 letter of credit to be pledged as
security for the new lease, which is to cover leasehold improvements for the
facility. We obtained the required letter of credit from an investor in exchange
for issuance of 100,000 warrants exercisable over five years to purchase our
Common Stock at $1.68 per share.
Although we have no material commitments for capital expenditures, we
anticipate that, subject to financing, we will expend approximately $600,000
during fiscal year 2001 on additional computer hardware resources, including
e-commerce servers and other furniture and equipment as needed. Our capital
expenditures could be materially different if our operating plans are altered.
RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"), which is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. This statement
establishes a new model for accounting for derivatives and hedging activities.
Under FAS 133, we must recognize all derivatives as assets and liabilities and
measure them at fair value. In July 1999, the FASB issued Statement of
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of Effective Date of FASB Statement No. 133," which defers
the effective date to
24
<PAGE> 26
all fiscal quarters of fiscal years beginning after June 15, 2000. We do not
expect the adoption of FAS 133 to have a significant impact on its financial
positions, results of operations or cash flows.
In December 1999, the Staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." This SAB summarizes certain of the Staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. Application of the views expressed in SAB 101, as amended
by SAB 101A, is required no later than June 30, 2000. Although it has not made a
definite determination of its impact, we do not expect the adoption of SAB 101
to have a materially adverse effect on our financial positions, results of
operations or cash flows.
In April 2000, The FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of APB 25." FIN 44 clarifies (a) the definition of employee for
purposes of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award and (d)
the accounting for an exchange of stock compensation awards in a business
combination. We do not expect the adoption of FAS 133 to have a significant
impact on our financial positions, results of operations or cash flows.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK.
The following discusses our exposure to market risk related to changes in
interest rates, foreign exchange rates and equity prices.
Interest rate risk. As of January 31, 2000, we had $698,000 in cash, which
consisted entirely of cash operating accounts. We also had $185,000 of
marketable securities, which consisted of $160,000 in stock in a privately held
company and $25,000 in U.S. Treasury notes. A decrease in market rates of
interest would have no material effect on the value of these assets. As of
January 31, 2000, we had $7.9 million of debt. Interest accruing on this debt
fluctuates based upon market rates, which therefore can affect our financial
results.
Foreign currency exchange rate risk. Almost all of our net sales are in the
United States and our sales transactions are denominated in the U.S. dollar.
Therefore, we are not currently exposed to any material foreign currency
exchange risk.
Equity price risk. We do not own any equity investments, except for a
$160,000 investment in stock that we sold in February 2000 for $240,000.
Therefore, we are not currently exposed to any direct equity price risk.
Inflation. We do not believe that inflation has had a material effect on
our results of operations in recent years. There can be no assurance, however,
that our business will not be adversely affected by inflation in the future.
25
<PAGE> 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants at January 31, 2000 and
for the year then ended................................... F-1
Independent Auditor's Report at January 31, 1999 and for the
two years then ended...................................... F-2
Consolidated Balance Sheets at January 31, 2000 and 1999.... F-3
Consolidated Statements of Operations for the years ended
January 31, 2000.......................................... F-4
Consolidated Statements of Comprehensive Income (Loss) for
the years ended January 31, 2000, 1999 and 1998........... F-5
Consolidated Statements of Changes in Stockholders' Equity
for the years ended January 31, 2000, 1999 and 1998....... F-6
Consolidated Statements of Cash Flows for the years ended
January 31, 2000, 1999 and 1998........................... F-11
Notes to Consolidated Financial Statements for the years
ended January 31, 2000, 1999 and 1998..................... F-12
Independent Auditor's Report on the Financial Statement
Schedule.................................................. F-27
Financial Statement Schedule................................ F-28
</TABLE>
26
<PAGE> 28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Virtual Technology Corporation:
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Virtual Technology Corporation (the Company) and its subsidiaries at
January 31, 2000, and the results of their operations and their cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with auditing standards generally accepted in
the United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company has suffered significant
operating losses, has an accumulated deficit of $35,891,696, a working capital
deficiency and is in violation of a covenant contained in its line of credit
facility, all of which raise substantial doubt the Company's ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
April 7, 2000, except as to Note 2,
for which the date is May 1, 2000.
F-1
<PAGE> 29
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Virtual Technology Corporation and Subsidiaries
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheet of Virtual
Technology Corporation and Subsidiaries as of January 31, 1999, and the related
consolidated statements of operations, comprehensive income (loss), changes in
stockholders' equity, and cash flows for each of the two years in the period
ended January 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Virtual
Technology Corporation and Subsidiaries as of January 31, 1999, and the results
of their operations and their cash flows for each of the two years in the period
ended January 31, 1999, in conformity with accounting principles generally
accepted in the United States of America.
/s/ LURIE, BESIKOF, LAPIDUS & CO., LLP
Minneapolis, Minnesota
April 23, 1999
F-2
<PAGE> 30
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT JANUARY 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 698,246 $ 125,993
Marketable securities..................................... 185,015
Receivables:
Customer (net of allowances for doubtful accounts and
returns of $1,238,131 and $263,000 at January 31, 2000
and 1999, respectively)............................... 11,811,050 4,364,905
Credit cards........................................... 106,440 132,387
Stock subscription..................................... 2,676,436
Other.................................................. 179,952
Inventories............................................... 4,677,997 5,236,292
Other current assets...................................... 2,603,725 2,761,670
------------ -----------
Total current assets................................... 20,262,425 15,297,683
Furniture and equipment, net................................ 1,326,643 280,364
Capitalized software development costs, net................. 323,033 101,298
Intangibles, net............................................ 10,180,627 9,887,410
Other....................................................... 2,574,055 175,823
------------ -----------
Total assets........................................... $ 34,666,783 $25,742,578
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes and line of credit, current portion................. $ 7,887,907 $ 7,340,673
Capital lease obligations, current portion................ 13,951 10,628
Accounts payable.......................................... 15,076,375 7,163,358
Accrued expenses and other current liabilities............ 3,474,854 1,884,983
------------ -----------
Total current liabilities.............................. 26,453,087 16,399,642
============ ===========
Notes and line of credit payable, net of current portion.... 371,543
Capital lease obligations, net of current portion........... 50,519 49,267
Commitments and contingencies
Stockholders' equity:
Common stock $.001 par value (no par value as of January
31, 1999) 100,000,000 shares authorized; 34,142,403 and
25,345,963 shares issued and outstanding at January 31,
2000 and 1999, respectively............................ 34,142 17,572,796
Additional paid-in capital................................ 44,949,469
Cumulative translation adjustment......................... (3,738)
Stock subscription receivable............................. (925,000) (925,000)
Accumulated deficit....................................... (35,891,696) (7,725,670)
------------ -----------
Total stockholders' equity............................. 8,163,177 8,922,126
------------ -----------
Total liabilities and stockholders' equity............. $ 34,666,783 $25,742,578
============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 31
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net sales............................................ $ 81,318,775 $ 4,945,907 $ 174,669
Cost of goods sold................................... 76,424,745 4,769,313
------------ ----------- -----------
Gross profit......................................... 4,894,030 176,594 174,669
------------ ----------- -----------
Operating expenses:
Sales and marketing................................ 7,074,673 1,792,238 550,802
General and administrative......................... 8,018,285 1,405,577 1,148,067
Consulting services, stock based (see Note 6)...... 10,263,401 1,322,360
Amortization of intangibles........................ 930,463
Write-off of Virtual Technology (UK) Limited
assets.......................................... 925,000
------------ ----------- -----------
26,286,822 4,520,175 2,623,869
------------ ----------- -----------
Loss from operations................................. (21,392,792) (4,343,581) (2,449,200)
------------ ----------- -----------
Other income (expense):
Interest expense................................... (6,566,915) (79,618) (58,254)
Other (expense) income, net........................ (206,319) 66,111 (31,707)
------------ ----------- -----------
(6,773,234) (13,507) (89,961)
------------ ----------- -----------
Net loss............................................. $(28,166,026) $(4,357,088) $(2,539,161)
============ =========== ===========
Net loss per common share -- basic and diluted....... $ (.95) $ (.26) $ (.36)
============ =========== ===========
Weighted average common shares outstanding -- basic
and diluted........................................ 29,740,670 16,958,284 7,068,687
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 32
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net loss, as reported................................ $(28,166,026) $(4,357,088) $(2,539,161)
Other comprehensive income (loss):
Foreign currency translation adjustment............ (3,738)
------------ ----------- -----------
Comprehensive loss................................... $(28,169,764) $(4,357,088) $(2,539,161)
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 33
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE STOCK
------------------------- PAID-IN UNEARNED INCOME SUBSCRIPTION
SHARES AMOUNT CAPITAL COMPENSATION (LOSS) RECEIVABLE
------ ------ ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances -- January 31, 1997: 6,792,098 $ 1,632,017 $(34,722)
March 21, 1997 to May 5, 1997:
Stock issued for cash --
$2.50 per share............ 18,800 47,000
May 8, 1997 to June 17, 1997:
Stock issued for services --
$1.25 per share............ 36,539 45,674
September 25, 1997:
Stock issued for cash -- $.40
per share.................. 25,000 10,000
Stock issued for cash -- $.25
per share.................. 200,000 50,000
Stock issued for services --
$1.50 per share............ 15,000 22,500
November 12, 1997:
Stock issued for cash --
$.125 per share............ 50,000 6,250
December 3, 1997 to December
19, 1997:
Stock issued for cash -- $.10
per share.................. 900,000 90,000
Stock issued for services --
$.50 per share............. 25,000 12,500
Stock issued for services --
$.375 per share............ 50,000 18,750
December 19, 1997:
Stock issued for cash -- $.50
per share.................. 10,000 5,000
January 26, 1998:
Stock issued for cash -- $.10
per share.................. 350,000 35,000
Stock issued for services --
$.018 per share............ 17,500 322
Stock compensation expense.... 34,722
Net loss......................
---------- ------------ ----------- -------- -------- ---------
Balances -- January 31,
1998......................... 8,489,937 1,975,013
Correction to shares
beginning of year............ (60,000)
February 25 to March 10, 1998:
Stock issued for cash -- $.10
per share.................. 250,000 25,000
Stock issued for services --
$.10 per share............. 240,000 24,000
March 10, 1998:
Stock issued for cash -- $.25
per share.................. 30,000 7,500
March 18 to March 23, 1998:
Stock issued for cash -- $.08
per share.................. 1,250,000 100,000
<CAPTION>
STOCKHOLDERS'
ACCUMULATED EQUITY
DEFICIT (DEFICIT)
----------- -------------
<S> <C> <C>
Balances -- January 31, 1997: $ (829,421) $ 767,874
March 21, 1997 to May 5, 1997:
Stock issued for cash --
$2.50 per share............ 47,000
May 8, 1997 to June 17, 1997:
Stock issued for services --
$1.25 per share............ 45,674
September 25, 1997:
Stock issued for cash -- $.40
per share.................. 10,000
Stock issued for cash -- $.25
per share.................. 50,000
Stock issued for services --
$1.50 per share............ 22,500
November 12, 1997:
Stock issued for cash --
$.125 per share............ 6,250
December 3, 1997 to December
19, 1997:
Stock issued for cash -- $.10
per share.................. 90,000
Stock issued for services --
$.50 per share............. 12,500
Stock issued for services --
$.375 per share............ 18,750
December 19, 1997:
Stock issued for cash -- $.50
per share.................. 5,000
January 26, 1998:
Stock issued for cash -- $.10
per share.................. 35,000
Stock issued for services --
$.018 per share............ 322
Stock compensation expense.... 34,722
Net loss...................... (2,539,161) (2,539,161)
------------ ------------
Balances -- January 31,
1998......................... (3,368,582) (1,393,569)
Correction to shares
beginning of year............
February 25 to March 10, 1998:
Stock issued for cash -- $.10
per share.................. 25,000
Stock issued for services --
$.10 per share............. 24,000
March 10, 1998:
Stock issued for cash -- $.25
per share.................. 7,500
March 18 to March 23, 1998:
Stock issued for cash -- $.08
per share.................. 100,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 34
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE STOCK
------------------------- PAID-IN UNEARNED INCOME SUBSCRIPTION
SHARES AMOUNT CAPITAL COMPENSATION (LOSS) RECEIVABLE
------ ------ ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Stock issued for services --
$.10 per share............. 70,000 $ 7,000
March 23, 1998:
Stock issued for services --
$.25 per share............. 600,000 150,000
April 2 to April 27, 1998:
Stock issued for cash -- $.10
per share.................. 1,690,000 169,000
Stock issued for services --
$.10 per share............. 85,000 8,500
April 29, 1998:
Stock issued for services --
$.10 per share............. 50,000 5,000
May 12, 1998:
Stock issued for conversion
of debentures -- $.25 per
share...................... 694,000 173,500
May 14 to May 15, 1998:
Stock issued for cash -- $.10
per share.................. 660,000 66,000
May 18, 1998:
Stock issued for cash -- $.25
per share.................. 100,000 25,000
May 19 to May 21, 1998:
Stock issued for cash -- $.10
per share.................. 50,000 5,000
Stock issued for services --
$.10 per share............. 50,000 5,000
May 23, 1998:
Stock issued for cash -- $.08
per share.................. 1,250,000 100,000
June 22, 1998:
Stock issued for cash -- $.08
per share.................. 625,000 50,000
July 3, 1998:
Stock issued for cash --
$.125 per share............ 200,000 25,000
July 6, 1998:
Stock issued for cash -- $.08
per share.................. 1,250,000 100,000
July 14, 1998:
Stock issued for services --
$.10 per share............. 50,000 5,000
July 9 to July 20, 1998:
Stock issued for cash --
$.125 per share............ 50,000 6,250
Stock issued for cash --
$.375 per share............ 705,500 264,562
Stock issued for conversion
of debentures -- $.25 per
share...................... 126,000 31,500
Stock issued for services --
$.375 per share............ 5,000 1,875
<CAPTION>
STOCKHOLDERS'
ACCUMULATED EQUITY
DEFICIT (DEFICIT)
----------- -------------
<S> <C> <C>
Stock issued for services --
$.10 per share............. $ 7,000
March 23, 1998:
Stock issued for services --
$.25 per share............. 150,000
April 2 to April 27, 1998:
Stock issued for cash -- $.10
per share.................. 169,000
Stock issued for services --
$.10 per share............. 8,500
April 29, 1998:
Stock issued for services --
$.10 per share............. 5,000
May 12, 1998:
Stock issued for conversion
of debentures -- $.25 per
share...................... 173,500
May 14 to May 15, 1998:
Stock issued for cash -- $.10
per share.................. 66,000
May 18, 1998:
Stock issued for cash -- $.25
per share.................. 25,000
May 19 to May 21, 1998:
Stock issued for cash -- $.10
per share.................. 5,000
Stock issued for services --
$.10 per share............. 5,000
May 23, 1998:
Stock issued for cash -- $.08
per share.................. 100,000
June 22, 1998:
Stock issued for cash -- $.08
per share.................. 50,000
July 3, 1998:
Stock issued for cash --
$.125 per share............ 25,000
July 6, 1998:
Stock issued for cash -- $.08
per share.................. 100,000
July 14, 1998:
Stock issued for services --
$.10 per share............. 5,000
July 9 to July 20, 1998:
Stock issued for cash --
$.125 per share............ 6,250
Stock issued for cash --
$.375 per share............ 264,562
Stock issued for conversion
of debentures -- $.25 per
share...................... 31,500
Stock issued for services --
$.375 per share............ 1,875
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE> 35
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE STOCK
------------------------- PAID-IN UNEARNED INCOME SUBSCRIPTION
SHARES AMOUNT CAPITAL COMPENSATION (LOSS) RECEIVABLE
------ ------ ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
July 29 to July 31, 1998:
Stock issued for cash -- $.80
per share.................. 56,000 $ 44,800
Stock issued for conversion
of debentures -- $.25 per
share...................... 175,648 43,912
July 31 to October 31, 1998:
Stock issued for cash --
$.375 per share............ 1,386,666 520,000
Stock issued for services --
$.375 per share............ 580,000 217,500
November 11 to
December 12, 1998:
Stock issued for cash --
$1.00 per share............ 500,000 500,000
Stock issued for services --
$.99 per share............. 225,000 222,750
December 22, 1998 to January
26, 1999:
Stock issued for cash --
$1.50 per share net of
offering costs of
$50,000.................... 333,333 450,000
Stock issued for cash --
$1.50 per share, net of
offering costs of
$165,000................... 1,000,000 1,335,000
Stock issued for services --
$2.75 per share............ 114,532 315,000
Exercise of warrants -- $.75
per share.................. 213,333 160,000
January 15, 1999:
Stock issued for conversion
of debentures -- $1.00 per
share...................... 177,443 177,443
January 25 to January 29,
1999:
Subscription agreement to
purchase stock for cash at
$5.2857 per share net of
offering costs of
$98,564.................... 700,000 3,601,436 (925,000)
Stock issued in purchase of
GTI -- $7.187 per share
(Note 4)................... 228,571 1,642,740
Stock issued for consulting
agreement in connection
with purchase of
GTI -- $7.187 per share
(Note 4)................... 145,000 1,042,115
Exercise of warrants -- $1.00
per share.................. 1,000,000 1,000,000
Warrants and options issued
for services (Note 6)........ 2,970,400
Net loss......................
---------- ------------ ----------- -------- -------- ---------
Balances -- January 31,
1999......................... 25,345,963 17,572,796 (925,000)
Warrants issued for cash...... -- 50
<CAPTION>
STOCKHOLDERS'
ACCUMULATED EQUITY
DEFICIT (DEFICIT)
----------- -------------
<S> <C> <C>
July 29 to July 31, 1998:
Stock issued for cash -- $.80
per share.................. $ 44,800
Stock issued for conversion
of debentures -- $.25 per
share...................... 43,912
July 31 to October 31, 1998:
Stock issued for cash --
$.375 per share............ 520,000
Stock issued for services --
$.375 per share............ 217,500
November 11 to
December 12, 1998:
Stock issued for cash --
$1.00 per share............ 500,000
Stock issued for services --
$.99 per share............. 222,750
December 22, 1998 to January
26, 1999:
Stock issued for cash --
$1.50 per share net of
offering costs of
$50,000.................... 450,000
Stock issued for cash --
$1.50 per share, net of
offering costs of
$165,000................... 1,335,000
Stock issued for services --
$2.75 per share............ 315,000
Exercise of warrants -- $.75
per share.................. 160,000
January 15, 1999:
Stock issued for conversion
of debentures -- $1.00 per
share...................... 177,443
January 25 to January 29,
1999:
Subscription agreement to
purchase stock for cash at
$5.2857 per share net of
offering costs of
$98,564.................... 2,676,436
Stock issued in purchase of
GTI -- $7.187 per share
(Note 4)................... 1,642,740
Stock issued for consulting
agreement in connection
with purchase of
GTI -- $7.187 per share
(Note 4)................... 1,042,115
Exercise of warrants -- $1.00
per share.................. 1,000,000
Warrants and options issued
for services (Note 6)........ 2,970,400
Net loss...................... (4,357,088) (4,357,088)
------------ ------------
Balances -- January 31,
1999......................... (7,725,670) 8,922,126
Warrants issued for cash...... 50
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<PAGE> 36
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE STOCK
------------------------- PAID-IN UNEARNED INCOME SUBSCRIPTION
SHARES AMOUNT CAPITAL COMPENSATION (LOSS) RECEIVABLE
------ ------ ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
February 23, 1999
Stock issued for services --
$2.937 per share........... 1,000,000 $ 2,937,000
February 24, 1999
Stock issued for cash --
$4.50 per share............ 1,000 4,500
February 24, 1999
Exercise of warrants -- $.250
per share.................. 50,000 12,500
February 24, 1999 --
April 26, 1999
Exercise of warrants -- $1.00
per share.................. 806,000 806,000
March 5, 1999
Stock issued for cash --
$3.84 per share, net of
offering costs of
$275,000................... 651,041 2,225,000
March 17, 1999
Exercise of warrants -- $5.00
per share.................. 6,300 31,500
May 4, 1999
Stock issued for services --
$5.00 per share............ 25,000 125,000
May 19, 1999
Stock issued for cash --
$3.299 per share, net of
offering costs of
$250,000................... 757,576 2,250,000
February 1, 1999 --
May 31, 1999
Warrants and options issued
for services (Note 6)...... 7,062,000
Warrants cancelled........... (740,000)
Stock issued to replace
cancelled warrants......... 400,000
June 1999
Adjustment to change common
stock par value from none
to $.001 per share......... (32,257,303) 32,257,303
June 17, 1999
Stock issued for services --
$1.721 per share........... 450,000 450 774,384
July 1, 1999
Stock issued for services --
$2.875 per share........... 25,000 25 71,850
July 20, 1999
Cancellation of shares issued
for services............... (666,700) (667) (1,957,431)
August 5, 1999
Stock issued for services --
$1.37 per share............ 162,500 163 222,462
<CAPTION>
STOCKHOLDERS'
ACCUMULATED EQUITY
DEFICIT (DEFICIT)
----------- -------------
<S> <C> <C>
February 23, 1999
Stock issued for services --
$2.937 per share........... $ 2,937,000
February 24, 1999
Stock issued for cash --
$4.50 per share............ 4,500
February 24, 1999
Exercise of warrants -- $.250
per share.................. 12,500
February 24, 1999 --
April 26, 1999
Exercise of warrants -- $1.00
per share.................. 806,000
March 5, 1999
Stock issued for cash --
$3.84 per share, net of
offering costs of
$275,000................... 2,225,000
March 17, 1999
Exercise of warrants -- $5.00
per share.................. 31,500
May 4, 1999
Stock issued for services --
$5.00 per share............ 125,000
May 19, 1999
Stock issued for cash --
$3.299 per share, net of
offering costs of
$250,000................... 2,250,000
February 1, 1999 --
May 31, 1999
Warrants and options issued
for services (Note 6)...... 7,062,000
Warrants cancelled........... (740,000)
Stock issued to replace
cancelled warrants.........
June 1999
Adjustment to change common
stock par value from none
to $.001 per share.........
June 17, 1999
Stock issued for services --
$1.721 per share........... 774,834
July 1, 1999
Stock issued for services --
$2.875 per share........... 71,875
July 20, 1999
Cancellation of shares issued
for services............... (1,958,098)
August 5, 1999
Stock issued for services --
$1.37 per share............ 222,625
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-9
<PAGE> 37
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE STOCK
------------------------- PAID-IN UNEARNED INCOME SUBSCRIPTION
SHARES AMOUNT CAPITAL COMPENSATION (LOSS) RECEIVABLE
------ ------ ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
August 9, 1999
Stock issued for services --
$1.69 per share............ 15,000 $ 15 25,335
August 23, 1999
Stock issued for services --
$1.8125 per share.......... 1,500,000 1,500 2,717,250
September 9, 1999
Stock issued for services --
$2.37 per share............ 10,000 10 23,690
November 1, 1999 -- December
29, 1999
Stock issued for cash --
$1.00 per share, net of
offering costs of
$145,000................... 2,505,000 2,505 2,357,495
Warrants issued for cash..... 2,900,000
Redemption of warrants (Note
7)......................... (1,450,000)
November 23, 1999
Stock issued for services --
$2.00 per share............ 250,000 250 499,750
December 30, 1999
Stock issued in purchase of
Softdisk -- $1.896 per
share (Note 4)............. 245,359 245 464,955
December 30, 1999
Exercise of warrants -- $1.00
per share.................. 568,000 568 567,432
January 13, 1999
Stock issued for services --
$1.75 per share............ 10,000 10 17,490
January 20, 1999
Stock issued for services --
$1.843 per share........... 20,000 20 36,829
Issuance of missing stock
certificates................. 5,364 5 (5)
June 1 1999 --
January 31, 2000
Warrants and Options issued
for services (Note 6)...... 5,420,680
Net loss......................
Cumulative translation
adjustment................... $ (3,738)
---------- ------------ ----------- -------- -------- ---------
Balances -- January 31,
2000......................... 34,142,403 $ 34,142 $44,949,469 $ -- $ (3,738) $(925,000)
========== ============ =========== ======== ======== =========
<CAPTION>
STOCKHOLDERS'
ACCUMULATED EQUITY
DEFICIT (DEFICIT)
----------- -------------
<S> <C> <C>
August 9, 1999
Stock issued for services --
$1.69 per share............ $ 25,350
August 23, 1999
Stock issued for services --
$1.8125 per share.......... 2,718,750
September 9, 1999
Stock issued for services --
$2.37 per share............ 23,700
November 1, 1999 -- December
29, 1999
Stock issued for cash --
$1.00 per share, net of
offering costs of
$145,000................... 2,360,000
Warrants issued for cash..... 2,900,000
Redemption of warrants (Note
7)......................... (1,450,000)
November 23, 1999
Stock issued for services --
$2.00 per share............ 500,000
December 30, 1999
Stock issued in purchase of
Softdisk -- $1.896 per
share (Note 4)............. 465,200
December 30, 1999
Exercise of warrants -- $1.00
per share.................. 568,000
January 13, 1999
Stock issued for services --
$1.75 per share............ 17,500
January 20, 1999
Stock issued for services --
$1.843 per share........... 36,849
Issuance of missing stock
certificates.................
June 1 1999 --
January 31, 2000
Warrants and Options issued
for services (Note 6)...... 5,420,680
Net loss...................... $(28,166,026) (28,166,026)
Cumulative translation
adjustment................... (3,738)
------------ ------------
Balances -- January 31,
2000......................... $(35,891,696) $ 8,163,177
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-10
<PAGE> 38
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net loss........................................... $(28,166,026) $(4,357,088) $(2,539,161)
Adjustments to reconcile net loss to net cash used
by operating activities:
Stock-based compensation and interest expense... 17,143,204 1,322,360 134,468
Depreciation.................................... 307,292 25,155 19,649
Amortization.................................... 966,906 3,202
Provision for losses on accounts receivable..... 292,528 157,780
Provision for inventory obsolescence............ 48,853
Loss on disposal of equipment................... 10,054
Write-off of Virtual Technology (UK) Limited
assets........................................ 925,000
Changes in operating assets and liabilities:
Customer and credit card receivables.......... (4,898,037) (1,297,634) 11,092
Inventories................................... 2,205,571 21,736 (8,287)
Other current assets.......................... (124,103) (164,519) 2,756
Deposits...................................... 3,939 (9,631)
Accounts payable.............................. 5,124,029 (102,436) 223,823
Accrued expenses and other current
liabilities................................ 1,120,736 821,779 433,744
------------ ----------- -----------
Net cash used by operating activities........... (5,975,108) (3,579,296) (786,862)
============ =========== ===========
Investing activities:
Purchases of furniture and equipment............... (843,548) (230,706) (19,061)
Acquisition of businesses, net of cash acquired.... (3,480,352) (950,147)
Marketable securities.............................. (185,015) (122)
------------ ----------- -----------
Net cash used in investing activities........... (4,508,915) (1,180,853) (19,183)
------------ ----------- -----------
Financing activities:
Line of credit borrowings.......................... 68,085,917
Line of credit payments............................ (61,202,102)
Borrowing under notes payable...................... 552,091
Proceeds from convertible debentures............... 237,000
Loans from related parties......................... (186,543) 75,000 341,543
Payments on notes payable and convertible
debentures...................................... (6,883,057) (50,284) (37,965)
Loan fees.......................................... (244,853) (50,250)
Payments on capital lease obligations.............. 4,575 (4,524) (1,121)
Proceeds from issuance of common stock............. 7,505,050 5,127,551 243,251
Offering costs incurred for common stock
issuance........................................ (670,000) (215,000)
Collection of subscription receivable.............. 2,676,436
Proceeds from options and warrants exercised....... 1,422,500
------------ ----------- -----------
Net cash provided in financing activities....... 11,060,014 4,882,493 782,708
------------ ----------- -----------
Effect of foreign currency on cash................... (3,738)
------------ ----------- -----------
Net increase (decrease) in cash...................... 572,253 122,344 (23,337)
Cash:
Beginning of year.................................. 125,993 3,649 26,986
------------ ----------- -----------
End of year........................................ $ 698,246 $ 125,993 $ 3,649
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-11
<PAGE> 39
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Virtual Technology Corporation ("VTC" or the "Company") is an e-commerce
provider of high performance computer hardware, software and peripheral products
to sophisticated computer users. Through its distribution, catalog and web-based
business, the Company sells computer and peripheral equipment to wholesale and
retail outlets throughout the United States and Canada.
2. BASIS OF PRESENTATION
The Company's consolidated financial statements have been prepared assuming
the Company will continue as a going concern, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
However, the Company incurred a net loss of $28,166,026 and negative cash flows
from operations of $5,975,108 during the fiscal year ended January 31, 2000. At
January 31, 2000, the Company had an accumulated deficit of $35,891,696, a
working capital deficit of $6,190,662 and was in violation of a covenant
contained in its line of credit facility (see Note 7).
The Company's ability to continue as a going concern will be dependent
upon, among other things, management's ability to:
- reduce operating costs and/or increase revenues and operating margins, in
order to improve operating cash flows;
- obtain additional debt and/or equity financing; and
- obtain waivers or renegotiate the terms of its existing line of credit.
The Company's management has developed an operating and financing plan to
reduce its operating costs, focus resources on the profitable elements of its
distribution business, renegotiate terms of its line of credit agreement, and
obtain additional debt and/or equity financing.
Management believes that the successful execution of its operating and
financing plan will allow the Company to fund operations and to service its
debts. However, there can be no assurance that the Company will be successful in
improving its operating cash flows or renegotiating terms of its line of credit,
or that additional debt or equity financing will be available to the Company or
that it will be available on terms desirable to management. Accordingly, there
can be no assurance that the Company will continue as a going concern. These
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, GTI Acquisition Corporation ("GTI"), T2
Acquisition Corporation ("T2"), and Virtual Technology (UK) Limited ("VTL"). GTI
acquired the assets of Herold Marketing Associates, Inc. ("HMA") on January 28,
1999, and is included in the consolidated statements of operations and cash
flows from January 29, 1999 (three days in fiscal 1999) through January 31,
2000. T2 Acquisition Corporation acquired certain assets and assumed certain
liabilities of Tech Squared, Inc. effective November 30, 1999 and is included in
the consolidated statements of operations and cash flows from November 30, 1999
through January 31, 2000. VTL is a wholly owned subsidiary operating in the
United Kingdom. In fiscal 1998, the Company wrote off $925,000 of intangible
assets and advances due to the termination of the VTL operations. VTL was
dormant throughout fiscal 1999 and limited operations were started again in
fiscal 2000.
F-12
<PAGE> 40
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
USE OF ESTIMATES
The preparation of these consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
REVENUE RECOGNITION
The Company recognizes revenue upon the shipment of the product. A
provision for estimated returns is recorded as a reduction of net sales at the
time of sale.
MARKETABLE SECURITIES
Marketable securities as of January 31, 2000 consist of U.S.
government-backed obligations with a carrying value of $25,015 and common stock
of a private company with a carrying value of $160,000. Marketable securities
are classified as short-term or long-term in the balance sheet based upon their
maturity date and expectations regarding sales.
At January 31, 2000, all marketable securities are classified as available
for sale. Available-for-sale securities are carried at fair value, with
unrealized gains and losses, net of tax, reported as a separate component of
stockholders' equity until realized. The fair values are determined using quoted
market prices, if available. The carrying amounts of securities for purposes of
computing unrealized gains and losses are determined by specific identification.
The cost of the U.S. government-backed securities approximates fair value. The
carrying amount of the Company's common stock investment equals cost, as no
market value is readily available.
CAPITALIZED SOFTWARE
In accordance with Statement of Position 98-1 ("SOP 98-1"), "Accounting for
the Costs of Computer Software Development or Obtained for Internal Use," it is
the Company's policy to capitalize the cost of its internal use software.
Capitalized software consists of purchased software, outsourcing costs and
internal staff costs incurred to develop software, including the Company's web
sites. The Company's policy is to amortize these costs over three years.
Software development costs not capitalizable pursuant to SOP 98-1, which totaled
$438,399, $107,835 and $13,440 in 2000, 1999 and 1998, respectively, are
included in general and administrative expenses.
INVENTORIES
Inventories consist of finished goods and are stated at the lower of cost
or market, with cost determined using the first-in, first-out (FIFO) method.
Appropriate consideration is given to obsolescence and other factors in
evaluating net realizable value.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Significant additions or
improvements extending asset lives are capitalized, while repairs and
maintenance are charged to expense as incurred. Depreciation is recorded using
the straight-line method over the estimated useful lives of the assets, ranging
from three to seven years. Gains or losses on dispositions are included in
current operations.
F-13
<PAGE> 41
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FINANCIAL INSTRUMENTS
The carrying values of cash, receivables, notes payable and accounts
payable approximate their fair values principally because of their short-term
nature. The carrying value of long-term debt does not differ significantly from
its fair value. It is not practicable to determine the fair value of loans from
related parties as the relationship influences the terms, and similar
instruments are not generally available.
ADVERTISING COSTS
Advertising costs, excluding direct response catalog advertising, are
expensed when incurred and totaled approximately $4,460,226, $1,530,900 and
$222,600 for the periods ended January 31, 2000, 1999 and 1998, respectively.
Advertising costs related to direct response catalog advertising are deferred
and charged to expense over the period during which the related sales are
expected to occur. The Company uses an accelerated amortization schedule for its
deferred catalog costs whereby approximately 90% of the costs are amortized in
the first four months following the release of the catalog and fully amortized
by the sixth month. Direct response catalog advertising expense was $16,574 for
the year ended January 31, 2000.
INTANGIBLE ASSETS
Intangible assets are being amortized on a straight-line basis over their
estimated lives, which range from 3 to 20 years. There was no accumulated
amortization on any intangible assets at January 31, 1999.
NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share is computed by dividing net
loss by the weighted average number of common and common equivalent shares
outstanding during the period. The Company's common equivalent shares are those
that result from dilutive common stock options, warrants, and convertible debt.
The calculation of diluted net loss per common share for 2000, 1999 and 1998
excludes 14,317,502, 6,342,152 and 3,085,841 equivalent shares, respectively,
because their effect would be antidilutive.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for employee stock and options under the method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations and provides the pro forma
disclosures required by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation." Compensation for common stock,
options and warrants issued in exchange for investment banking, strategic
planning, legal and other services are measured in accordance with EITF Issue
No. 98-16, "Accounting for Equity Instruments that are Issued to other than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services."
VALUATION OF LONG-LIVED ASSETS
The Company periodically, at least quarterly, analyzes its long-lived
assets for potential impairment, assessing the appropriateness of lives and
recoverability of unamortized balances through measurement of undiscounted
operating cash flows.
INCOME TAXES
The Company calculates income taxes in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes," which requires the use of the
liability method of accounting for income taxes. Under the liability method,
deferred income taxes are recorded to reflect the tax consequences in future
years of temporary differences between the tax bases of assets and liabilities
and their financial
F-14
<PAGE> 42
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
reporting amounts using enacted tax rates for the years in which these items are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is tax payable and the change during the period in deferred
tax assets and liabilities.
OTHER RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"), which is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. This statement
establishes a new model for accounting for derivatives and hedging activities.
Under FAS 133, the Company must recognize all derivatives as assets and
liabilities and measure them at fair value. In July 1999, the FASB issued
Statement of Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of Effective Date of FASB Statement
No. 133," which defers the effective date to all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company does not expect the adoption of FAS
133 to have a significant impact on its financial position, results of
operations or cash flows.
In December 1999, the Staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." This SAB summarizes certain of the Staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. Application of the views expressed in SAB 101, as amended
by SAB 101A, is required no later than the Company's second quarter of fiscal
year 2001. Although it has not made a definite determination of its impact, the
Company does not expect the adoption of SAB 101 to have a materially adverse
effect on its financial position, operating income (loss) or cash flows.
In April 2000, The FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation -- an
Interpretation of APB 25." FIN 44 clarifies (a) the definition of employee for
purposes of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. The Company does not expect the adoption of FAS 133 to have a
significant impact on its financial position, results of operations or cash
flows.
4. ACQUISITIONS
On December 17, 1999, the Company, through its wholly-owned subsidiary, T2
Acquisition Corporation, completed its acquisition with an effective date of
November 30, 1999, of substantially all of the operating assets of Tech Squared
Inc. ("Tech") for approximately $3,200,000 in cash and the assumption of certain
liabilities. The acquisition was accounted for using the purchase method of
accounting.
Tech sells microcomputer hardware and software products. Tech's target
markets are (i) desktop publishing, graphic arts and pre-press industries, (ii)
computer dealers and value-added resellers, and (iii) developers of internal
corporate intranet and external Internet sites and managers of local area
networks and wide area networks.
F-15
<PAGE> 43
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The table below is a summary of the purchase price and calculation of
amounts allocated to intangible assets:
<TABLE>
<S> <C>
Cash........................................................ $3,252,536
Liabilities assumed......................................... 3,048,568
Acquisition costs........................................... 200,000
----------
Total purchase price................................. 6,501,104
Estimated fair value of tangible assets acquired............ 5,301,104
----------
Purchase price in excess of the estimated fair value of
assets acquired........................................... $1,200,000
==========
</TABLE>
The Company has allocated the excess purchase price to intangible assets as
follows:
<TABLE>
<CAPTION>
AMORTIZATION
DESCRIPTION AMOUNT PERIOD (YEARS)
----------- ------ --------------
<S> <C> <C>
Customer list........................................ $ 690,000 5
Assembled workforce.................................. 225,000 4
Domain names......................................... 130,000 5
Trade names.......................................... 155,000 7
----------
$1,200,000
==========
</TABLE>
On December 30, 1999, the Company completed its acquisition of certain
assets of Softdisk, Inc., including the Internet web site domain name and
trademark for downloadstore.com for $752,220, which included cash, 245,359
shares of the Company's common stock and a promissory note. The acquisition was
accounted for using the purchase method of accounting.
Downloadstore.com is an Internet retail web site in the business of selling
downloadable software and licenses to end user consumers and businesses.
The table below is a summary of the purchase price and calculation of
amounts allocated to intangible assets:
<TABLE>
<S> <C>
Cash........................................................ $150,000
Common stock................................................ 465,200
Promissory note due seller.................................. 104,215
Acquisition costs........................................... 32,805
--------
Total purchase price................................... 752,220
Estimated fair value of tangible assets acquired............ 325,000
--------
Purchase price in excess of the estimated fair value of
assets acquired........................................... $427,220
========
</TABLE>
The Company has allocated the excess purchase price to intangible assets as
follows:
<TABLE>
<CAPTION>
AMORTIZATION
DESCRIPTION AMOUNT PERIOD (YEARS)
----------- ------ --------------
<S> <C> <C>
Customer list......................................... $394,415 4
Goodwill.............................................. 32,805 5
--------
$427,220
========
</TABLE>
On January 28, 1999, the Company, through its wholly-owned subsidiary, GTI
Acquisition Corporation ("GTI"), completed its acquisition of substantially all
of the operating assets of Herold Marketing Associates, Inc., dba Graphics
Technology, Inc. for approximately $17,100,000, which included
F-16
<PAGE> 44
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
cash, 373,571 shares of the Company's common stock and notes and the assumption
of certain liabilities. The acquisition was accounted for using the purchase
method of accounting.
GTI is a 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 a
stock inventory of approximately 1,600 products.
The table below is a summary of the purchase price and calculation of the
preliminary amounts allocated to intangible assets:
<TABLE>
<S> <C>
Cash........................................................ $1,200,000
Notes payable, net of discount of $111,400.................. 7,188,600
Common stock................................................ 2,684,855
Liabilities assumed......................................... 6,049,636
----------
Total purchase price................................. 17,123,091
Estimated fair value of tangible assets acquired
(approximates recorded book value)........................ 7,235,681
----------
Purchase price in excess of the estimated fair value of
assets acquired........................................... $9,887,410
==========
</TABLE>
The Company initially allocated the excess purchase price to intangible
assets as follows:
<TABLE>
<CAPTION>
AMORTIZATION
DESCRIPTION AMOUNT PERIOD (YEARS)
----------- ------ --------------
<S> <C> <C>
Covenant not to compete.............................. $ 500,000 3
Consulting agreement................................. 1,042,115 3
Goodwill............................................. 8,345,295 20
----------
$9,887,410
==========
</TABLE>
In fiscal 2000, the Company settled certain contingencies and more
accurately determined the values of certain tangible assets and liabilities
assumed related to the GTI acquisition. As a result, goodwill was reduced by
$403,539 to $7,941,756.
The following unaudited pro forma financial information gives effect to the
Tech, Softdisk, and Graphics acquisitions as if they had occurred at the
beginning of each of the years ended January 31, 2000 and 1999. The pro forma
results were prepared for comparative purposes only and do not purport to be
indicative of the results of operations which actually would result had the
acquisitions occurred on the date indicated, or which may result in the future.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
----------------------------
2000 1999
---- ----
(UNAUDITED)
<S> <C> <C>
Net sales......................................... $118,960,522 $108,334,478
Net loss.......................................... (32,842,423) (6,321,555)
Net loss per common share -- basic and diluted.... (1.05) (0.33)
Weighted average common shares
outstanding -- basic and diluted................ 31,191,922 19,449,774
</TABLE>
F-17
<PAGE> 45
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SELECTED BALANCE SHEET INFORMATION
The following provides additional balance sheet information:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------------
2000 1999
---- ----
<S> <C> <C>
Other current assets:
Prepaid consulting and service agreements.......... $ 1,934,173 $2,546,630
Credit card company holdbacks...................... 470,069 174,000
Prepaid expenses and other......................... 116,706 41,040
Prepaid catalog.................................... 82,777
----------- ----------
$ 2,603,725 $2,761,670
=========== ==========
Furniture and equipment:
Office furniture and equipment..................... $ 344,161 $ 291,674
Computer equipment and purchased software.......... 1,325,185 24,100
----------- ----------
1,669,346 315,774
Less accumulated depreciation...................... (342,703) (35,410)
----------- ----------
$ 1,326,643 $ 280,364
=========== ==========
Capitalized software development costs............... $ 362,678 $ 104,500
Less accumulated amortization........................ (39,645) (3,202)
----------- ----------
$ 323,033 $ 101,298
=========== ==========
</TABLE>
Amortization expense resulting from amortization of capitalized software
development costs was $36,443, $3,202 and $-0- during 2000, 1999 and 1998,
respectively.
<TABLE>
<CAPTION>
JANUARY 31,
-------------------------
2000 1999
---- ----
<S> <C> <C>
Intangible assets:
Goodwill........................................... $ 7,974,560 $8,345,295
Covenant not to compete............................ 500,000 500,000
Consulting agreement............................... 1,042,115 1,042,115
Customer lists..................................... 1,084,415
Assembled workforce................................ 225,000
Domain names....................................... 130,000
Trade names........................................ 155,000
----------- ----------
11,111,090 9,887,410
Less accumulated amortization...................... (930,463)
----------- ----------
$10,180,627 $9,887,410
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31,
-------------------------
2000 1999
---- ----
<S> <C> <C>
Other assets:
Prepaid investor relation services................. $ 74,000 $ 103,600
Loan fees.......................................... 2,482,021 50,250
Deposits........................................... 18,034 21,973
----------- ----------
$ 2,574,055 $ 175,823
=========== ==========
</TABLE>
F-18
<PAGE> 46
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PREPAID CONSULTING AND SERVICE AGREEMENTS
The Company enters into consulting and service agreements whereby the
Company receives, generally over a period of one year or less as specified in
the agreements, investment banking, legal and other services. As consideration
for these agreements, the Company paid cash, issued common stock and/or issued
warrants to purchase common stock, or a combination thereof. In fiscal 2000, the
Company accounted for such agreements pursuant to the requirements of Emerging
Issues Task Force Issue No. 96-18 and Statement of Financial Standards No. 123.
As of January 31, 2000, the Company has $1,934,173 included in prepaid and
other current assets and $1,190,093 included in other assets which will be
charged to operating and interest expense, respectively, during fiscal year 2001
as the underlying services are provided or over the term of the Company's line
of credit agreement. Total expenses related to these agreements were $10,263,401
and $1,322,360 in fiscal years 2000 and 1999, respectively.
7. NOTES AND LINE OF CREDIT PAYABLE
Notes and line of credit payable consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------------
2000 1999
---- ----
<S> <C> <C>
Line of credit, Coast Business Credit............... $ 6,883,816
Note payable, Coast Business Credit................. 375,000
Note payable to HMA, interest imputed at 9.75%,
balance due in fiscal 2001........................ 276,673 $ 7,188,600
Notes payable to former stockholder of VTL with
interest at 8%.................................... 93,129
Notes payable to related parties with interest at
10%, due December 2000 and March 2001, repaid in
April 2000........................................ 30,000 416,543
Note payable to related party, repaid in February
2000.............................................. 200,000
Softdisk note, discounted at 9.75%, due in monthly
payments of $9,150 through December 2000.......... 95,911
Other notes payable................................. 26,507 13,944
----------- -----------
7,887,907 7,712,216
Less current portion................................ (7,887,907) (7,340,673)
----------- -----------
$ -- $ 371,543
=========== ===========
</TABLE>
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 line of credit financing of up to
$10,000,000, based upon eligible levels of receivables and inventories. The loan
bears interest at the prime rate (8.5% at January 31, 2000) plus 1.5% and, as
amended, expires March 31, 2003. In connection with setting up the Coast
Agreement, the Company incurred certain fees and expenses that it paid for with
a combination of cash and warrants to purchase the Company's common stock. The
loan fees are being amortized over the term of the Coast Agreement and charged
to interest expense. The total loan fees of $3,332,278 included three-year
warrants to purchase 500,000 shares of common stock at $6.29 per share.
Approximately $1,110,800 of the loan fee was amortized to interest expense
during the year ended January 31, 2000. As part of the Coast Agreement, the
Company may also borrow up to an additional $250,000 for capital expenditures at
the bank's reference rate plus 2.0%. In addition, the Company may borrow up to
$500,000 at the bank's reference rate plus 2%, with principal borrowings payable
in 24 equal monthly installments. As of January 31, 2000, the Company had
borrowed $375,000 of
F-19
<PAGE> 47
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the $500,000 available. Borrowings under the Coast Agreement are collateralized
by all of the assets of the Company. The Coast Agreement requires the Company to
maintain a minimum level of tangible net worth and contains a covenant which
allows Coast to declare an event of default in the event there is a material
adverse change in the Company's financial position or results of operations
("material adverse effect"), as defined. As of January 31, 2000, the Company had
$6,883,816 of borrowings under the line of credit. At January 31, 2000, the
Company was in violation of the tangible net worth covenant contained in the
Coast Agreement. Because of the covenant violation, Coast has the right to
declare the Company in default and to require repayment of all borrowings under
the Coast Agreement. Accordingly, all Coast borrowings have been classified as a
current liability.
The Company was in violation of the tangible net worth covenant, contained
in the Coast Agreement, as of September 30, 1999 and October 31, 1999. In
December 1999, Coast and the Company amended the Coast Agreement ("the Amended
Agreement") to permanently waive these covenant violations in exchange for a
five-year warrant to purchase 50,000 shares of the Company's common stock at an
exercise price of $2.04 per share. The value of the warrants, $59,500, has been
included in fiscal year 2000 interest expense. The Amended Agreement also
provides that in the event that the Company terminates the agreement prior to
March 31, 2003, the Company will continue to pay Coast, as a termination fee,
the minimum monthly interest that Coast would otherwise have received under the
agreement. The Company currently estimates this termination fee would be
approximately $33,000 per month. In addition, the Amended Agreement provided for
additional borrowings of $2,100,000 to partially fund the Tech Squared
acquisition and added the Tech Squared assets as additional collateral for
borrowings under the Amended Agreement.
As a condition of its $2,100,000 loan, Coast required that the Company
obtain a minimum of $2,000,000 of additional equity funds, and issue to Coast an
additional five-year warrant to purchase 200,000 shares of the Company's common
stock at an exercise price of $2.04 per share, subject to certain adjustments.
The $238,000 value of the warrants has been recorded as prepaid loan fees, and
is being amortized over the term of the Amended Agreement. The Company satisfied
Coast's additional equity requirement in December 1999 upon receipt of
$1,423,000 from the sale of 1,423,000 shares of common stock and $1,450,000 from
the sale of five-year warrants to purchase 5,800,000 shares of common stock for
$0.50 per share. The warrant holders had the right to demand redemption of
one-half of these warrants for $0.50 per warrant. Upon the warrant holders'
demand in December 1999 and January 2000, the Company redeemed all of the
2,900,000 redeemable warrants for $1,450,000 in cash. The fair value of the
remaining 2,900,000 warrants of $4,777,000 was charged to interest expense in
fiscal year 2000. If the Company does not register the shares underlying these
warrants with the Securities and Exchange Commission by May 31, 2000, the
Company is required to issue these warrant holders additional warrants to
purchase an aggregate of 2,900,000 shares of common stock for $0.50 per share.
F-20
<PAGE> 48
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LEASE COMMITMENTS
OPERATING LEASES
The Company leases office facilities and certain office equipment under
operating lease agreements which expire at various dates through February 2007.
The Company may elect to extend its headquarter facility lease for an additional
five years, beginning March 2007. The lease requires the Company to pay
insurance, property taxes and other operating expenses related to the leased
facility. Total rent expense was $295,082, $58,400 and $31,300 for the years
ended January 31, 2000, 1999 and 1998.
CAPITAL LEASES
The Company has entered into capital lease agreements for certain office
equipment. These agreements, which expire at various dates through October 2004,
require monthly lease payments, including interest at annual rates from 10.8% to
16.5%. Cost of equipment in the accompanying balance sheets includes the
following amounts under capital leases as of January 31:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cost....................................................... $82,091 $66,260
Less accumulated amortization.............................. (22,768) (8,724)
------- -------
$59,323 $57,536
======= =======
</TABLE>
Future minimum lease payments under capital and operating leases are as
follows as of January 31, 2000:
<TABLE>
<CAPTION>
CAPITAL OPERATING
------- ---------
<S> <C> <C>
2001.................................................... $ 22,806 $ 420,434
2002.................................................... 22,273 422,994
2003.................................................... 22,273 411,209
2004.................................................... 14,704 333,960
2005.................................................... 3,079 342,611
Thereafter.............................................. 741,207
-------- ----------
85,135 $2,672,415
==========
Less amount representing interest....................... (20,665)
--------
Present value of minimum lease payments................. 64,470
Less current portion.................................... (13,951)
--------
$ 50,519
========
</TABLE>
9. STOCKHOLDERS' EQUITY
In June 1999, the stockholders of the Company approved an amendment to 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, 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, effective June 1999, $32,257,303 was reclassified from common stock
to additional paid in capital.
During fiscal 2000, the Company issued 5,364 common shares to a shareholder
of a predecessor company who had not previously contacted the Company to present
such shares for exchange.
F-21
<PAGE> 49
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTIONS AND WARRANTS
The Company maintains a stock option plan (the Plan) pursuant to which a
maximum of the greater of 4,000,000 shares or 15% of the total outstanding
shares of common stock are reserved for issuance. These options can be either
incentive stock options or nonqualified options as designated by the Board of
Directors at the time of grant. Incentive stock options may be granted to
employees, including officers, at exercise prices determined at the discretion
of the Board of Directors. Nonqualified stock options may be granted to
directors, officers, employees and other eligible recipients at exercise prices
determined at the discretion of the Board of Directors.
The vesting and expiration terms of stock options granted under the Plan
are determined by the Board of Directors at the time of grant, but in no event
are options exercisable more than ten years after the date of grant. A summary
of selected information regarding the stock option activity under the Plan is as
follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE
OPTIONS PER OPTION
------- ----------------
<S> <C> <C>
Balance at January 31, 1998
Granted........................................... 1,500,000 $1.46
--------- -----
Balance at January 31, 1999......................... 1,500,000 $1.46
Granted........................................... 1,868,000 $3.24
Cancelled......................................... (15,000) $4.75
--------- -----
Balance at January 31, 2000......................... 3,353,000 $2.46
--------- -----
</TABLE>
At January 31, 2000, 1,768,360 options were available for grant under the
Plan.
The weighted average fair value of options granted under the Plan at the
date of grant was $3.13 and $0.93 during fiscal 2000 and 1999, respectively. All
of these options had exercise prices equal to or greater than the fair value of
common stock on the date of grant.
OTHER OPTION GRANTS
The Company's Board of Directors, at their discretion, may grant stock
options that are not part of the Plan. The vesting and expiration terms of stock
options granted outside of the Plan are determined by the Board of Directors at
the time of grant. A summary of selected information regarding the stock option
activity not granted under the Plan during each of the three years in the period
ended January 31, 2000, is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE
OPTIONS PER OPTION
------- ----------------
<S> <C> <C>
Balance at January 31, 1997......................... 520,000 $1.67
Granted........................................... 298,000 $1.00
--------- -----
Balance at January 31, 1998......................... 818,000 $1.43
Granted........................................... 190,000 $0.65
Cancelled......................................... (350,000) $2.00
--------- -----
Balance at January 31, 1999......................... 658,000 $0.90
Granted........................................... 831,950 $1.28
--------- -----
Balance at January 31, 2000......................... 1,489,950 $1.11
--------- -----
</TABLE>
F-22
<PAGE> 50
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The weighted average fair value of options granted outside of the Plan
during fiscal 2000, 1999 and 1998 were $1.12, $0.08 and $0.90, respectively.
The following table summarizes information about all stock options
outstanding and exercisable at January 31, 2000.
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------------------ ----------------------------
WEIGHTED AVERAGE
---------------------------- WEIGHTED
REMAINING AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE-YEARS PRICE EXERCISABLE PRICE
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.05 - $0.25 356,950 .86 $0.10 356,950 $0.10
$1.00 - $1.94 3,040,000 7.60 $1.29 1,708,000 $1.04
$2.22 - $3.50 281,000 8.62 $2.39 252,200 $2.41
$3.75 - $4.75 1,165,000 9.21 $4.53 421,250 $4.45
</TABLE>
WARRANTS
As of January 31, 2000, the Company had outstanding and exercisable
warrants to purchase 9,474,552 shares of the Company's common stock at prices
ranging from $0.50 to $9.00 per share. The warrants expire at various dates
through December of 2004. The following table summarizes information about all
common stock warrants outstanding and exercisable at January 31, 2000:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------------------ ----------------------------
WEIGHTED AVERAGE
---------------------------- WEIGHTED
REMAINING AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE-YEARS PRICE EXERCISABLE PRICE
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.50 - $1.68 7,999,552 3.62 $0.81 7,999,552 $0.81
$2.00 - $3.00 775,000 3.07 $2.17 775,000 $2.17
$6.29 - $9.00 700,000 1.82 $7.06 700,000 $7.06
</TABLE>
As permitted by SFAS 123, "Accounting for Stock-Based Compensation", the
Company elected to follow Accounting Principles Board opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees," to measure compensation cost for
stock options and warrants issued to employees. Under APB 25, if the exercise
price of the Company's stock options and or warrants equals the market price of
the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net loss and net loss per share is required
by SFAS 123, and was determined as if the Company had accounted for its stock
options and warrants granted to employees based upon their fair values. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
PERIOD ENDED JANUARY 31,
-----------------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Dividend yield............................. 0% 0% 0%
Volatility factor.......................... 99% - 253% 240% - 307% 0%
Risk-free interest rates................... 5.53% - 6.24% 4.46% - 5.62% 5.48% - 5.66%
Expected lives -- years.................... 0.8 - 8.0 1.6 - 8.0 1.1 - 4.8
</TABLE>
F-23
<PAGE> 51
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized over the option's vesting period. The pro forma information
is as follows:
<TABLE>
<CAPTION>
PERIOD ENDED JANUARY 31,
------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net Loss:
As reported........................................ $(28,166,026) $(4,357,088) $(2,539,161)
Pro forma.......................................... (30,952,980) (4,765,848) (2,781,841)
Net loss per common share -- basic and diluted:
As reported........................................ (0.95) (0.26) (0.36)
Pro forma.......................................... (1.04) (0.28) (0.39)
</TABLE>
11. INCOME TAXES
The Company provides for income taxes based on income reported for
financial reporting purposes. Deferred taxes are recognized for temporary
differences between the bases of assets and liabilities for financial statement
and income tax purposes. Net deferred tax assets have been offset by a valuation
allowance because management has concluded, based upon the Company's history of
net operating losses, that realization is not presently likely. No income taxes
are currently payable due to the Company's net operating losses.
The significant components of deferred income tax assets and liabilities,
all of which are long-term, are as follows:
<TABLE>
<CAPTION>
JANUARY 31,
---------------------------------------------------------------------------------
2000 1999
----------------------------------------- -------------------------------------
TOTAL FEDERAL STATE TOTAL FEDERAL STATE
----- ------- ----- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Deferred tax assets:
Net operating loss
carryforwards... $ 13,652,700 $ 10,337,900 $ 3,314,800 $ 2,485,000 $ 1,929,000 $ 556,000
Write-off of VTL... 457,600 355,200 102,400 457,600 355,200 102,400
------------ ------------ ----------- ----------- ----------- ---------
14,110,300 10,693,100 3,417,200 2,942,600 2,284,200 658,400
Valuation
allowance.......... (14,110,300) (10,693,100) (3,417,200) (2,718,800) (2,060,400) (658,400)
------------ ------------ ----------- ----------- ----------- ---------
223,800 223,800
Deferred tax
liabilities:
Other.............. 223,800 223,800
------------ ------------ ----------- ----------- ----------- ---------
Net.................. $ -- $ -- $ -- $ -- $ -- $ --
============ ============ =========== =========== =========== =========
</TABLE>
Approximately $437,000, $949,000, $4,165,000, and $25,845,000 of the net
operating losses expire in 2012, 2013, 2019 and 2020 respectively.
Certain changes in ownership resulting from the sales of common stock and
the issuance of common stock options and warrants will limit the future annual
realization of the tax net operating loss carry forwards to a specified
percentage under Section 382 of the Internal Revenue Code.
12. COMMITMENTS AND CONTINGENCIES
The Company has an agreement with a consultant. Under the terms of the
agreement, if certain performance measures are met the consultant is entitled to
a bonus consisting of warrants to purchase 100,000 shares of the Company's
common stock for three years at an exercise price of $1.00 per share. No
F-24
<PAGE> 52
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
compensation has been recorded related to the bonus because management does not
consider it probable that the performance measures will be met.
In October 1999, the Company entered into a three-year E-Commerce Agreement
with Lycos, Inc. for comprehensive Internet marketing activities, including
co-branding of a Company web site on the Lycos network. Under the agreement, the
Company has paid Lycos $1,125,000 and is obligated to pay an additional
$5,875,000 in fiscal 2001, $5,000,000 in fiscal 2002 and $2,500,000 in fiscal
2003. Although the Company has included all amounts due through January 31, 2000
in the fiscal 2000 financial statements, the Company believes that Lycos has
breached the underlying contract and has suspended payments on the agreement and
is currently negotiating with Lycos to amend or terminate the agreement.
In March 1999, the Company entered into a nine-month agreement with Cnet,
Inc. to provide advertising and lead generating services through links to the
Company's web site. Under the agreement, the Company agreed to pay a base
monthly fee plus additional fees based upon traffic at the Company's web site.
Although the Company has included all amounts due through the end of the
contract in its fiscal 2000 financial statements, the Company suspended payments
to Cnet in October 1999 because of dissatisfaction with the services provided.
In December 1999, Cnet initiated a lawsuit seeking to recover approximately
$1,600,000 plus interest and costs. The Company believes it has adequately
provided for any amount that may be due as a result of this action.
13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
PERIOD ENDED JANUARY 31,
----------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Cash paid for interest...................................... $ 714,743 $ 74,451 $3,835
Noncash investing and financing activities:
Capital lease obligation incurred for equipment
purchase............................................... 15,831 61,418
Note payable issued for prior year accrued expenses....... 130,000
Note payable issued for insurance......................... 52,092 27,357
Stock subscriptions....................................... 3,601,436
Stock and warrants issued for prepaid consulting and
service agreements..................................... 3,443,625 2,650,226
Debt converted to common stock............................ 426,355
Stock issued for consulting agreement..................... 1,042,115
Note payable, Softdisk acquisition........................ 104,215
Stock issued for Softdisk acquisition..................... 465,200
Warrants issued for loan fees............................. 3,372,500
</TABLE>
F-25
<PAGE> 53
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. OPERATING SEGMENTS AND RELATED INFORMATION
Prior to January 28, 1999, the Company operated in one segment, retail
sales. As a result of the acquisition of GTI and Tech Squared, the Company now
operates in two segments, retail sales and distribution sales to retail and
wholesale outlets.
<TABLE>
<CAPTION>
AS OF AND FOR THE
YEAR ENDED JANUARY 31, 2000
--------------------------------------------------------
RETAIL DISTRIBUTION CORPORATE TOTAL
------ ------------ --------- -----
<S> <C> <C> <C> <C>
Identifiable assets........................ $11,279,841 $22,355,385 $1,031,557 $34,666,783
=========== =========== ========== ===========
Net sales to external customers............ $17,115,510 $64,203,265 $81,318,775
Cost of goods sold......................... 15,996,899 60,427,846 76,424,745
----------- ----------- ---------- -----------
Gross profit............................. $ 1,118,611 $ 3,775,419 $ -- $ 4,894,030
=========== =========== ========== ===========
</TABLE>
F-26
<PAGE> 54
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Virtual Technology Corporation and Subsidiaries
Minneapolis, Minnesota
We have audited the consolidated financial statements of Virtual Technology
Corporation and Subsidiaries as of January 31, 1999, and for each of the two
years in the period ended January 31, 1999, and have issued our report thereon
dated April 23, 1999; such financial statements and report are included
elsewhere in this Form 10-K. Our audits also included the financial statement
schedule of Virtual Technology Corporation and Subsidiaries, listed in Item 14
for each of the two years in the period ended January 31, 1999. The financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ LURIE, BESIKOF, LAPIDUS & CO., LLP
Minneapolis, Minnesota
April 23, 1999
F-27
<PAGE> 55
SCHEDULE II
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- ------------------------------ ------------ ----------
ADDITIONS
------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS - DEDUCTIONS- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
----------- ---------- ---------- ---------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended January 31, 1998
Deducted from asset accounts:
Allowance for doubtful accounts.... $ -- $ -- $ -- $ -- $ --
Allowance for returns.............. $ -- $ -- $ -- $ -- $ --
Allowance for obsolete inventory... $ -- $ -- $ -- $ -- $ --
Year Ended January 31, 1999
Deducted from asset accounts:
Allowance for doubtful accounts.... $ -- $157,780 $ 75,000(1) $ (69,780)(4) $163,000
Allowance for returns.............. $ -- $ -- $ 100,000(1) $ -- $100,000
Allowance for obsolete inventory... $ -- $ -- $ 350,000(1) $ -- $350,000
Year Ended January 31, 2000
Deducted from asset accounts:
Allowance for doubtful accounts.... $163,000 $292,528 $ 523,500(2) $ (312,506)(4) $666,522
Allowance for returns.............. $100,000 $ -- $ 557,168(3) $ (85,559)(5) $571,609
Allowance for obsolete inventory... $350,000 $ 48,853 $ 129,000(2) $ (192,853)(6) $335,000
</TABLE>
- -------------------------
(1) Allowances recorded as part of the acquisition of Herold Marketing
Associates, Inc.
(2) Allowances recorded as part of the acquisition of Tech Squared, Inc.
(3) Comprised of $25,000 of allowances recorded as a part of the acquistion of
Tech Squared, Inc. and $532,168 charged against net sales
(4) Uncollectable accounts written off, net of recoveries
(5) Returns received
(6) Disposal of obsolete inventories
F-28
<PAGE> 56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
In October 1999, we engaged PricewaterhouseCoopers LLP as our independent
public accountants to audit our financial statements as of January 31, 2000 and
for the year then ended. Our Board of Directors approved the decision to dismiss
Lurie, Besikof, Lapidus & Co., LLP and to engage PricewaterhouseCoopers LLP as
our independent public accountants. The reports of Lurie, Besikof, Lapidus &
Co., LLP as of January 31, 1998 and 1999 and for the fiscal years then ended do
not contain an adverse opinion or a disclaimer of opinion nor a qualification
with respect to our ability to continue operations as a going concern. Those
reports also were not otherwise qualified or modified as to uncertainty, audit
scope or accounting principles. There were no disagreements with the former
auditors on any matters of accounting principles or practices, financial
statement disclosure or auditing scope or procedures which, if not resolved to
our former auditor's satisfaction, would have caused them to make reference to
the subject matter in their reports. Prior to retaining PricewaterhouseCoopers
LLP, we did not consult with them regarding the application of accounting
principles to a specified transaction, the type of audit opinion that might be
rendered on our financial statements or any other matter.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
James D. Ross, age 51, became a member of our Board of Directors in
December 1999 and was elected as Chairman in January 2000. Since 1998, Mr. Ross
has been Managing Director of FIMG Capital Management, a private corporate
advisory organization. Between 1995 and 1998, Mr. Ross was Executive Vice
President of Aegon, USA, an insurance company. Mr. Ross was Vice President and
Chief Investment Officer of Shenandoah Life Insurance Company between 1991 and
1995. From 1975 to 1985, Mr. Ross served in various management capacities with
Maccabees Mutual Life Insurance Company, most recently as Vice President and
Treasurer.
Gregory A. Appelhof, age 38, joined us in October 1998 as our President and
a director. He was additionally elected as Chief Executive Officer in November
1998. Prior to joining us, Mr. Appelhof was employed by Herold Marketing
Associates, Inc. (the entity constituting GTI) for over 11 years until its
acquisition by us, most recently as Vice President of Sales.
Kenneth M. Israel, age 46, has been our Chief Strategy Officer since
January 2000 and a director since February 1996. Mr. Israel was our Chairman
between February 1996 and January 2000 and was Chief Executive Officer between
February 1996 and November 1998. Between March 1989 and January 1996, Mr. Israel
served as Chairman of Exchange Resources, Inc., a company specializing in
disaster recovery services and facilities. Between 1981 and 1987, Mr. Israel was
the Regional Manager of Lanier Business Products, a company that was later
acquired by Harris Corporation, where he became Director of Research and
Development. From 1979 to 1981, Mr. Israel was the General Manager of Pi
Engineering, where he was the Project Manager for the redesigning and rebuilding
of the security and communications systems for Northern States Power nuclear
plants. Prior to 1979, Mr. Israel served for five years as a Regional Service
Manager with Raytheon Data Systems with responsibility for the Southeastern
United States and Central and South America.
John L. Harvatine, age 49, became our Chief Financial Officer in January
1999. Between 1997 and 1998, he served as Chief Financial Officer of CyberStar
Computer Corporation. Between 1987 and 1996, he served in a variety of financial
positions with AmeriData Technologies, Inc., most recently as Chief Financial
Officer. From 1986 to 1987, he served as Controller of Fisher Cheese Co. From
1973 to 1986, Mr. Harvatine served in various management positions with The
Pillsbury Company, most recently as Accounting Manager -- Marketing.
Jeffrey Maynard, age 55, has been our Executive Vice President of
Technology and a director since February 1996. Between 1993 and 1996, Mr.
Maynard was the Chief Executive Officer of Secure Backup
27
<PAGE> 57
Systems, a company he formed to deliver public data vaulting services. Between
1990 and 1993, he was Development Director for Mercury Communications. Mr.
Maynard served as Managing Director for Mtel Corp. and SkyTel Ltd. between 1989
and 1990.
Philip Lacerte, age 54, has served as a director since April 1999. Since
1982, Mr. Lacerte has been Executive Vice President of Lacerte Software
Corporation. Between 1971 and 1975, Mr. Lacerte held a management position with
Data Processing, Inc. Between 1994 and 1998 he served as the Chairman of the
Board of Crystallex, an American Stock Exchange Company, and has worked as a
consultant and advisor for various start-up companies.
Maceo K. Sloan, age 50, has served as a director since May 1999. Mr. Sloan
has been the Chairman, President and Chief Executive Officer of Sloan Financial
Group, Inc. since 1991, the Chairman, President and Chief Executive Officer and
Chief Financial Officer of NCM Capital Management Group, Inc. since 1986 and
Chairman of New Africa Advisers, Inc. since 1993. Mr. Sloan has served as the
Chairman of Sloan Communications, Inc. and CONXUS Communications since 1994.
Between 1973 and 1986, Mr. Sloan served North Carolina Mutual Life Insurance
Company, where he was employed in various positions including Vice
President -- Treasurer and Chief Investment Officer. Mr. Sloan has also been a
member of the Board of Trustees of the College Retirement Equities Fund since
1991, the Board of Directors of SCANA Corporation since 1997, and the Board of
Directors of Mechanics and Farmers Bank since 1979.
James P. Secord, age 63, has served as a director since May 1999. Mr.
Secord has been President of Lakewood Publications since 1976, and Chief
Executive Officer since 1986. Upon Lakewood's acquisition by Bill
Communications, Inc. in 1995 and until his retirement in February 2000, Mr.
Secord served as Division President of Bill Communications, Inc. He has been a
member of the Board of Governors for Minnesota Magazine Publishers Association
since 1997, and a member of the Board of Advisors for Catholic Digest since
1996. Mr. Secord served BPA International on the Board of Directors between 1992
and 1998, and on the Executive Committee between 1994 and 1997. Between 1985 and
1991, Mr. Secord served on the Board of Directors of American Business Press. He
is an Executive Fellow of the University of St. Thomas Graduate School of
Business.
Committees. Messrs. Appelhof, Ross and Sloan serve on our executive
committee. Messrs. Lacerte, Secord and Sloan serve on our audit and compensation
committees.
Section 16(a) Beneficial Ownership Compliance. Based solely upon a review
of Forms 3 and 4 and amendments to them furnished to us during fiscal 2000 and
Forms 5 and amendments to them furnished to us for fiscal 2000, the following
directors, officers and 10% beneficial shareholders failed to timely file those
forms with the SEC during fiscal 2000:
- Messrs. Israel, Appelhof, Ross and Lacerte failed to file a required Form
4;
- Messrs. Israel, Harvatine, Appelhof, Sloan, Maynard and Ross failed to
timely file a required Form 5; and
- Messrs. Lacerte and Secord failed to file a required Form 5.
28
<PAGE> 58
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes the amount of compensation paid and accrued
to our executive officers for the fiscal years ended January 31, 1998, 1999 and
2000. No other executive officers had aggregate salaries and bonuses that
exceeded $100,000.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------- ----------------------------------------------------------------------
AWARDS PAYOUTS
-------------------------- ----------------------------------------
OTHER RESTRICTED SECURITIES
NAME AND ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL SALARY BONUS COMPENSATION AWARD OPTIONS/SAR'S PAYOUTS COMPENSATION
POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
--------- ---- ------ ----- ------------ ---------- ------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Greg Appelhof,........ 1999 86,115 0 2,000 0 1,250,000 0 0
Chief Executive
Officer 2000 155,000 223,333 6,000 0 165,000 0 0
Kenneth Israel,....... 1997 0 0 0 909,091 280,000 0 0
Chairman 1998 0 0 0 600,000 56,000 0 0
1999 163,750 0 6,000 10,000 30,000 0 0
2000 200,000 0 6,000 227,500 0 0
John Harvatine,....... 1999 8,334 0 400 250,000 0 0 0
Chief Financial
Officer 2000 100,000 25,000 4,800 30,000 0 0 0
</TABLE>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information as of January 31, 2000 regarding
outstanding options to executive officers and directors granted for the year
ended January 31, 2000:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
----------------------------------------------------------- --------------------------
PERCENT OF
TOTAL
NUMBER OF OPTIONS/SAR'S
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES IN EXERCISE OF
OPTIONS/SAR'S FISCAL YEAR BASE PRICE EXPIRATION
NAME GRANTED 2000 ($/SH.) DATE 5%($) 10%($)
---- ------------- ------------- ----------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Kenneth Israel.......... 135,000 6.7% $4.75 5/13/09 $403,279 $1,021,987
62,500 3.1 2.22 9/15/09 87,259 221,132
30,000 1.5 1.94 10/29/09 36,602 92,756
Greg Appelhof........... 135,000 6.7 4.75 5/13/09 403,279 1,021,987
30,000 1.5 1.94 10/29/09 36,602 92,756
John Harvatine.......... 30,000 1.5 4.75 5/13/09 89,617 227,108
Jeff Maynard............ 75,000 3.7 4.75 5/13/09 224,044 567,771
62,500 3.1 2.22 9/15/09 87,259 221,132
30,000 1.5 1.94 10/29/09 36,602 92,756
James Ross.............. 30,000 1.5 1.78 12/13/09 33,583 85,106
Maceo Sloan............. 30,000 1.5 4.75 5/13/09 89,617 227,108
20,000 1.0 2.22 9/15/09 27,923 70,762
Philip Lacerte.......... 30,000 1.5 4.75 5/13/09 89,617 227,108
20,000 1.0 2.22 9/15/09 27,923 70,762
James Secord............ 30,000 1.5 4.75 5/13/09 89,617 227,108
20,000 1.0 2.22 9/15/09 27,923 70,762
</TABLE>
29
<PAGE> 59
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SAR'S AT IN-THE-MONEY OPTIONS/
FY-END SARS AT FY-END
SHARES ACQUIRED VALUE (#) EXERCISABLE/ ($) EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
---- --------------- -------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
Greg Appelhof.............. 0 0 1,663,333/405,000 $2,161,850/$284,950
Kenneth Israel............. 0 0 900,500/155,000 $1,155,850/$3,700
John Harvatine............. 0 0 125,000/155,000 $0/$0
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information as of May 10, 2000 regarding the
ownership of our Common Stock by our officers and directors and other persons
known by us to beneficially own 5% or more of our stock. Each shareholder has
sole voting and investment power with respect to the shares shown as
beneficially owned, except as otherwise indicated in a footnote.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES(1) PERCENTAGE OWNERSHIP
---- ------------------- --------------------
<S> <C> <C>
James D. Ross(2)........................................ 241,250(3) *
Gregory A. Appelhof(2).................................. 1,753,616(4) 4.6%
Kenneth M. Israel(2).................................... 2,604,348(5) 7.0%
John L. Harvatine(2).................................... 132,500(6) *
Jeffrey Maynard(2)...................................... 987,500(7) 2.7%
Maceo K. Sloan(2)....................................... 784,100(8) 2.1%
Philip Lacerte(2)....................................... 3,891,041(9) 10.4%
James P. Secord(2)...................................... 44,000(10) *
All officers and directors as a group................... 10,458,355(11) 25.2%
Harry Lowell............................................ 9,060,029(12) 24.6%
Stephen Antebi.......................................... 3,483,000(13) 9.4%
Stephan G. Herold....................................... 1,985,570(14) 5.5%
</TABLE>
- -------------------------
* Denotes less than 1%
(1) Shares issuable upon the exercise of outstanding stock options and warrants
that are currently exercisable or become exercisable within 60 days from
the date hereof are considered outstanding for the purpose of calculating
the percentage of Common Stock owned by such person and owned by a group,
but not for the purpose of calculating the percentage of Common Stock owned
by any other person.
(2) The address of each of these executive officers or directors is: c/o
Netdirect, 6690 Shady Oak Road, Eden Prairie, Minnesota 55344.
(3) Includes options and warrants to purchase 210,000 shares.
(4) Includes options and warrants to purchase 1,697,083 shares.
(5) Includes options and warrants to purchase 934,250 shares, 62,000 of which
are owned by companies under Mr. Israel's control. Also includes 11,850
shares owned by Mr. Israel's wife.
(6) Includes options to purchase 132,500 shares.
(7) Includes options and warrants to purchase 477,500 shares.
(8) Includes options and warrants to purchase 140,000 shares. Also includes
100,000 shares and warrants to purchase an additional 500,000 shares held
by Sloan Financial, a company under Mr. Sloan's control.
30
<PAGE> 60
(9) Includes options to purchase 40,000 shares. Also includes 2,651,041 shares
and warrants to purchase an additional 1,200,000 shares held by Euro Realty
Development Ltd., a company controlled by Mr. Lacerte.
(10) Includes options to purchase 40,000 shares.
(11) Includes options and warrants to purchase 5,371,333 shares.
(12) Includes warrants to purchase 554,886 shares. Also includes 610,700 shares
and warrants to purchase 200,000 shares of Common Stock held by Laurel
Center Management Co., a company controlled by Dr. Lowell.
(13) Includes 1,983,000 shares and warrants to purchase 1,000,000 shares owned
by Fontenelle, LLC, of which Mr. Antebi is the sole equity owner and
manager. Also includes 300,000 shares owned by Novante Communication Corp.
Money Pension Plan, of which Mr. Antebi is the trustee. Also includes
200,000 shares owned by the Antebi Family Foundation, of which Mr. Antebi
is the trustee. Excludes 300,000 shares and 300,000 shares held by the 1995
Antebi Children's Insurance and Other Trust, and the 1997 Antebi Children's
Insurance and Other Trust, respectively, of which Mr. Antebi disclaims
beneficial ownership.
(14) Includes warrants to purchase 213,333 shares. Also includes 228,571 shares
issued to Herold Marketing Associates, Inc., of which Mr. Herold is the
sole shareholder, in connection with the acquisition of the assets of GTI.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
GTI ACQUISITION
Gregory A. Appelhof, our President and Chief Executive Officer, formerly
was with Herold Marketing Associates, Inc. for 11 years, most recently as Vice
President of Sales. Herold Marketing did business as GTI. We acquired
substantially all of the assets and assumed certain liabilities of Herold
Marketing in January 1999 for an aggregate purchase price of $17.1 million. Mr.
Appelhof owned the right to be treated as though he were a 20% owner of Herold
Marketing's stock in the event of a sale of Herold Marketing for purposes of
distributing the proceeds of the sale to Herold Marketing's shareholders. Mr.
Appelhof entered into this agreement with Herold Marketing's sole shareholder,
Stephan G. Herold. As of April 28, 2000, Mr. Appelhof had received $1.4 million
of cash distributions from Herold Marketing. We understand that final
distribution of cash received by Herold Marketing for the sale of Herold
Marketing's assets to us is due to Mr. Appelhof at the time the last payment is
received by Herold Marketing from us.
EMPLOYMENT AGREEMENTS
Effective as of October 1998, Mr. Appelhof entered into an employment
agreement with us to receive an annual salary of $150,000, with a quarterly
guaranteed $25,000 bonus and a quarterly performance bonus award paid at a rate
of .15% of net sales. This award amounted to approximately $120,000 in fiscal
2000. Under the agreement, we granted Mr. Appelhof options to purchase 1,250,000
shares of our Common Stock at $1.00 per share. 500,000 of these options vested
in April 1999, 500,000 of these options vested in October 1999, 125,000 options
vest in October 2000 and the remaining 125,000 options vest in October 2001,
assuming Mr. Appelhof's continued employment by us. Mr. Appelhof may exercise
all vested options until October 2008. In addition, in October 1999, we granted
30,000 options to Mr. Appelhof for serving as a director. We also agreed to
provide Mr. Appelhof with a monthly vehicle allowance of $500. Under Mr.
Appelhof's employment agreement, if we had terminated his employment
involuntarily for reasons other than cause in the first year of employment, he
would have received severance pay equal to six months of base salary. If we
terminate his employment involuntarily after the first year of employment but
before the second year, he will receive severance pay equal to one year of base
salary. If we terminate his employment involuntarily after the second year of
employment, he will receive severance pay equal to 18 months of base salary.
Effective as of January 1999, Mr. Harvatine entered into an employment
agreement with us to receive an annual salary of $100,000, with an annual
$25,000 bonus awarded based upon Mr. Harvatine reaching
31
<PAGE> 61
certain performance goals. Under the agreement, we granted Mr. Harvatine options
to purchase 250,000 shares of our Common Stock at $3.75 per share. 62,500 of
such options vested immediately upon Mr. Harvatine's employment, 62,500 options
vested in January 2000, 62,500 vest in January 2001 and the remaining 62,500
options vest in January 2002, assuming Mr. Harvatine's continued employment by
us. All vested options are exercisable until January 2009. We also agreed to
provide Mr. Harvatine with a monthly vehicle allowance of $400. Under the
agreement, if we had terminated Mr. Harvatine's employment involuntarily for
reasons other than cause in the first year of employment, he would have received
severance pay equal to three months of base salary. If we terminate his
employment involuntarily after the first year of employment, he will receive
severance pay equal to six months of base salary.
LOANS FROM RELATED PARTIES
Between March 1997 and June 1998, we received from Kenneth Israel, then our
Chief Executive Officer, Kate Israel, his daughter and companies under his
control loans in the total amount of $371,543. These loans bear interest at 10%
per annum and were due in fiscal year 2001. However, as of April 20, 2000, we
had repaid all of the amount due, including interest. In January 2000, we
borrowed $200,000 from Mr. Israel and repaid him without interest in February
2000.
In October 1998, we issued a promissory note to Dr. Harry Lowell, a major
shareholder, in the amount of $40,000 with an interest rate of 10%, due in
November 1998. Dr. Lowell and we agreed to extend the due date of the note to
April 1999 and we repaid the note, including interest of $1,552, in February
1999.
LOANS TO RELATED PARTIES
Between February and April 1999, we loaned Mr. Israel an aggregate of
$123,750. Mr. Israel used the proceeds of these loans and $25,000 of his
personal money to form VTCO, LLC, a start-up company to compete in the direct
response informercial market. In March 1999, we incorporated VTC TV, Inc. ("VTC
TV") our wholly owned subsidiary to acquire the assets of VTCO, LLC in exchange
for $148,750. In November 1999, we loaned VTC TV the $148,750 for this purpose.
In November 1999, Mr. Israel repaid the $123,750 of loans to us, without
interest.
CONSULTING AGREEMENTS WITH RELATED PARTIES
In February 1999, we entered into a one-year Consulting Agreement with
Fontenelle, LLC ("Fontenelle"), an affiliate of Stephen Antebi, a principal
stockholder, to provide business consulting services to the Company. In exchange
for Fontenelle's services, we issued 1,000,000 shares of Common Stock valued at
$5.875 per share, for a total consideration of $5,875,000. The Company
registered the issuance of such shares with the SEC on Form S-8. The Consulting
Agreement was mutually terminated effective July 20, 1999. Fontenelle accepted
333,300 shares for services performed prior to the date of termination and
returned the remaining 666,700 shares to the Company.
In August 1999, we entered into a one-year Consulting Agreement with
Fontenelle whereby Fontenelle agreed to assist us in developing a financial
strategy and in identifying potential investors. In exchange for Fontenelle's
services, we issued 1,500,000 shares of Common Stock valued at $1.812 per share,
for a total consideration of $2,718,750.
ADDITIONAL ISSUANCES OF SECURITIES
In fiscal 2000, Mr. Lacerte and his affiliates purchased 1,651,041 shares
of Common Stock for $3,500,000 cash. Also in fiscal 2000, Mr. Lacerte received,
as directors' compensation, options to purchase 30,000 shares of Common Stock,
exercisable for 10 years at $4.75 per share. Also in fiscal 2000, Mr. Lacerte
received, as directors' compensation, options to purchase 20,000 shares of
Common Stock, exercisable for 10 years at $2.22 per share. Also in fiscal 2000,
Mr. Lacerte purchased 400,000 redeemable warrants, exercisable for five years at
$.50 per share, for $100,000 cash. Under the terms of the warrants, Mr. Lacerte
subsequently elected to require us to redeem 200,000 warrants for $100,000. The
remaining
32
<PAGE> 62
200,000 warrants will double in amount if we fail to file a registration
statement and achieve effectiveness by May 31, 2000.
In fiscal 2000, Maceo Sloan purchased 100,000 shares of our Common Stock
and 100,000 two-year warrants exercisable for $1.00 per share, for $100,000
cash. Also in fiscal 2000, Mr. Sloan received, as directors' compensation,
options to purchase 30,000 shares of Common Stock, exercisable for 10 years at
$4.75 per share. Also in fiscal 2000, Mr. Sloan received, as directors'
compensation, options to purchase 20,000 shares of Common Stock, exercisable for
10 years at $2.22 per share. Also in fiscal 2000, Sloan Financial Group, Inc., a
company under Mr. Sloan's control, purchased 1,000,000 redeemable warrants,
exercisable for $.50 per share, for $250,000 cash. Under the terms of the
warrants, Sloan Financial subsequently elected to require us to redeem 500,000
warrants for $250,000. The remaining 500,000 warrants will double in amount if
we fail to file a registration statement and achieve effectiveness by May 31,
2000.
In fiscal 2000, Greg Appelhof received, as directors' compensation, options
to purchase 30,000 shares of Common Stock, exercisable for 10 years at $2.22.
Also in fiscal 2000, Mr. Appelhof received options to purchase 135,000 shares of
Common Stock, exercisable for 10 years at $4.75 per share. Also in fiscal 2000,
Mr. Appelhof purchased 1,200,000 redeemable warrants, exercisable for $.50 per
share, for $300,000 cash. Under the terms of the warrants, Mr. Appelhof
subsequently elected to require us to redeem 600,000 warrants for $300,000. The
remaining 600,000 warrants will double in amount if we fail to file a
registration statement and achieve effectiveness by May 31, 2000.
In fiscal 2000, Kenneth Israel received, as directors' compensation,
options to purchase 30,000 shares of Common Stock, exercisable for 10 years at
$1.94 per share. Also in fiscal 2000, Mr. Israel received, for services
rendered, options to purchase 62,500 shares of Common Stock exercisable for 10
years at $1.94 per share. Also in fiscal 2000, Mr. Israel received options to
purchase 135,000 shares of Common Stock, exercisable for 10 years at $4.75 per
share. Also in fiscal 2000, Mr. Israel purchased 800,000 redeemable warrants,
exercisable for $.50 per share, for $200,000 cash. Under the terms of the
warrants, Mr. Israel subsequently elected to require us to redeem 400,000
warrants for $200,000. The remaining 400,000 warrants will double in amount if
we fail to file a registration statement and achieve effectiveness by May 31,
2000.
In fiscal 2000, James Ross received, as directors' compensation, options to
purchase 30,000 shares of Common Stock, exercisable for 10 years at $1.78 per
share. Also in fiscal 2000, Mr. Ross purchased 400,000 redeemable warrants,
exercisable for $.50 per share, for $100,000 cash. Under the terms of the
warrants, Mr. Ross subsequently elected to require us to redeem 200,000 warrants
for $100,000. The remaining 200,000 warrants will double in amount if we fail to
file a registration statement and achieve effectiveness by May 31, 2000.
In fiscal 2000, Mr. Secord received, as directors' compensation, options to
purchase 30,000 shares of Common Stock, exercisable for 10 years at $4.75 per
share. Also in fiscal 2000, Mr. Secord was granted, as directors' compensation,
options to purchase 20,000 shares of Common Stock, exercisable for 10 years at
$2.22 per share.
In fiscal 2000, Jeffrey Maynard received, as directors' compensation,
options to purchase 30,000 shares of Common Stock, exercisable for 10 years at
$1.94 per share. Also in fiscal 2000, Mr. Maynard received, for services
rendered, options to purchase 62,500 shares of Common Stock, exercisable for 10
years at $1.94 per share. Also in fiscal 2000, Mr. Maynard received options to
purchase 75,000 shares of Common Stock, exercisable for 10 years at $4.75 per
share.
In fiscal 2000, Fontenelle LLC received 1,000,000 shares of our Common
Stock in connection with a Consulting Agreement. The Consulting Agreement was
subsequently terminated and Fontenelle accepted 333,300 shares for services
performed prior to the date of termination. Fontenelle returned 666,700 shares
to us. Also in fiscal 2000, we granted warrants to Fontenelle to purchase
750,000 shares because we failed to register securities previously issued to
Fontenelle. Fontenelle then exercised these 750,000 warrants for $750,000 cash.
Also in fiscal 2000 Fontenelle received 1,500,000 shares of our Common Stock in
connection with a Consulting Agreement. Also in fiscal 2000, Fontenelle
purchased 2,000,000 redeemable warrants, exercisable for $.50 per share, for
$500,000 cash. Under the terms of the warrants, Fontenelle
33
<PAGE> 63
subsequently elected to require us to redeem 1,000,000 warrants for $500,000.
The remaining 1,000,000 warrants will double in amount if we fail to file a
registration statement and achieve effectiveness by May 31, 2000.
In fiscal 2000, Harry Lowell and affiliates purchased $250,000 shares of
our Common Stock and 250,000 warrants for $250,000 cash.
34
<PAGE> 64
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Consolidated Financial Statements
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants at January 31, 2000 and
for the year then ended................................... F-1
Independent Auditor's Report at January 31, 1999 and for the
two years then ended...................................... F-2
Consolidated Balance Sheets at January 31, 2000 and 1999.... F-3
Consolidated Statements of Operations for the years ended
January 31, 2000.......................................... F-4
Consolidated Statements of Comprehensive Income (loss) for
the years ended January 31, 2000, 1999 and 1998........... F-5
Consolidated Statements of Changes in Stockholders' Equity
for the years ended January 31, 2000, 1999 and 1998....... F-6
Consolidated Statements of Cash Flows for the years ended
January 31, 2000, 1999 and 1998........................... F-11
Notes to Consolidated Financial Statements for the years
ended January 31, 2000, 1999 and
1998...................................................... F-12
Independent Auditor's Report on Financial Statement
Schedule.................................................. F-27
Financial Statement Schedule................................ F-28
</TABLE>
(a)(2) See above.
35
<PAGE> 65
(a)(3) Exhibits.
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.
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- -------- -----------
<S> <C>
3.1 Articles of Incorporation of the Company, as amended.*
3.2 By-Laws of the Company, as amended.*
4.1 Form of Stock Certificate, form of Stock Purchase Warrant
and Stock Option Agreement.*
4.2 Form of redeemable warrant for December 1999 private
placement.
10.1 Asset Purchase Agreement dated January 28, 1999, by and
among GTI Acquisition Corporation, Herald Marketing
Associates, Incorporated, dba Graphics Technology, Inc. and
Stephan G. Herold*
10.2 Consulting Agreement dated January 28, 1999, between GTI
Acquisition Corporation and Stephan G. Herold*
10.3 Loan and Security Agreement dated February 11, 1999, by and
among Virtual Technology Corporation, GTI Acquisition
Corporation and Coast Business Credit.*
10.4 Employment Agreement with Gregory Appelhof. ***
10.5 Employment Agreement with John Harvatine.***
10.6 Asset Purchase Agreement dated November 8, 1999 among Tech
Squared Inc., T2 Acquisition Corporation, Chareles E. Reese
Jr. and Joel A Ronning.****
10.7 First and Second Amendments to the Loan and Security
Agreement dated December 10, 1999 and December 15, 1999,
respectively, by and among Virtual Technology Corporation,
GTI Acquisition Corporation and T2 Acquisition Corporation.
10.8 Agreement dated effective September 1, 1999 between Virtual
Technology Corporation and eSystems21 Corporation.
10.9 Electronic Commerce Agreement dated effective January 4,
2000 between Virtual Technology Corporation dba Netdirect
Corporation International and the University of Minnesota.
21. List of subsidiaries
24. Power of Attorney. Included in this 10-K under "Signatures."
27. Financial Data Schedule
</TABLE>
- -------------------------
(b) Reports on Form 8-K. The Company did not file any current reports on Form
8-K during the fourth quarter ended January 31, 1999.
(c) See Part IV, Item 14(a)(3) and the exhibit list immediately above.
(d) None.
* Incorporated by reference from the Company's 10-SB, filed with the SEC on
February 12, 1999.
** Incorporated by reference from the Company's amended Form S-8, filed with
the SEC on April 15, 1999.
*** Incorporated by reference from the Company's 10-K, filed with the SEC on
May 6, 1999.
**** Incorporated by reference from the Company's 8-K, filed with the SEC on
December 30, 1999.
36
<PAGE> 66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ GREGORY A. APPELHOF
------------------------------------
Gregory A. Appelhof, President and
Chief Executive Officer
Date: May 15, 2000
POWER OF ATTORNEY
Each person whose signature to this Annual Report on Form 10-K appears
below hereby appoints Gregory A. Appelhof and John L. Harvatine, or either of
them, as his attorney-in-fact to sign on his behalf individually and in the
capacity stated below and to file all amendments and post-effective amendments
to this Annual Report on Form 10-K, and any and all instruments or documents
filed as part of or in connection with this Annual Report on Form 10-K or the
amendments thereto, and the attorney-in-fact, or either of them, may make such
changes and additions to this Annual Report on Form 10-K as the
attorney-in-fact, or either of them, may deem necessary or appropriate.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ GREGORY A. APPELHOF
--------------------------------------
Gregory A. Appelhof, President and
Chief Executive Officer and Director
(Principal Executive Officer)
Date: May 15, 2000
/s/ JOHN L. HARVATINE
--------------------------------------
John L. Harvatine, Chief Financial
Officer (Principal Financial and
Accounting Officer)
Date: May 15, 2000
/s/ JAMES D. ROSS
--------------------------------------
James D. Ross, Director
Date: May 15, 2000
/s/ KENNETH M. ISRAEL
--------------------------------------
Kenneth M. Israel, Director
Date: May 15, 2000
/s/ JEFFREY MAYNARD
--------------------------------------
Jeffrey Maynard, Director
Date: May 15, 2000
37
<PAGE> 67
/s/ MACEO K. SLOAN
--------------------------------------
Maceo K. Sloan, Director
May 15, 2000
/s/ PHILIP LACERTE
--------------------------------------
Philip Lacerte, Director
Date: May 15, 2000
/s/ JAMES P. SECORD
--------------------------------------
James P. Secord, Director
Date: May 15, 2000
38
<PAGE> 1
EXHIBIT 4.2
VIRTUAL TECHNOLOGY CORPORATION
[FORM OF] COMMON STOCK PURCHASE WARRANT
Virtual Technology Corporation, a Minnesota corporation (the
"Company"), hereby agrees that, for $ value received,
is entitled, subject to the terms set forth below, to
purchase from the Company at any time or from time to time on or after December
, 1999, and before 5:00 p.m., Minneapolis, Minnesota time, on December ,
2004, ( ) shares (subject to reduction and other
adjustments below) of the Company's Common Stock, par value $.001 per share, at
an exercise price of $0.50 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 wire transfer or 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 December , 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. This Warrant is issued upon the following terms,
to which each holder hereof consents and agrees:
(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. Redemption Rights and Adjustments of this Warrant Related Thereto. At any
time that this Warrant is outstanding and has not been exercised in any part,
the holder hereof may demand in writing
<PAGE> 2
the redemption of the right to acquire [1/2] of the Warrant Shares hereunder
(the "Secured Warrant Portion") for $[the original purchase price]. If the
holder receives good funds from the Company upon such redemption demand within
seven (7) calendar days of the date of such redemption demand, then the right to
acquire the Warrant Shares upon exercise of the Secured Warrant Portion shall
lapse. If the holder does not receive good funds from the Company upon such
redemption demand within such seven (7) calendar days, then no such reduction in
this Warrant shall take effect, but the right of the holder to be paid the
$[original purchase price] shall continue absolutely. In no event shall the
redemption of the Secured Warrant Portion affect the holder's right to exercise
this Warrant with respect to the other [1/2] of the Warrant Shares purchasable
hereunder.
4. 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
-2-
<PAGE> 3
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.
5. Demand Registration Rights. The Company agrees to use its best efforts by
April 1, 2000 to file a registration statement under the Securities Act of 1933,
as amended (the "Act"), on Form S-1 (or if available, on Form S-2 or S-3)
covering all or such part of the Warrant Shares, and all or such part of any
other shares of Common Stock of the Company underlying options, warrants or
other rights to acquire such securities then held by such original holder, as to
which the original holder may prior to April 1, 2000 request registration of in
writing.
(a) Obligations of Holder. It shall be a condition precedent to the
obligation of the Company to register any Warrant Shares or other Common Stock
pursuant to this Section 5 that the original holder hereof shall furnish to the
Company such information regarding the Warrant Shares or other Common Stock held
by such seller and the intended method of disposition thereof and other
information concerning the seller as the Company shall reasonably request and as
shall be required in connection with the registration statement to be filed by
the Company.
(b) Registration Procedures. If and whenever the Company is required by
the provisions of this Section 5 to effect the registration under the Act of
Warrant Shares or other Common Stock owned by the original holder hereof, until
the Common Stock covered by such registration statement has been sold or for
nine (9) months after effectiveness, whichever is the shorter period of time,
the Company shall:
(i) Prepare and file with the Securities and Exchange Commission
("SEC") and/or any applicable state securities agency a registration statement
with respect to such Common Stock and use its best efforts to cause such
registration statement to become and remain effective within 60 days after the
demand for registration made hereunder by the original holder;
(ii) Prepare and file such amendments to such registration statement
and supplements to the prospectus contained therein as may be necessary to keep
such registration statement effective;
(iii) Furnish to the original holder hereunder such reasonable
number of copies of the registration statement, preliminary prospectus, final
prospectus and such other documents as such holder may reasonably request in
order to facilitate the public offering of its securities;
(iv) Notify the original holder hereunder promptly after it shall
receive notice thereof of the time when such registration statement has become
effective or a supplement to any prospectus forming a part of such registration
statement has been filed;
(v) Notify the original holder hereunder promptly of any request by
the SEC or applicable state securities agency for the amending or supplementing
of such registration statement or prospectus or for additional information;
(vi) Prepare and file promptly upon the request of the original
holder hereunder any amendments or supplements to such registration statement or
prospectus which, in the opinion of
-3-
<PAGE> 4
counsel to the original holder hereunder, are required under the Act or the
rules and regulations thereunder in connection with the distribution of Common
Stock by such holder;
(vii) Prepare and promptly file with the SEC and promptly notify the
original holder hereunder of the filing of such amendment or supplement to such
registration statement or prospectus as may be necessary to correct any
statements or omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Act, any event shall have
occurred, the result of which any such prospectus or any other prospectus as
then in effect would include an untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading;
(viii) In case the original holder hereunder is required to deliver a
prospectus at a time when the prospectus then in circulation is not in
compliance with the Act, the Company will prepare and file such supplements or
amendments to such registration statement and such prospectus or prospectuses as
may be necessary to permit compliance with the requirements of the Act;
(ix) Advise the original holder hereunder, promptly after it shall
receive notice or obtain knowledge thereof, of the issuance of any stop order
suspending the effectiveness of such registration statement or the initiation or
threatening of any proceeding for that purpose and promptly use its best efforts
to prevent the issuance of any stop order or to obtain its withdrawal if such
stop order should be issued; and
(x) Not file any amendment or supplement to such registration
statement or prospectus to which the original holder hereunder shall reasonably
have objected on the grounds that such amendment or supplement does not comply
in all material respects with the requirements of the Act or the rules and
regulations thereunder, after having been furnished with a copy thereof at least
two (2) business days prior to the filing thereof.
(c) Expenses. With respect to the inclusion of shares of Common Stock in a
registration statement pursuant to this Section 5, all reasonable fees, costs,
and expenses of and incidental to such registration, inclusion and public
offering in connection therewith shall be borne by the Company; provided,
however, that the original holder hereof shall bear its pro rata share of any
underwriting discounts and commissions and shall bear any fees and disbursements
of accountants and counsel retained by it (other than accountants and counsel
also retained by the Company).
(d) Adjustment in Number of Warrants if Registration Statement not Timely
Effected. If the Company fails to obtain effectiveness on or before May 31,
2000, of the registration statement demanded above by the original holder
hereof, then ipso facto and without any action on the part of the original
holder hereof or the Company, this Warrant will automatically be adjusted to
represent the right to purchase twice the number of Warrant Shares (i.e.,
Warrant Shares if the Secured Warrant Portion has been redeemed or Warrant
Shares if the Secured Warrant Portion has not been redeemed).
6. Notices. The Company shall mail to the registered holder of the Warrant, at
its 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
-4-
<PAGE> 5
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. Any other notice or communication required
or permitted hereunder shall in writing and shall be deemed to have been given,
when received, if delivered by hand, telegram, telex or telecopy, and, when
deposited, if placed in the mails for delivery by air mail, postage prepaid,
addressed to the appropriate party as specified on the first page of this
Agreement. Addresses may be changed by written notice given pursuant to this
Section; however, any such notice shall not be effective, if mailed, until three
(3) working days after depositing in the mails or when actually received,
whichever occurs first.
7. 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.
8. 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. 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 December, 1999.
VIRTUAL TECHNOLOGY CORPORATION
By:
----------------------------------------
Its:
---------------------------------------
-5-
<PAGE> 6
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 $
therefore in cash, wire transfer 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)
-6-
<PAGE> 7
SECURED WARRANT PORTION REDEMPTION DEMAND FORM
To be signed for redemption demand as to the Secured Warrant Portion
of this Warrant.
The undersigned, the original holder of the within Warrant, hereby
demands redemption of the Secured Warrant Portion of this Warrant for the
redemption price of $[original purchase price], such amount being due seven (7)
calendar days from the date below.
Dated:
---------------------
--------------------------------------
By
------------------------------------
Its
-----------------------------------
-7-
<PAGE> 1
EXHIBIT 10.7
Coast Business Credit(R)
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
BORROWER: VIRTUAL TECHNOLOGY CORPORATION
ADDRESS: 3100 WEST LAKE STREET, SUITE 410
MINNEAPOLIS, MN 55416
BORROWER: GTI ACQUISITION CORPORATION
ADDRESS: 7615 GOLDEN TRIANGLE DRIVE, SUITE G
MINNEAPOLIS, MN 55344
BORROWER: T2 ACQUISITION CORPORATION
ADDRESS: 6698 SHADY OAK ROAD
EDEN PRAIRIE, MN 55344
DATE: DECEMBER 10, 1999
THIS FIRST AMENDMENT TO THE LOAN AND SECURITY AGREEMENT is entered into as of
the above date between COAST BUSINESS CREDIT, a division of Southern Pacific
Bank ("Coast"), a California corporation, with offices at 12121 Wilshire
Boulevard, Suite 1400, Los Angeles, California 90025, and Virtual Technology
Corporation, GTI Acquisition Corporation and T2 Acquisition Corporation (jointly
and severally, the "Borrower") whose chief executive offices are located
respectively at the above addresses ("Borrower's Addresses"). This Amendment
shall for all purposes be deemed to be a part of the Loan and Security Agreement
("Loan Agreement"), and the same is an integral part of the Loan Agreement.
CONSENT AND APPROVAL
1. Coast hereby consents and approves Borrower's request to add T2 Acquisition
Corporation, a Minnesota Corporation ("T2") as a co-borrower, jointly and
severally liable for all Obligations under the Loan Agreement and all
documents related thereto (collectively, "Loan Documents").
2. T2 agrees to be bound by all of the terms and conditions in the Loan
Documents, and to be liable, jointly and severally, for all Obligations
thereunder whether now existing or hereinafter arising.
AMENDMENT
1
<PAGE> 2
1. The Loan Documents are hereby amended in all respects to define Borrower to
include, jointly and severally, T2. All other terms and conditions, as
amended, shall remain the same, and are hereby ratified and affirmed.
2. Section 2.1 (b) of the Schedule shall be amended as follows:
"Inventory Loans, subject to an appraisal acceptable to
Coast, in an amount not to exceed the lesser of:
(1) Fifty percent (50%) of
the value of Virtual
Technology Corporation
and GTI Acquisition
Corporation's Eligible
Inventory (as defined
in Section 1 of the
Agreement), calculated
at the lower of cost
or market value and
determined on a
first-in, first-out
basis, plus
(2) Forty-five percent
(45%) of the value of
T2 Acquisition
Corporation's Eligible
Inventory (as defined
in Section 1 of the
Agreement), calculated
at the lower of cost
or market value and
determined on a
first-in, first-out
basis, or
(3) Five Million Dollars
($5,000,000.00), plus"
3. Section 2 of the Schedule is hereby amended to add the following
sub-paragraph at the end of the existing section:
"The availability of the Inventory Loans advanced against T2's
Eligible Inventory, as set forth in Section 2.1 (b) (2), is subject to
Coast's receipt of a final appraisal of the T2 Inventory being not less
than fifty percent (50%) of Orderly Liquidation Value."
4. Section 3.2 of the Schedule entitled "Facility Fee" is hereby amended to
substitute "$6,000" in place of "$5,000".
5. Section 8.1 of the Schedule is hereby amended to add the following
sub-paragraphs:
"17. Virtual Technology Corporation ("VTC") shall execute and issue an
additional warrant to Coast with respect to shares of voting common stock
of VTC representing 250,000 shares of common stock with a term of three (3)
years and an aggregate exercise price equal to the average stock price of
the past thirty (30) trading days immediately preceding the date of the
First Amendment to the Loan and Security Agreement. The warrant shall
include standard and customary issuer representations, warranties and such
other provisions as Coast shall require, in form and substance acceptable
to Coast.
2
<PAGE> 3
18. Borrower shall as of January 1, 2000, and at all times thereafter,
maintain a minimum consolidated Tangible Net Worth of not less than a negative
Three Million Five Hundred Thousand Dollars ($3,500,000.00), measured monthly."
6. Section 8.3 of the Schedule is hereby amended to add the following
sub-paragraph:
"Quarterly inventory appraisals (desktop only), as soon as available, and
in any event within forty-five (45) days after the end of each fiscal quarter of
Borrower."
7. Section 9.1 of the Schedule entitled "Maturity Date" is hereby amended to
substitute "March 31, 2003" in place of "March 31, 2002".
8. Section 9.1 of the Schedule entitled "Early Termination Fee" is hereby
amended to read as follows:
"An amount equal to the greater of (i) an amount equal to all
interest due and payable during the six (6) months immediately preceding the
effective date of termination, or (ii) an amount equal to the average monthly
interest due and payable based on the greater of the six (6) month monthly
interest immediately preceding the effective date of termination or, if the
effective date of termination is less than six (6) months from the Closing
Date, an amount equal to the average monthly interest due hereunder
multiplied by the number of full or partial months from the effective date of
termination to the Maturity Date, or (iii) an amount equal to the average
monthly interest accrued during the six (6) months immediately preceding the
effective date of termination multiplied by the number of full or partial
months from the effective date of termination to the Maturity Date."
VARIANCE FROM FINANCIAL COVENANTS
1. Coast hereby consents and agrees to waive Borrower's failure to comply with
the minimum consolidated Tangible Net Worth provision set forth in Section
8.1 (13) of the Schedule for the months September, 1999 and October, 1999,
and only as to those two months.
CONDITIONS PRECEDENT TO EFFECTIVENESS OF FIRST AMENDMENT
1. T2 shall comply with each and every condition precedent contained in the Loan
Documents.
2. Borrowers' execution and return of this First Amendment.
3. Borrowers' execution and return of a Stock Pledge, in form and substance
acceptable to Coast, pledging all of the stock of T2 as additional Collateral
(as defined in Section 1 of the Loan and Security Agreement).
4. Borrower shall pay Coast a Restructuring Fee by way of an additional Warrant,
in form and substance acceptable to Coast, for an additional 200,000 shares
of VTC, as set forth above under Amendment Section 5.
3
<PAGE> 4
5. Borrower shall pay Coast a Waiver Fee by way of an additional Warrant, in
form and substance acceptable to Coast, for an additional 50,000 shares of
VTC, as set forth above under Amendment Section 5.
6. Borrowers' execution and return of a Security Agreement in Patent and
Trademarks, in form and substance acceptable to Coast, assigning rights in
and to all trademarks acquired from Tech Squared, Inc.
7. Borrowers' delivery of a fully executed assignment from Tech Squared, Inc.
to T2 of Tech Squared, Inc.'s trademarks.
8. Coast's receipt and approval of a fully executed copy of the Asset Purchase
Agreement and all Schedules and Exhibits thereto between T2 and Tech
Squared, Inc.
9. Confirmation, in form and substance acceptable to Coast, that all
conditions to the Tech Squared, Inc. Asset Purchase Agreement have been
satisfied and title to all assets transferred to T2.
10. Coast's receipt and approval of an Opinion of Counsel, in form and
substance satisfactory to Coast, in connection with the transaction
contemplated in this First Amendment.
11. Confirmation, in form and substance acceptable to Coast, of Borrower's
receipt in December 1999 of an equity infusion of not less than Two Million
Dollars ($2,000,000.00).
EXCEPT AS EXPRESSLY PROVIDED FOR HEREIN, ALL OF THE TERMS AND CONDITIONS OF
THE LOAN AGREEMENT AND ALL OTHER DOCUMENTS AND AGREEMENTS BETWEEN COAST AND
BORROWER, AS AMENDED, SHALL CONTINUE IN FULL FORCE AND EFFECT AND THE SAME
ARE HEREBY RATIFIED AND AFFIRMED. THE WAIVERS CONTAINED HEREIN DO NOT
CONSTITUTE A WAIVER OF ANY OTHER PROVISION OR TERM OF THE LOAN AGREEMENT
NOR ANY RELATED DOCUMENT OR AGREEMENT, NOR AN AGREEMENT TO WAIVE ANY TERM
OR CONDITION OF THE LOAN AGREEMENT NOR ANY RELATED DOCUMENT OR AGREEMENT IN
THE FUTURE.
Signatures follow on separate page 5
Borrower:
VIRTUAL TECHNOLOGY CORPORATION
By:/s/ Gregory Appelhof
----------------------
4
<PAGE> 5
Gregory Appelhof, President
And by: /s/ John Harvatine
---------------------
John L. Harvatine, Chief Financial Officer
Borrower:
GTI ACQUISITION CORPORATION
By: /s/ Gregory Appelhof
------------------------
Gregory Appelhof, President
And by: /s/ John Harvatine
---------------------
John L. Harvatine, Chief Financial Officer
Coast:
COAST BUSINESS CREDIT
By: /s/ Todd Davock
----------------------
Todd Davock, Vice President
The undersigned hereby agrees to be bound by all of the terms and
conditions set forth in the Loan Documents, and further expressly agrees to
be liable, jointly and severally, for all outstanding Obligations existing
as of the date hereof and arising hereafter.
Borrower:
T2 ACQUISITION CORPORATION
By: /s/ Gregory Appelhof
-------------------------------
Gregory Appelhof, President and Chief Executive Officer
And by: /s/ John Harvatine
--------------------------
John L. Harvatine, Chief Financial Officer, Secretary and Treasurer
Signature page to First Amendment to Loan and Security Agreement
5
<PAGE> 6
EXHIBIT 10.7
COAST BUSINESS CREDIT(R)
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
BORROWER: VIRTUAL TECHNOLOGY CORPORATION
ADDRESS: 3100 WEST LAKE STREET, SUITE 410
MINNEAPOLIS, MN 55416
BORROWER: GTI ACQUISITION CORPORATION
ADDRESS: 7615 GOLDEN TRIANGLE DRIVE, SUITE G
MINNEAPOLIS, MN 55344
BORROWER: T2 ACQUISITION CORPORATION
ADDRESS: 6698 SHADY OAK ROAD
EDEN PRAIRIE, MN 55344
DATE: DECEMBER 15, 1999
THIS SECOND AMENDMENT TO THE LOAN AND SECURITY AGREEMENT is entered into as of
the above date between COAST BUSINESS CREDIT, a division of Southern Pacific
Bank ("Coast"), a California corporation, with offices at 12121 Wilshire
Boulevard, Suite 1400, Los Angeles, California 90025, and Virtual Technology
Corporation, GTI Acquisition Corporation and T2 Acquisition Corporation (jointly
and severally, the "Borrower") whose chief executive offices are located
respectively at the above addresses ("Borrower's Addresses"). This Amendment
shall for all purposes be deemed to be a part of the Loan and Security Agreement
("Loan Agreement"), and the same is an integral part of the Loan Agreement.
RECITALS
1. Coast and Borrower entered into a First Amendment to the Loan and Security
Agreement as of December 10, 1999.
2. Condition Precedent to Effectiveness of First Amendment No. 11 ("Condition
No. 11") requires Borrower's receipt in December 1999 of an equity infusion
of not less than Two Million Dollars ($2,000,000.00).
3. Borrower has requested that Coast extend additional credit as if the First
Amendment is effective even though Borrower, to date, is unable to satisfy
Condition No. 11.
1
<PAGE> 7
LIMITED AND CONDITIONAL WAIVER FROM FINANCIAL COVENANTS
1. Coast hereby consents and agrees to a limited, conditional waiver of
Condition No. 11 as follows:
(a) Coast will deem the First Amendment effective upon Coast's
receipt, in form and substance acceptable to Coast, of
Borrower's receipt of an equity infusion of not less than One
Million Dollars ($1,000,000.00) in December 1999.
CONDITION OF WAIVER
1. On or before December 31, 1999, Borrower shall confirm its receipt, in form
and substance acceptable to Coast, of a total equity infusion in December
1999 of not less than Two Million Dollars ($2,000,000.00), inclusive of the
One Million Dollars ($1,000,000.00) that is a condition precedent to the
effectiveness of this Amendment.
AGREEMENT OF THE PARTIES
1. Coast and Borrower agree that Borrower's failure to satisfy Condition of
Waiver No. 1, above, shall be an Event of Default under the Loan Agreement.
CONDITIONS PRECEDENT TO EFFECTIVENESS OF SECOND AMENDMENT
1. Borrowers' execution and return of this Second Amendment.
2. Coast's receipt of confirmation, in form and substance acceptable to Coast,
of Borrower's receipt of an equity infusion of not less than One Million
Dollars ($1,000,000.00) in December 1999.
EXCEPT AS EXPRESSLY PROVIDED FOR HEREIN, ALL OF THE TERMS AND CONDITIONS OF
THE LOAN AGREEMENT AND ALL OTHER DOCUMENTS AND AGREEMENTS BETWEEN COAST AND
BORROWER, AS AMENDED, SHALL CONTINUE IN FULL FORCE AND EFFECT AND THE SAME
ARE HEREBY RATIFIED AND AFFIRMED. THE WAIVERS CONTAINED HEREIN DO NOT
CONSTITUTE A WAIVER OF ANY OTHER PROVISION OR TERM OF THE LOAN AGREEMENT
NOR ANY RELATED DOCUMENT OR AGREEMENT, NOR AN AGREEMENT TO WAIVE ANY TERM
OR CONDITION OF THE LOAN AGREEMENT NOR ANY RELATED DOCUMENT OR AGREEMENT IN
THE FUTURE.
Signatures follow on separate page three (3)
Borrower:
2
<PAGE> 8
VIRTUAL TECHNOLOGY CORPORATION
By: /s/ Gregory Appelhof
--------------------------------
Gregory Appelhof, President
And by: /s/ John Harvatine
----------------------------
John L. Harvatine, Chief Financial Officer
Borrower:
GTI ACQUISITION CORPORATION
By: /s/ Gregory Appelhof
--------------------------------
Gregory Appelhof, President
And by: /s/ John Harvatine
----------------------------
John L. Harvatine, Chief Financial Officer
Borrower:
T2 ACQUISITION CORPORATION
By: /s/ Gregory Appelhof
--------------------------------
Gregory Appelhof, President and Chief Executive Officer
And by: /s/ John Harvatine
----------------------------
John L. Harvatine, Chief Financial Officer, Secretary and Treasurer
Coast:
COAST BUSINESS CREDIT
By: /s/ Britt Terrell
--------------------------------
Britt Terrell, Vice President
Signature page to Second Amendment to Loan and Security Agreement
3
<PAGE> 1
EXHIBIT 10.8
AGREEMENT BETWEEN VIRTUAL TECHNOLOGY CORPORATION AND
eSystems21 CORPORATION
This agreement is made effective September 1, 1999 by and between Virtual
Technology Corporation (herein referred to as VTC) having its principal office
located at, 3100 West Lake Street Suite 400, Minneapolis, MN 55416 and
eSystems21, whose principal office is located at 7625 Golden Triangle Dr. Eden
Prairie, MN 55344 (herein referred to as Allworkstore.com)
In consideration of the mutual covenants contained herein, IT IS HEREBY AGREED
BETWEEN THE PARTIES AS FOLLOW:
ARTICLE 1. PURPOSE AND INTENT
1. The purpose and intent of this agreement is to define the administrative
responsibilities of VTC and Allworkstore.com with regard the purchasing
program which will allow Allworkstore.com members and customers the ability
to purchase products via an on-line technology shopping site located at
http//www.Allworkstore.com./techmart or it's equivalent.
ARTICLE 2. DEFINITIONS
2.1 VTC - As used herein all shall mean and include VTC, it's successors,
permitted subsidiaries, affiliates and any of its present and future
subsidiaries or organizations controlled by, controlling or under common control
with it.
2.2 Allworkstore.com - As used herein, shall mean and include Allworkstore.com,
its successors, permitted assigned, subsidiaries, affiliates, and any of its
present and future subsidiaries or organizations controlled by, controlling or
under common control with it.
ARTICLE 3. PROGRAM DESCRIPTION
3. Through Allworkstore.com/techmart, VTC makes available their on-line
technology shopping site.
ARTICLE 4. RESPONSIBILITIES
4.1 Constructing an "E-Commerce" for the Allworkstore.com based on the VTC
"E-Commerce" page with customization to the Allworkstore.com "Home Page" as is
reasonable. Provide links from the Allworkstore.com's "Home Page" to the
"Techmart" site.
<PAGE> 2
4.2 Listing a minimum of 40,000 products for purchase by the, (not withstanding
restrictions by statute or from OEMs).
4.3 Obtaining the most competitive prices available for Allworkstore.com and
it's members and customers.
4.4 Assisting in the development of marketing brochures as well as providing
general support, retention, and assistance in the marketing of this program to
members and customers.
4.5 Processing orders received from Allworkstore.com members and customers,
delivering and billing them directly.
4.6 Fulfilling orders, customer order service, and final calculation of product
pricing, shipping charges and sales tax (where applicable).
4.7 Keeping close communications with Allworkstore.com as to all activity with
members and customers.
4.8 Submitting monthly volume sales reports to Allworkstore.com in Eden Prairie
MN, for the total dollar purchases made under the terms of this agreement.
4.9 Notifying Allworkstore.com of unusual price changes, product additions or
cancellations.
ARTICLE 5. Allworkstore.com ADMINISTRATIVE RESPONSIBILITIES
5.1 Receiving leads from members and customers and forward them to VTC for
follow-up.
5.2 Acting as a liaison, if necessary, between members and customers and VTC to
resolve any customer assistance issues.
5.3 Marketing VTC to members and customers through mailings, conferences,
meetings, newsletters, and purchasing updates.
ARTICLE 6. AUDITS
6. VTC agrees that the Purchasing Staff of Allworkstore.com may audit their
relevant records to establish that total compliance of this agreement is met.
VTC agrees to provide verifiable documentation tracking services form
manufacturer to member. Allworkstore.com will provide at least twenty-four hour
notice of audit.
ARTICLE 7. FEES
<PAGE> 3
7. VTC agrees to pay Allworkstore.com an administrative fee of .5% to 1% for all
products purchased by Allworkstore.com members and customers monthly. Said fee
to be in support of the marketing and promotional efforts of Allworkstore.com
ARTICLE 8. TERM
---------------
8.1 Term. This agreement shall become effective as of September 1, 1999 for a
period of two years and continue in force until further notice by either party
with 60 days written notification. After the initial two-year term, the contract
is renewable yearly in one-year terms.
8.1 Termination. This agreement shall terminate immediately upon any one of the
following events:
8.2-1 VTC's voluntary or involuntary bankruptcy or insolvency.
8.2-2 VTC's failure to remedy a material breach of this agreement
within 30 days of receipts of notice from Allworkstore.com specifying in
reasonable detail the nature of such breach.
8.2-3 Receipt of written information from any authorized agency finding
activities of VTC engaged in pursuant to this agreement to be in violation of
the law.
8.2-4 Written agreement by either party herein giving 30 days notice.
8.3 Rights and Obligations upon Termination. Termination of this agreement shall
not release the party from the obligation to make payment of all amounts due and
payable.
ARTICLE 9. MISCELLANEOUS
------------------------
9.1 Assignment. Neither party shall have the right to assign or otherwise
transfer its rights and obligations under this agreement except with the prior
written consent of the other party; provided that a successor in interest by
merger, by operation of law, assignment, purchase or otherwise of the entire
business of either party shall acquire all interest of such party hereunder. Any
prohibited assignment shall be null and void.
9.2 Relationship. Each party is an independent entity under the terms of this
agreement. Neither party, by virtue of this agreement will have any right,
power, nor authority to act or create any obligation, expressed or implied, on
behalf of the other party. Except as otherwise provided, or as may hereafter be
established by a written agreement executed by authorized representatives of the
parties, all operational expenses by written agreement executed by authorized
representatives of the parties, all operational expenses incurred by either
party will be borne by the party incurring the expense.
9.3 Governing Law. This agreement shall be interpreted in accordance with and
governed by the laws of the State of Minnesota.
9.4 Confidentiality. Subject to any obligation, applicable law, the parties
agree that the terms of this agreement shall remain confidential. The parties
agree that upon written
<PAGE> 4
execution hereof they shall be free to make a statement to the press or develop
other such publicity as is mutually beneficial and agreed upon.
9.5 Hold Harmless. Each party agrees to hold the other harmless from any and all
claims and demands of members and customers which may result from the negligence
of the other in connection with their duties and responsibilities under this
agreement, unless such action is a result of intentional wrongdoing of the other
party.
9.6 Notices. Notices permitted or required to be given hereunder shall be deemed
sufficient if given by registered or certified mail, postage prepaid, return
receipt requested, addressed to the following addresses of the parties, or at
such other addresses as the respective parties may designate by like notice from
time to time. Notices so given shall be effective upon (a) receipt by the party
to which notice is given, or (b) on the seventh (7th) day following the date
such notice was posted, whichever occurs first:
Virtual Technology Corporation Allworkstore.com
3100 West Lake Street Suite 400 7625 Golden Triangle Dr.
Minneapolis, MN 55416 Eden Prairie, MN 55344
9.7 Binding Effect. This agreement binds and insures to the benefit of the
parties hereto, and their respective successors and permitted assigns.
9.8 Entire Agreement. The individuals signing this agreement hereby represent
that they are authorized on behalf of their respective organizations to execute
this agreement and the agreement contains the entire understanding between the
parties concerning the subject matter.
9.9 Severability. In the event that any of the terms of this agreement are in
conflict with any rule or law or statuary provision or otherwise unenforceable
under the laws or regulations of any government or subdivision thereof, such
terms shall be deemed stricken from this agreement, but such invalidity or
unenforceablitiy shall not invalidate any of the other terms of this agreement,
and this agreement shall continue in force, unless the invalidity or
unenforceability of any such provisions hereof does substantial violence to, or
where the invalid or unenforceable provisions compromise an integral part of or
are otherwise inseperable from, the remainder of this agreement.
9.10 Waiver. No failure by either party to take any action or assert any right
hereunder shall be deemed to be a waiver of such right in the event of the
continuation or repetition of the circumstances giving to such right.
9.11 Amendments. This agreement shall not be deemed or construed to be modified,
amended, rescinded, canceled or waived, in whole or in part, other than by
written amendment signed by the parties hereto.
<PAGE> 5
IN WITNESS WHEREOF, the parties have executed this agreement effective the day
and year first above written.
Virtual Technology Corporation Allworkstore.com
By /s/ Steve Mihm By /s/ Tim Morin
- ------------------------ --------------------------
Steve Mihm Tim Morin
Date: 9/3/99 Date: 8/27/99
<PAGE> 1
EXHIBIT 10.9
ELECTRONIC COMMERCE AGREEMENT BETWEEN
THE UNIVERSITY OF MINNESOTA
AND
VIRTUAL TECHNOLOGY CORPORATION
d/b/a
NET DIRECT CORPORATION INTERNATIONAL
THIS AGREEMENT including all Exhibits attached hereto and incorporated
herein by reference (the "Agreement") is made as of the 4th day of January,
2000, by and between Virtual Technology Corporation d/b/a Net Direct
Corporation International, a corporation organized under Minnesota law
(hereinafter called "NDC"), and the Regents of the University of Minnesota
(hereinafter called "the University"). On a nonexclusive basis, the University
agrees to buy products and services from NDC and NDC agrees to provide or
supply products and services to the University on the following terms and
conditions specified herein.
INDUCEMENTS
WHEREAS, the University has submitted to NDC, and others, a Request for
Proposal issued on May 14, 1999, and referred to as #U110.19, which is
attached hereto and incorporated herein as Exhibit 2 (the "RFP") setting forth
certain terms and conditions, and certain information regarding (i) hardware,
software and services related to the implementation of an E-Commerce system as
well as sales of Computer Peripherals and other related Products throughout the
University's organization, (ii) the University's desire to add value and to
improve its capability for delivering business solutions through such an
E-Commerce environment, and (iii) certain technical requirements to fulfill the
present and future needs of the University over the period of this contract;
and
WHEREAS, based on the results of NDC's review and analysis of the RFP,
NDC has prepared and delivered to the University a Proposal dated June 4, 1999,
which is attached hereto and incorporated herein as Exhibit 1 (the "Proposal")
setting forth representations including conclusions, recommendations, and
benefits regarding the E-Commerce environment and the sale of suitable Products
of hardware, software, and services and other related Products required to
provide the University with certain capabilities as specified in the RFP's
requirements and specifications for ongoing operations; and to further provide
the University with the capability and flexibility sufficient to handle its
current and reasonable anticipated growth over the period of this contract; and
WHEREAS, on the basis of the representations contained in NDC's
proposal, presentations, other printed material, correspondence, discussions,
and in reliance upon the expertise of NDC in analyzing, designing, and
developing E-Commerce solutions for institutions such as the University, the
University desires to enter into a mutually beneficial relationship with NDC
under the terms and conditions hereinafter set forth in order to facilitate the
anticipated purchase by the University of certain Products and Services; and
NOW, THEREFORE, in consideration of the inducements, mutual covenants
and conditions herein contained, the parties agree as follows:
1.0 TERM OF AGREEMENT.
1.1. TERM. This Agreement shall become effective as of the day first
written above and shall expire on December 31, 2001, unless terminated earlier
as provided herein. This Agreement may be extended by either party for three
successive one-year terms by giving notice to the other party at least sixty
days prior to the end of the initial term or, as applicable, sixty days prior
to the end of each successive one-year term.
1.2. Termination for Convenience. The University may terminate this
Agreement for convenience in whole or with respect to particular products
offered by NDC herein; provided that notice is given by the University to NDC
at least (60) sixty days in advance - In full discharge of any obligations with
respect to this Agreement and such termination, the University shall pay NDC
for all orders accepted by the University prior to the effective date of
termination.
<PAGE> 2
1.3. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The terms, provisions,
representations and warranties contained in this Agreement that by their sense
and context are intended to survive the performance thereof by either or both
parties hereunder shall so survive the completion of performance and
termination of this Agreement and any Order placed hereunder, including, but
not limited to, the making of any and all payments due hereunder, confidential
information, insurance, any rights and obligations conveyed by license and any
cause of action that accrued prior to said termination.
1.4. RIGHTS UPON ORDERLY TERMINATION. Upon termination or other
expiration of this, Agreement, or any license or Order made hereunder, each
party shall forthwith return to the other, or-, where applicable certify in
writing the destruction of, all papers, materials and properties of the other
held by such party and required to be returned by this Agreement or any license
or Order hereunder. In addition each party will assist the other party in
orderly termination of this Agreement or any Order and the transfer of all
aspects hereof, tangible and intangible, as may be necessary for the orderly,
nondisrupted business continuation of each party.
2.0 DEFINITIONS.
2.1 Acceptance Date. Acceptance date is the date on which the
University has received delivery of the complete Order and has inspected such
delivery for satisfactory and complete performance according to NDC's
specifications and the applicable order.
2.2 Component. A Component is any integral part of a "System", whether
hardware or software.
2.3 Delivery Date. Delivery Date is the date by which all items and
parts of the applicable Product(s) shall be delivered to the destination
specified in the Order.
2.4 Installation Date. The Installation Date is the date by which all
items or parts of the applicable Product(s) shall be installed and prepared for
Acceptance at the location specified in the Order.
2.5 ORDER. An Order is any written request for any Product or Service
issued on the University's Purchase Order pursuant to this Agreement.
2.6 Preinstalled Software. Preinstalled Software is commercial software
products sold by NDC as part of a system installed prior to shipment.
2.7 PRODUCT(S), Product is any Equipment, Software, Service,
communications hardware or software, or Supply Item offered by NDC; "Software"
includes any program, programming aid, routine translation, compiler,
diagnostic routine, Operating System Software or Application Software; "Supply
Item" includes any cards, paper, magnetic tape, compact discs, other magnetic
storage media, and similar items that are used or required to operate the
Products acquired by NDC or the University under this Agreement or any Order.
2.8 RELATED ORDER(S). Related Order(s) is any Order(s) that is related
to one or more other Order(s) where (i) either such Order specifies that the
two or more orders are so related; or (ii) either such order specifies that one
or more such Orders is conditioned or contingent upon the execution or
performance of the other Order(s); or (iii) the Order(s) is for Products that
are necessary to the reasonable or intended operation or use of any other
Product ordered by the University within thirty (30) days before or after the
date a University customer executes the other Order, or (iv) a change order
which alters the conditions or specifications of any Order.
2.9 Services. Services include any programming service, preventive
maintenance, remedial hardware maintenance, software maintenance, consulting
service, or support service or other service provided by NDC or its authorized
representatives to the University.
2.10 SPECIFICATIONS. Specifications are the information, which fully
describes the capabilities and functionality of the Product as set forth in any
material provided by NDC including the documentation and user's manuals
described herein.
<PAGE> 3
2.11 System. A System is any collection or aggregation of two (2) or
more components that is designed to function, or is represented by NDC as
functioning or being capable of functioning, as an entity.
3.0 GENERAL DESCRIPTION OF SCOPE OF SERVICES
3.1 APPLICABILITY. This agreement is applicable to the procurement by
the University in any University designated site of any Products and Services
that are available or will be made available during the term of this Agreement.
3.2 INTERRELATIONSHIP WITH ORDERS. This is a nonexclusive general
procurement agreement for electronic transfer of orders that contemplates the
future execution by NDC and the University of one (1) or more Orders. Each
Order shall contain the minimum information agreed upon by NDC and the
University and shall automatically be deemed to include, without the necessity
of reference or incorporation, all the terms and provisions of this Agreement.
All transactions between NDC and the University during any terms of this
Agreement shall be governed by this Agreement and any applicable Order;
provided that:
I. The parties may otherwise agree in writing executed by
authorized representatives of both of them; and
II. Whenever the provisions of an Order conflict with the
provisions of this Agreement, the provisions of the Order which have been
mutually agreed upon by the parties in writing and which are not pre-printed as
part of a form shall control and take precedence over the conflicting
provisions of this Agreement, but only for purposes of such Order and, except
for such Order, the terms and conditions of this Agreement shall not be deemed
to be amended, modified, canceled, or waived. Conflicting template provisions
belonging to either party shall be deemed deleted.
III. The University reserves the right to obtain any or all
Supply items from sources other than NDC without effect to Maintenance and
Performance Warranties, provided such supplies conform to manufacturer's
specifications.
3.3 Scope of Use. The scope of use by the University may be increased
under this Agreement to include additional groups such as student purchases,
staff purchases for personal use, or use by other entities. Reasonable advance
notice will be given to NDC by the University that the University desires to
increase the scope of use. Terms and conditions for any increase in scope will
be renegotiated as deemed necessary and by agreement of NDC and the University.
4.0 RELATIONSHIP BETWEEN THE UNIVERSITY AND NDC
4.1 NDC Visits to the University. NDC will, at NDC's expense, visit the
University's designated location no less than once quarterly. NDC personnel
will include, but not be limited to, product development specialists and/or
other such technical specialists as requested by the University.
4.2 University Visits to NDC. The University will, at its discretion
and expense, visit NDC facilities. NDC will make available, at NDC's expense,
technical specialists as determined by the University and NDC to discuss NDC's
technical strategic direction. Such visits would be subject to non-disclosure
provisions executed by the University in conformance with the Minnesota
Government Data Practices Act. Such visits may include NDC's development
laboratory so that the University, may participate in product development
discussions.
<PAGE> 4
4.3 NDC PERSONNEL REMOVAL FOR CAUSE. Certain individuals will have
access to the University's plans and confidential information as a requirement
for fulfilling their duties, and the University will become dependent on these
individuals for advice and expertise ("Key NDC Personnel") The University may
require NDC to immediately remove Key NDC Personnel from University projects
for the violation of the terms and conditions of this Agreement including the
violation of the University's policies, rules and regulations, violation of
Local, State, Federal or Municipal statutes, or where said individual is
engaged in activities that could be detrimental to the University or University
Personnel. The University's sole liability to NDC when NDC Personnel are
removed under the provisions of this paragraph will be for the payment of valid
invoices submitted to the University by NDC covering the period of time of the
University notifying NDC to remove said personnel.
4.4 No Effect on Warranty. The University's selection, use (or nonuse)
of its rights and remedies regarding Personnel shall not affect in any way NDCs
responsibilities, liabilities, or warranties under this Agreement."
4.5 SITE RULES AND REGULATIONS. NDC and its employees and agents, while
on the University's premises, shall comply with the University's site rules and
regulations.
4.6 PREFERENTIAL SCHEDULING. In determining the availability of a
Product or replacement Product, if necessary to meet the University's
requirements or replace damaged Product(s), NDC shall provide reasonable best
efforts to expedite and allocate to the University the next available Product
at NDC's facilities, superseding to the extent permitted by law all other
delivery commitments and schedules.
4.7 NEW TECHNOLOGY REPLACEMENT. The University and NDC recognize that
NDC will market new Products ("New Technology") that are designed to enhance or
replace Products provided for in this Agreement. To accommodate each party's
requirements, NDC agrees to include New Technology as part of its Product
offerings within the terms provided for in this Agreement. The University's
acquisition of New Technology will be included in any pricing discounts for
Product or Purchase volumes stated within this Agreement.
4.8 INDEPENDENT OBLIGATION OF NDC TO CONTINUE PERFORMANCE. Because of
the critical importance of the obligations undertaken by NDC hereunder to the
operations of the University and the substantial expertise (not otherwise
possessed by the University) which NDC has represented it will utilize in
connection with the fulfillment of its obligations and the reliance of the
University on such expertise for the fulfillment of its business processing,
NDC assumes an independent obligation to continue performance of its
obligations hereunder in all respects regardless of any dispute which may arise
between the University and NDC in connection with any claims by NDC that the
University has materially breached its obligations hereunder. Such independent
obligation shall continue for ninety (90) days from the date upon which the
University receives written notice of such alleged breach from NDC. NDC
undertakes this independent obligation without prejudice to any rights or
remedies it may otherwise have in connection with any dispute between NDC and
the University.
4.9 TRADE-IN OF PURCHASED EQUIPMENT. NDC will accept trade-ins of
previously purchased equipment with the purchase of new equipment. Trade-in
values, if any, will be determined by agreement between NDC and the
University.
4.10 TIME LINE FOR UNIVERSITY E-COMMERCE ENVIRONMENT AND CONTRACT
CONDITIONS - NDC WILL USE, best efforts to complete the following time line
projects in accordance with a mutually agreeable timeline:
4.10.1 Phase I is to be completed no later than thirty (30)
days following the execution of this Agreement and consists of the following:
Automatic notification (from University to NDQ of
approved purchase orders, with funds committed, for departmental computer sales.
This notification will inform NDC that release of the order from NDC's web site
is authorized and NDC should ship Order.
4.10.2 Phase II is to be completed not later than one hundred
and eighty (180) days following the execution of this Agreement and consists of
the following:
<PAGE> 5
1. Open Buying on the Internet (OBI) solution;
2. Automatic notification of NDC Shopping Cart
information to the University to feed the University's electronic purchase
order and approval system.
4.10.3 Phase III is to be completed no later than three
hundred and sixty five (365) days following the execution of this Agreement and
consists of the following:
Electronic funds Transfer (EFT) for invoice payment of
the E-Commerce purchases. Reasonable terms and conditions of EFT will be
negotiated by representatives of NDC and the University at such time as is
reasonable during the development of this Phase.
4.10.4 NDC will provide regular progress reports to the
University summarizing progress made under each Phase.
4.11 PRODUCT LISTING RIGHTS. NDC will regularly inform the University
of additions, deletions, and changes in products listed on their E-Commerce Web
page. The University will have the right to request additions, deletions and
changes of these listings necessary to maintain the integrity of products
supplied to the University. NDC, upon receipt of such request, will use best
efforts to fulfill these requests within forty-eight (48) hours or less.
Requests must be authorized by designated University personnel. For purposes of
this provision, the designated individual from the University is
Dr. Shih-Pau Yen
190 Shepherd Laboratories
100 Union Street, S.E.
Minneapolis, MIN 55455
Telephone: (612) 624-8865
Facsimile: (612) 625-6817
The University agrees to provide NDC notice of any change of its designated
individual.
4.12 Capacity. NDC will maintain capability within their system to
expeditiously handle the number of orders entered by the University community
throughout the term of this agreement.
4.13 UNIVERSITY COLLEGES. NDC will maintain the capability to customize
product availability to meet the needs of differing and specific colleges
within the University.
4.14 PRICE SPECIALS. Within the PARAMETERS APPROVED BY THE UNIVERSITY,
INCLUDING, BUT NOT, LIMITED to advance notice, NDC will roll-out SPECIAL
PRICING TO THE UNIVERSITY COMMUNITY VIA E-MAIL lists provided by the
University. The University retains the right to accept or reject products
offered as specials or promotions.
4.15 E-mail Lists. Under no circumstances, will NDC provide, sell, lend
or give E-mail lists supplied to NDC by the University to any other business,
entity, organization, group, persons or person.
4.16 Reports. NDC shall provide to the University quarterly reports
which will include but not be limited to total number of transactions under
this Agreement, total dollars in transactions, list of categories being
purchased, leading ten (10) products for each category including cost for each
Product or range of costs for each Product.
5.0 ORDER INFORMATION AND PROCEDURES
5.1 Order Information. Each Order hereunder shall be transmitted
electronically, using the Internet and such systems as developed between the
University and NDC. Each Order will contain at the least:
a. a complete list of the Products covered by the Order
specifying the quantity, type and model number, SKU number, and description for
each;
<PAGE> 6
b. University's price for each Product; any additional charges
and costs, including without limitation, non-standard services and special
features, the total amount payable by the University.
c. the location at which the Products shall be delivered
and, if different, the location at which the Products shall be initially
installed or used;
d. any non-standard site specifications for the Product;
e. the Delivery Date for the Products and, if applicable,
any interim delivery schedule;
f. if requested, the Installation Date for the Products;
g. the maintenance -,schedule for the Products, if
applicable;
h. any special terms and conditions agreed upon by NDC
and the University.
5.2 ORDER ACCEPTANCE. NDC agrees to notify the University (e-mail is
not considered a writing, for the purposes of timely communication under this
paragraph; fax notification, however, is considered a writing) if NDC does not
accept the Order as submitted by University within two (2) days of receipt of
order. NDC shall have the right to reject any Order for failure of the
University to: (i) provide all ordering information required by this Agreement
on said Order; or (ii) correctly state prices or other amounts on the Order; or
(iii) allow reasonable time for NDC to manufacture, ship, supply, or install
the Product requested in the statement of dates on the Order; or (iv) NDC
recognizes the Order will not function as described on the Order. If the Order
is not accepted, NDC shall detail in writing to the University its reasons for
such rejection and shall indicate the modifications necessary to make the Order
acceptable to NDC. Acceptance of any Order by NDC will bind NDC to honor dates,
amounts and other ordering information shown on the Order, including
supplemental provisions contained therein unless otherwise agreed upon.
5.3 EFFECTIVE DATE OF ORDER. The effective date of an Order shall be
the date upon which the Order is accepted by the later of NDC or the University
without modification or amendment.
5.4 UNIVERSITY ORDER AUTHORITY. Each Order placed hereunder shall be
considered authorized by the appropriate authority when transmitted
electronically to NDC. The University reserves the right to refuse delivery or
cancel an outstanding order, regardless of order cancellation terms stated in
this Agreement, if it is determined that NDC accepted an order outside the
process stated herein.
5.5 ORDER CANCELLATION. An Order for Products or Services may be
canceled under any of the following circumstances: (i) an Order for Equipment
may be canceled up to seven (7) days prior to its Delivery Date (ii)
University may cancel and terminate any Order for maintenance, support or
similar service at any time upon thirty (30) days, prior written notice to NDC
provided Service has not begun. Upon cancellation and termination by
University, University shall have no liability for any payments, costs or fees
accruing after the termination date; provided, however, that University shall
comply with its obligations, if any, relating to the return or redelivery of
the applicable Products to the University.
5.6 SHIPMENT. NDC WILL be responsible for payment to the shipper. Title
of all ordered products will be passed to the University upon delivery to
the exact address stated on the Order.
6.0 EQUIPMENT
6.1 NEW BUILD EQUIPMENT WARRANTY. NDC hereby represents and warrants to
University that unless specifically noted and agreed on the Order, as of the
Acceptance Date for any Equipment purchased by or provided to University
pursuant to this Agreement, such Equipment shall be: (i) new and of original
use; and (ii) not
<PAGE> 7
refurbished, reworked, rebuilt or repackaged. Notwithstanding the foregoing, NDC
may offer to the University such "specials" which may be in contradiction
thereof, with advance notice to the University as provided in 4.14.
6.2 MAINTENANCE TO BE PROVIDED. An order for maintenance may be
specified within the Order for equipment or issued as a separate, Related
Order. Such maintenance will maintain the stated equipment in good operating
condition.
6.3 ELECTRICAL POWER AND AIR CONDITIONING. Failure of electrical power
or air conditioning shall not be considered as cause to invalidate any
warranties by NDC, nor constitute University noncompliance with Product
Specifications.
7.0 PRODUCT RETURNS. The University and its customers shall be entitled to
return Products to NDC as follows:
7.1 Open Box. A nondefective Product in an opened box and which
conforms to the specifications of the Order is nonreturnable to NDC.
7.2 Unopened Sealed Box. A nondefective Product in an unopened
sealed box which conforms to the specifications of the Order may be returned
within 14 days of receipt, subject to a fifteen percent (15%) restocking fee
unless the order for such Product has been effectively canceled by the
University. under Section 5.5, in which case no re-stocking fee will be
charged. Return shipping of the Product to NDC is the responsibility of the
University and original shipping charges, if any, will not be refunded;
provided, however, that return shipping will be the responsibility of NDC and,
original shipping charges, if any, will be refunded, in the event the
University effectively canceled the order for such products under Section 5.5.
7.3 Defective/Non-Conforming Product. Any Product that is claimed
by the University or its customer to be defective or which does not conform to
the specifications of the Order may be returned within 14 days of receipt with
no restocking fee so long :; as the Product is actually defective or does not
conform to the specifications of the Order. Defective Products and/or Products
which do not conform to the Order will be replaced or the Order for such
product may be cancelled at the University or University customer's request .
Return shipping, of actually defective or non conforming Product to NDC within
said 14 day period is the responsibility of NDC. A call tag will be issued via
UPS to pick up the defective and/or non-conforminor Product. UPS will pick up
the defective Product at the address originally shipped to. NDC will inspect
Product that is claimed to be defective and or non-conformina upon arrival at
its warehouse. If the Product is found to be defective and/or non-c on forming,
the University's account will be appropriately credited within 14 days of
arrival of the returned Product to NDC's warehouse. If the Product is found not
to be defective or non-conforming, the University will be appropriately billed
for the return shipping and a 15% restocking; fee. In such event; original
shipping charges, if any, will not be refunded.
7.4 Return Procedure. In order to return a Product, the University or
its customer must contact a NDC customer service representative and obtain a
Return Merchandise Authorization number ("RMA#"). All returned product must
have an RMA# for it to be accepted. The University's account will be
appropriately credited within 14 days of arrival of the returned product in
NDC's warehouse.
8.0 WARRANTIES AND REPRESENTATIONS. The University and NDC recognize and agree
that NDC is not a Software or Product manufacturer or publisher and accordingly
offers no warranties on the quality or workmanship of Software or Products sold
to the University under this Agreement except for the warranties provided by
the Software or Product manufacturer or publisher and except as may be provided
in this Agreement.
8.1 COMPONENT AND CONFIGURATION WARRANTY.
8.1.1 COMPATIBILITY WARRANTY. Unless the applicable Order
specifically indicates otherwise, NDC warrants that all Products acquired
pursuant to an order shall be both data, program,
<PAGE> 8
and communications compatible to all other Products acquired pursuant to such
Order and to any Related order. NDC will review each University Order as to
completeness and will notify the University as to any inaccuracies or known
deficiencies or incompatibility with a Related Order.
8.1.2 CONFIGURATION WARRANTY. Unless the applicable Order
specifically indicates otherwise, NDC warrants that the product list for such
Order for a configuration of components, intended to work together as a system,
will be compatible, one Product with another. NDC will notify the University if
such Order is incomplete or contains incompatible components or peripherals.
8.2 ADDITIONAL COMMITMENTS AND WARRANTIES. Any written commitment by
NDC under the terms of any Order or of this Agreement shall be binding upon NDC
whether or not incorporated into said Order or this Agreement. For purposes of
this Agreement, a commitment by NDC shall include: (i) prices and options
committed by NDC or its agent to remain in force during the term of this
Agreement, (ii) any warranty or representation made by NDC or its agent in a
written proposal to the University as to Product performance, total System's
performance, or any other physical, design, or functional characteristics of
any equipment, Software, System, or other Product; (iii) any written warranty
or representation made by NDC or its agent concerning the characteristics or
items described in above, made in any literature, descriptions, drawings or
specifications accompanying or referred to in a proposal or presentation to the
University; and (iv) any modification of or affirmation or representation as to
any of the above which is made in writing by NDC or its agent in the course of
negotiations or during & term of this Agreement whether or not incorporated
into a formal amendment to the proposal; and (v) any representation by NDC or
its agent in a written proposal, in supporting documents or in negotiations
subsequent thereto as to training to be provided, services to be performed,
prices and options committed to remain in force over a fixed period of time, or
any other similar matter regardless of the fact that the duration of such
commitment may exceed the duration of this Agreement.
8.3 Warranty of Title. NDC warrants that it shall have, as of the date
of each order, as of the Delivery Date of each Product thereunder, and
throughout any applicable license term thereunder, including any renewals or
extensions thereof, free and clear title io, and the right to possess, use,
sell, transfer, or assign, license, or sub license, any and all Products that
are sold, licensed or otherwise provided to the University by NDC pursuant to
such Order. Except as permitted in this Agreement, or in an Order, NDC shall
not create or permit the creation of any lien, encumbrance, or security
interest in any Product licensed to the University, or sold to the University
and for which title has not yet passed to the University, without the prior
written consent of the University. Title to any Product purchased by the
University hereunder shall pass to the University upon delivery to the exact
address on the order for the applicable Product unless the Order specifies that
title shall pass to the University at some other time. Passing title to any
Product shall not constitute acceptance on the part of the University.
8.4 GOOD AND WORKMANLIKE MANNER. NDC warrants all services performed
under this Agreement pursuant to any extended service plan offered by NDC will
be performed in a good and workmanlike manner.
8.5 Warranty of Past Success. NDC warrants the Products have been
installed and are operational in a production capacity at similar user sites.
8.6 WARRANTY, OF SUPPLIER CAPABILITY. NDC warrants that it is
financially capable of fulfilling all requirements of this Agreement, that
there are no legal proceedings against it that could threaten performance of
this Agreement, that the Supplier is a validly organized entity to enter into
the agreement. Further, NDC is not prohibited by any supplier loan, contract,
financing arrangement, or any other such constraint from entering into this
Agreement.
8.7 Disclaimer of Warranties. EXCEPT FOR THE EXPRESS WARRANTIES MADE OR
REFERENCED IN THIS AGREEMENT, NEITHER PARTY MAKES ANY OTHER WARRANTIES,
EXPRESS OR IMPLIED, CONCERNING THE SUBJECT MATTER OF THIS AGREEMENT, INCLUDING
WITHOUT LIMITATION ANY IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE.
<PAGE> 9
8.8 WARRANTY OF SECURE E-COMMERCE ENVIRONMENT. NDC warrants that the
E-Commerce environment it maintains is secure and that it uses state of the art
technology for among other things: user and system authentication, fraud
prevention and detection, user privilege restriction, intellectual property
protection, privacy and confidentiality preservation, service continuation and
restoration, data integrity preservation, and information security management.
9.0 MAINTENANCE, SERVICE, AND SUPPORT OF PRODUCTS. NDC shall provide
service, and support for all Products provided under this Agreement.
10.0 SOFTWARE.
10.1 SOFTWARE TO BE PROVIDED. The terms and conditions of the
University's use of all Software provided by NDC under this Agreement shall
be as specified in this Agreement and in the applicable order. The University
shall receive a license (or where, applicable, an assignment of license) from
NDC providing for the University's use of such Software on terms and conditions
that are not inconsistent with this Agreement and the applicable Order. Each
Software Order and license shall be deemed to be a Related Order to the Order
or Orders that govern the acquisition by University of the Equipment for which
the Software is used.
10.2 Grant of License. NDC shall grant (or assign to) the University,
its agents, servants, contractors and assigns the right to utilize any Software
delivered by NDC during the term of this Agreement, on or in connection with
any CPU worldwide that is utilized by the University to fulfill the
University's data processing needs; provided such use does not exceed the scope
specified on the Order. The University shall have a perpetual, irrevocable
license for unlimited use of such Software.
10.3 Warranty. NDC warrants that, all Software supplied hereunder shall
conform to all published Software Specifications*and developer warranty.
11.0 UNIVERSITY'S COMPUTER REPAIR SERVICES
NDC acknowledges that the University's Computer Repair Services ("CRS")
is an authorized computer repair service provider for various Products to be
sold under this Agreement. NDC agrees to use best efforts to refer incoming
service calls from University customers regarding such products to CRS. Use of
CRS shall not be deemed to abrogate any warranties, representations, or
obligations of NDC under this Agreement.
<PAGE> 10
12. TRANSPORTATION AND DELIVERY.
12.1 SPECIAL DUTIES OF NDC. The Products shall be shipped UPS Ground
freight prepaid by NDC to the University's site, as indicated in the applicable
Order, it being expressly agreed that NDC will pay for all UPS Ground shipping
for Products under this Agreement. Expedited shipping services will incur
additional transportation charges to be prepaid and added to the invoice.. NDC
shall assume full responsibility for dealing with carriers to ensure delivery
of shipments, locate missing or late shipments, resolve billing for
transportation charges, and submit and resolve all insurance claims arising
form damage to its shipments. NDC shall be responsible for direct payment of
carrier invoices. Such Products shall be crated and packed in materials,
pursuant to procedures, meeting or exceeding the Product manufacturer's then
current standards for comparable components.
12.2 PAYMENT OF CHARGES. Subject to the provisions herein,
actual transportation charges on Products both from and to NDC's plant or
warehouse are to be prepaid by NDC. NDC will pay the cost of transportation for
products (i) shipped for mechanical replacement purposes; (ii) removed as a
result of Product failure, whether for convenience of NDC or pursuant to a
demand by the University as provided herein; or (iii) removed as a result of
default by NDC in any of its obligations under this Agreement or the Order.
12.3 DELIVERY. Supplier shall deliver all Products on the dates
and at the locations specified. All orders for delivery will be considered as
ordered for "Inside Delivery", and all orders will specify same. Handling,
shipping and unloading of the Products shall meet or exceed the manufacturer's
then current standards for comparable components. The NDC E-commerce Website
will state if Product is in stock. If Product is not in stock, the E-commerce
site will state the estimated delivery date.
12.4 STAGED DELIVERY AUTHORIZATION. Under staged orders, NDC may not
deliver any Product more than the (10) days prior to the specified Delivery
Date without receipt of written consent form University. The University and NDC
may mutually agree in writing to change any Delivery Date, in which event all
other dates listed in the Order shall remain unchanged unless specifically
adjusted by written agreement of NDC and the University. The University may, at
its discretion, designated an order or orders for staged delivery with
specified delivery dates. Such staged orders shall be managed by NDC
accordingly. The University may delay and Delivery Date for not more than
thirty (30) days by providing prior written notice to NDC not less than fifteen
(15) days prior to the Delivery Date provided the Order has not already been
shipped; if such delay stated herein, all other dates, including any
<PAGE> 11
Installation Date, shall be delayed by an equivalent period, unless otherwise
agreed in writing by NDC and the University.
12.5 DELIVERY OF ALL ITEMS. No Product under any Order shall be deemed
to be "delivered" hereunder unless and until all Products including all items
necessary for the operation thereof required by the Order to be delivered by a
specified date have in fact been delivered as required in the Order.
12.6 NOTICE OF CHANGE OR DELAY. NDC shall notify the University in
writing in advance of any delay in delivery or change of delivery location when
such delay or change becomes apparent to NDC. Unless the University is so
notified and grants its written approval to NDC for such delay or change, the
University may, at its sole option, suspend or terminated the Order (s)
affected, and any Related order not yet shipped.
12.7 DELIVERY AND INSTALLATION DELAY REMEDIES. If any Product purchased
by the University pursuant to this Agreement is not delivered by the Delivery
Date specified or if installation is ordered, is not installed by the
Installation Date, the University may, at is sole discretion, either: (I)
cancel any Product that has not met the agreed upon Delivery or Installation
date without regard for delayed or back-ordered Products, and (ii) as an
alternative remedy for delayed or back-ordered Products, and not withstanding
the terms of the Agreement as to the University default rights, NDC may, upon
mutual agreement, temporarily install non-conforming Products of equal or
greater capabilities until the University order can be fulfilled as written.
NDC will pay all costs associated with the temporary installation including
transportation, installation, and any environmental requirements differing form
the originally ordered Products. Any costs associated with de-installation
and/or return of the canceled Product will be borne by NDC. The University's
right to cancel Products under this Paragraph shall not preclude the University
from enforcing any remedies that may be available to the University in this
Agreement.
13 SITE PREPARATION AND INSTALLATION.
13.1 INSTALLATION. For an additional charge as shown on Exhibit 3, when
the order specifies installation by NDC, if the University has prepared the
installation site to satisfy NDC's minimum specifications by the time specified
in the Order, NDC shall cause the applicable Products to be installed and
prepared for normal operation by the agreed upon Installation Date specified on
the Order. Unless otherwise indicated, NDC shall install and prepare the
Products for normal operation during the normal working hours of the NDC's
personnel at the University's site location. If the University requests that
installation or preparation of the Products occur during other hours, the
University shall reimburse NDC for any overtime, shift differential or similar
costs actually incurred by NDC in accommodating such request; provided,
however, that no additional charges shall be paid by the University if NDC must
provide overtime or multiple shift staffing in order to meet the agreed upon
applicable Installation Date hereunder. Normal Operation shall be understood to
mean that, Products are operating according to any written or published
specifications distributed by NDC.
13.2 Early Installation and Operation. If the Products are certified by
NDC to be ready for Installation and Operation prior to the agreed upon
Installation Date specified in the Order, the University at its option, may
elect to begin Operation and change the agreed upon Installation Date
accordingly.
13.3 Delay of Installation Date. At any time prior to the agreed upon
Installation Date specified in the Order, the University, by written
notification to NDC, may delay such date at no additional charge or penalty. If
any such delay occurs in the Installation Date for any product, all subsequent
dates specified for such Product and any related Product shall be delayed by an
equivalent period, unless otherwise specifically agreed in writing by the
University and NDC.
13.4 Installation of All Items. No Product shall be deemed to be
installed for purposes of this Agreement unless and until: (i) all Components
of the Product specified on the order have also been installed in accordance
with this Agreement; provided, however that the terms within this paragraph
shall not apply to any such items for which a subsequent agreed upon
Installation Date is specified; and (ii) any and all Products required by this
Agreement or the Order or any Related Order to be installed on or before the
same Installation Date have also been installed in accordance with this
Agreement.
13.5 NOTICE OF CHANGE OR DELAY. NDC shall provide the University with
written notice of the reasons for and anticipated duration of any delay in
installation within two (2) business day after such delay becomes known to NDC.
Neither the delivery of such notice by NDC nor the acceptance of such notice by
the University shall affect the University's rights or NDC's obligations
pursuant to this Agreement.
<PAGE> 12
14. INSURANCE AND RISK OF LOSS. NDC and the University agree to defend, hold
harmless and indemnify each other, their officers, agents and employees,
against all claims for loss or damage to property or injury or death to persons
arising from or connected with their performance of their obligations under
this agreement. NDC must provide and maintain during the contract period the
following insurance limits and types:
<TABLE>
<S> <C>
General Liability:
General Aggregate (Per Project) $2,000,000
Product/ Completed Operations $1,000,000
Personal & Advertising Injury $1,000,000
Each Occurrence $1,000,000
Fire Damage $50,000
Medical Expense $5,000
Automobile Liability:
Combined Single Limit $500,000
Umbrella Liability: N/A
Workers' Compensation: Statutory
Each Accident $100,000
Disease - Policy Limit $500,000
Disease - Each Employee $100,000
</TABLE>
Errors and Omissions or Professional Liability insurance in an amount not less
than $1,000,000 Each Claim and $3,000,000 Each Occurrence if applicable.
Primary Additional Insured: Regents of the University of Minnesota
Notice of Cancellation: 60 days
Additional Comments: Certificate of Insurance must be provided with the above
limits and naming the "Regents of the University of Minnesota" as additional
insureds.
A certificate of insurance evidencing the foregoing coverages must be provided
prior to inception of the contract period, and renewals of coverages provided
by certificate prior to policy expiration. (Wherever feasible or indicated we
recommend $1,000,000 CSL (Combined Single Limit) per occurrence limits for
comprehensive general liability.)
In lieu of the Commercial General Liability Policy, NDC may maintain an Owner's
and Contractor's Protective Liability Insurance Policy.
15. CHARGES, INVOICES, PAYMENTS AND AUDITS
15.1 PRICING DISCOUNTS. The price NDC will charge the University for
Products and Services covered by this Agreement shall be on a "cost plus" basis
more fully described on the Pricing Matrix, shown on Exhibit 3, attached hereto
and made a part hereof.
<PAGE> 13
15.2. MARKETING AND PROMOTIONAL FEE. The University shall receive from
NDC at end of every three (3) months a marketing and promotional fee in an
amount equal to 2% of the gross amount of all Products and Services sold to
the University under this Agreement during the preceding three (3) month
period.
15.3 Charges. The University will determine the applicability of
charges by the following criteria: (i) no Product or Service shall be deemed to
be accepted by the University and the University shall have no obligation to
NDC for any payment unless and until the Product or Service has been delivered
and accepted by the University as fully operable; (ii) the University shall not
be billed or liable for any charges or expenses other than those charges or
expenses stated and expressly authorized in this Agreement or on an order;
(iii) unless otherwise specified in the applicable Order, charges payable by
the University pursuant to an Order shall apply and be calculated from the
Delivery Date for the applicable Product or 30 days following receipt of
invoice, whichever is later.
13.4 REDUCTION BEFORE SHIPMENT. If NDC's published price for any
Product is less than the price set forth in the University's order for the same
on Product's Ship Date, then the University shall have the benefit of the
lesser published price for such Product.
15 Increase of Price.
15.5.1 PRODUCTS. Unless otherwise agreed in writing by the
University, NDC shall not, increase the price of a Product once an Order has
been placed by the University or University customer.
15.5.2 SERVICES. Unless otherwise agreed in writing by the
university, NDC shall not during the effective term of this Agreement increase
the prices for any applicable services provided by NDC during any consecutive
twelve (12) month period by more than five percent (5%). Notwithstanding any
other term of this Agreement or any Order, the University may terminate any
Order on which NDC has notified the University of a Service price increase by
providing written notice of such termination to NDC up to thirty (30) days
after the University receives such notice.
15.6 INVOICING STANDARDS. NDC shall render one (1) copy of an invoice
not later than the month following the month for which the charges in the
invoice accrue. Provided that the amounts covered by the invoice are in fact
due and payable by the University hereunder, each invoice shall be paid within
thirty (30) days of receipt by the University, or within thirty (30) days of
receipt of product by the University, whichever is later. Invoices shall
differentiate the costs between tangible and non-tangible products on the
invoice, and include as a minimum: (i) type and description of Product; (ii)
purchase order number; (iii) basic charge for each Product; (iv) other charges
as applicable; (v) total charges; (vi) other detail required by the applicable
order, and (vii) serial numbers for all equipment that carries a serial number.
15.7 Delivery of Invoices. Invoices shall be delivered to the
University as instructed on the Order. The University does not have central
billing, so it is the responsibility of NDC to direct the invoices to the
ordering department within the University and it is the responsibility of the
University to include such address on each order.
15.8 CREDITS. Any credits due the University may be applied by the
University against NDC's invoices with appropriate information attached. Any
credits due the University that are not so applied against NDC's invoices for
any reason shall be paid to the University Department credited or refunded (at
the University's option) by NDC within thirty (30) days after NDC's receipt and
confirmation of the University's written request for such Payment. At no time
shall NDC credit a different department than the ordering department that
received the Credit. The University will not be responsible for having accepted
a credit made to other than the original Ordering department to which the
credit was applied.
15.9 The University may use the Products acquired hereunder for such
purposes and functions as may be necessary or convenient, and the University's
use of the Products shall not be restricted to any particular purpose or
function.
<PAGE> 14
16.0 RESOLUTIONS OF DISPUTES.
16.1 Resolution of Disputes of Invoices. If the University disputes any
amount on any NDC Invoice, the University and NDC agree to use all reasonable
efforts to resolve such dispute within five (5) days after the University
provides written notification of the dispute to NDC. Both parties agree to
provide full supporting documentation concerning any disputed amount or invoice
within five (5) days after written notification of the dispute. Provided that
one party furnishes written notification of the dispute to the other party
within thirty (30) days, neither party shall have any obligation, during the
sixty (60) day period specified above, to pay any amount that remains in
dispute.
16.2 Escalation. Disputes arising out of or relating to this Agreement
shall first be discussed by Buyer level personnel of NDC and the University.
Any dispute that cannot be resolved in ten (10) days at the Buyer level shall
then be discussed by the Vendor Performance Coordinator of the University and
by Director level by NDC. At such time the University's Vendor Performance
Program procedures will be followed.
17.0 INDEMNIFICATION.
17.1 Mutual Indemnification. Each party shall, at its sole expense,
indemnify and hold harmless the other, including its assigns and its officers,
directors, employees, agents, and servants from and against any and all direct
losses, damages, injuries, causes of action, claims, demands and expenses
(whether based upon tort, breach of contract, patent or copyright infringement,
failure to pay employee taxes or withholdings, failure to obtain workmen's
compensation insurance, or otherwise), including reasonable legal fees and
expenses, of any kind or nature arising directly out of or on account of, or
resulting from, any intentional or negligent act or omission of, or default in
the performance of its obligations pursuant to this Agreement or any Order. IN
NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY INDIRECT, SPECIAL OR
CONSEQUENTIAL DAMAGES OF ATNTY TYPE OR NATURE.
17.2 Notice. Each party hereunder shall give the other party prompt
notice of any claim or liability hereby indemnified against by such other party
and thereupon such other party shall be entitled to control, and shall assume
full responsibility for, the defense of such matter. The indemnities contained
herein shall not be deemed to be a waiver of or in limitation of any other
rights either party may have, including but not limited to rights of indemnity
or contribution.
17.3 INTELLECTUAL PROPERTY INDEMNITY. NDC warrants that each Product
furnished by NDC hereunder, including without limitation each Component and
System and any unit or part thereof, and any software, will not infringe upon
or violate any patent, copyright, trade secret or any other proprietary right
of any third party or contain the confidential information of any third party.
If any claim by a third party against the University asserting or involving
patent, copyright, trade secret or proprietary right violation involving any
Product acquired by the University hereunder, NDC will defend, at its expense,
and will indemnify the University against any loss, cost, expense, or liability
arising out of such claim, whether or not such claim is successful; provided,
however that NDC is notified by the University in writing within a reasonable
time after the University first receives written notice of any such claim,
action, or allegation of infringement. NDC shall have no liability for
infringement to the extent that such claim is based on the use, license, or
sale of the Product in combination with other products (including software) not
furnished by NDC, use of the Product in a manner not allowed under any license
granted to the University, or modification of the Product by the University,
where without such combination, use or modification the claim would not have
arisen.
17.4 Use OF INFRINGING PRODUCTS. If an injunction or order shall be
obtained against the University's use of any such Product by reason of the
allegations, or if in NDC's opinion any such Product is likely to become a
subject of a claim of infringement or violation of a copyright, trade secret or
other proprietary right of a third party, NDC will, at its option and its
expense; (i) procure for the University the right to continue using the
Product; or (ii) replace or modify the same so that it becomes non-infringing
(which modification or replacement shall not adversely affect the applicable
specifications for, or the use or operation by the University of, the Product);
or (iii) if the Product is purchased, and the other options stated are not
practicable, repurchase the Product; or (iv) if the Product is licensed, and
the other options stated are not practicable, remove such Product from the
University's
<PAGE> 15
site(s) and refund to the University any charges paid by the University, other
than charges for license payments for any actual period of use by the
University in excess of twenty-four (24) months, and release the University
from any further liability under the applicable Order or other agreement.
17.5 REMOVAL OF INFRINGING PRODUCTS DISCONTINUATION OF PAYMENTS. In no
event shall the University be liable to NDC for any license or maintenance
payments after the date, if any, THAT THE UNIVERSITY is no longer legally
permitted to use the Product because of such actual or claimed' infringement.
If removal or replacement of the PRODUCT IS REQUIRED OR UNDERTAKEN PURSUANT TO
THIS Agreement, NDC shall use reasonable care in the removal or modification
thereof and shall, at its own expense, restore the premises as nearly to their
original condition as is reasonably possible.
18.0 DEFAULTS AND REMEDIES.
18.1 DEFAULTS BY EITHER PARTY. The occurrence of any of the following
shall constitute a default:
18.1.1 Either party shall fail to pay when due any undisputed
amount due hereunder and such failure shall continue for a period of sixty (60)
days after written notice from one party to the other; or
18.1.2 Any representation or warranty made by either party in
this Agreement or any Order to which it is a party shall prove to have been
false or misleading in any material respect as of the date on or as of which
the same was made; or
18.1.3 Either party shall fail to perform or observe any
covenant, condition or agreement required by the Agreement or any Order to be
performed or observed by it and such failure continues for thirty (30) days
after written notice of one party to the other; or
18-1.4 If bankruptcy, receivership, insolvency,
reorganization, dissolution, liquidation or other proceedings shall be
instituted by or against either party or all or any substantial part of its
property under any federal or state law, and such proceedings shall continue
for sixty (60) days.
18.2 REMEDIES OF EITHER PARTY. If a default by either party shall occur
and be continuing, the other party shall have the following remedies except as
set forth in Section 4. 8.
18.2.1 Terminate the applicable Order and, at their option,
any Related Order or Change Order and redeliver any and all such Products to
NDC, in the manner required by this Agreement or the Order for redelivery at
the end of the Product's term, except that such return shall be at sole expense
of the defaulting party; and
18.2.2 By written notice to the defaulting party declare the
applicable order covering the Product to be terminated, without prejudice to
either party's rights in respect to the obligations then accrued and remaining
unsatisfied; and
18.2.3 Exercise any other right or remedy that may be
available at law or in equity or in accordance with the Uniform Commercial
Code.
18.3 No Waiver. In no event shall the acceptance by the University, or
the application by NDC, of any license, maintenance, or other credit pursuant
to this Agreement or any Order be deemed to be a waiver by the University of
any of its rights under this Agreement or such Order or at law or in equity.
18.4 LIMITATION AND MITIGATION OF DAMAGES OF EITHER PARTY.
Notwithstanding any other provision of this Agreement:
18.4.1 OTHER RIGHTS. A default by one party under one (1) or
more Orders shall not affect the other party's rights under any one (1) or more
other Orders not in default or under this Agreement; and
18.4.2 TIME TO CURE. In addition to the time periods specified
herein, above, either party shall be permitted a period of thirty (30) days to
cure any default; provided, however, that if the defaulting party has
<PAGE> 16
commenced the curing of any default, other than a default in the payment of
amounts due to be paid by one party to the other, within the thirty (30) day
period so provided and the defaulting party is diligently and continuously
pursuing the curing of such default, the thirty (30) day period shall be
extended to permit the defaulting party to complete the cure. This Time to Cure
clause does not alter Section 10.6 Notice of Change or Delay, which does not
include 30 days to cure a default in Delivery Date.
18.4.3 MITIGATE DAMAGES. Both parties shall in all events be
required to mitigate their damages. The University shall be entitled to receive
as a credit against such damages the reasonable salvage, resale, or release
value of the Products acquired by the University under the Order, and returned
to, repossessed by, sold, or otherwise disposed of by ND6.
18.4.4 Consequential Damages. In no event shall either party
be liable to the other for indirect, incidental, special, or consequential
damages arising out of this agreement for the existence, furnishing,
functioning, or the University's use of the work product, documentation or
tools provided by NDC. The foregoing limitation of liability shall not apply
to: (i) claims for damages in tort against either party; or (ii) claims for
damages for which NDC ha~ indemnified the University.
19.0 PROPRIETARY RIGHTS. Neither Party may advertise or promote using the name
or description of the other Party (including, but not limited to, disclosing
the existence of the Agreement), without in each instance the express written
consent of the other Party.
20.0 GENERAL PROVISIONS.
20.1 Disaster Recovery. If any Product acquired hereunder is rendered
inoperative as a result of a natural or other disaster or emergency (including
major Product failure or breakdown and peak load conditions), NDC will make all
reasonable efforts to supply or help locate back up or replacement Products. In
such event, NTDC agrees to waive any delivery schedule priorities, to the
extent reasonable or permitted by law, and, to the extent possible, to make the
replacement Product available from the manufacturing facility currently
producing such equipment or from inventory. Subject to this Agreement, the
price for any replacement Product provided by NDC will be in compliance with
this Agreement, plus shipment costs; provided, however, that if the
non-operation is due to the negligence or fault of NDC, replacement equipment
will be provided and delivered at no cost to the University. The University
shall retain the right to accept or reject any offer by NDC to supply any
emergency or backup Product or other equipment or service.
20.2 Notice. Any and all notices permitted or required to be given
hereunder shall be deemed duly given (i) upon actual delivery, if delivery is
by hand; or (ii) u on receipt by the transmitting party of confirmation of
receipt of a facsimile; or, (iii) upon delivery into the United States mail if
delivery is by postage paid registered or certified return receipt requested
mail. Each such notice shall be sent to the respective party at the address
indicated below or to any other address as the respective party may designate
by notice delivered pursuant to this Subparagraph or in any Order placed
hereunder:
If to NDC: IF TO THE UNIVERSITY:
Gregory Appelhof Katharine Anderson, Technology Buyer
NDC Suite 560
3100 W. Lake Street University of Minnesota
Suite 400 1300 South Second Street
Minneapolis, NfN 55416 Minneapolis, MN 55454
Fax Number (612) 915-1133 Fax Number: (612) 626-0366
20.3 NON-WAIVER. No term or provision of this Agreement or of any Order
shall be deemed waived and no breach shall be deemed excused unless such waiver
or consent shall be in writing and signed by the party claimed to
<PAGE> 17
have waived or consented. No consent by any party to, or waiver of, a breach by
the other, whether express or implied, shall constitute a consent to, waiver
of, or excuse for any different or subsequent breach.
20.4 PARTIAL INVALIDITY. If any term or provision of this Agreement, or
of any Order shall be found to be illegal or unenforceable then,
notwithstanding such illegality or unenforceability, this Agreement, and each
applicable Order, shall remain in full force and effect and such term or
provision shall be deemed to be deleted.
20.5 PARAGRAPH HEADINGS. The Paragraph and Subparagraph headings used
in this Agreement are for reference purposes only and shall not be deemed a
part of this Agreement.
20.6 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
20.7 SUBCONTRACTORS AND PARTNERS. NDC is responsible for the
performance of any subcontractors, partners or any other entity represented by
NDC in this Agreement.
20.8 ENTIRE AGREEMENT - This Agreement, with its attachments, taken
together with Orders and subordinate documents incorporated by reference in
such orders, constitutes the entire agreement between the parties with respect
to the subject matter contained herein and may only be modified by an amendment
executed in writing by both parties.
20.9 AMENDMENT. This Agreement shall not be modified, amended or in any
way altered except by an instrument in writing signed by Vice President level
personnel or their designees of the parties for that express purpose. All
amendments or modifications of this Agreement shall be binding upon the parties
despite any lack of consideration.
20.10 COMPLIANCE WITH LAW. NDC agrees that it will comply with the
provisions of all applicable federal, state, county, and local laws,
ordinances, regulations, and codes in the performance of this Agreement
including the procurement of permits and certificates where needed. NDC further
agrees to indemnify the University for any loss or damage that may be sustained
by reason of NDCs failure to comply with the aforementioned federal, state,
county, and local laws, ordinances, regulations, and codes.
20.11 GOVERNING LAW. The laws of the State of Minnesota shall govern
this Agreement and any action to enforce this Agreement shall be brought only
in Minnesota.
20.12 PUBLICITY. Neither party shall use the name, trademark, trade
name or other designation of the other party in any advertising, publicity or
other promotional activity without the prior express, written permission of the
other party.
20.13 Order of Precedence. In the event of conflict between this
Agreement, its exhibits, and any Orders the following order of precedence shall
prevail:
1. The order, providing any changes to this Agreement made through an
Order will only prevail for that Order and will not incur a change to this
Agreement, its Exhibits or other Orders for the term of this Agreement.
2. This Agreement and its Exhibits
3. The Request for Proposal
4. The Proposal
The parties have read this Agreement, understand it, and agree to be bound by
it.
<PAGE> 18
IN WITNESS WHEREOF, this Agreement has been executed by the parties as of the
date first above written.
VIRTUAL TECHNOLOGY CORPORATION
d1b/a NET DIRECT CORPORATION
INTERNATIONAL
By: /s/ Greg Appelhof
---------------------------
Greg Appelhof
- -------------------------------
(print)
Its President
- -------------------------------
Title
January 17, 2000
- -------------------------------
Date
THE UNIVERSITY OF MINNESOTA
By: /s/ Katharine Anderson
- -------------------------------
Katharine Anderson
- -------------------------------
(print)
Its President
- -------------------------------
Title
January 20, 2000
- -------------------------------
Title
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES
The Company has two subsidiaries, GTI Acquisition Corporation, a Minnesota
Corporation, doing business as "Graphics Technology, Incorporated", GTI
Distribution Services, and "GTI"; and T2 Acquisition Corporation, a Minnesota
Corporation doing business as DTP Direct and Netdirect. None of the Company's
other subsidiaries is a "significant subsidiary" as defined by Rule 1-02(w) of
Regulation S-X promulgated under the Securities Act of 1933, as amended.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from historical
annual audited financial statements as of and for the year ended January 31,
2000 and is qualified in its entirety by reference to such Form 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> JAN-31-2000
<CASH> 698,246
<SECURITIES> 185,015
<RECEIVABLES> 11,917,490
<ALLOWANCES> 1,238,131
<INVENTORY> 4,677,997
<CURRENT-ASSETS> 20,262,425
<PP&E> 2,032,024
<DEPRECIATION> 382,348
<TOTAL-ASSETS> 34,666,783
<CURRENT-LIABILITIES> 26,453,087
<BONDS> 50,519
0
0
<COMMON> 34,142
<OTHER-SE> 8,129,035
<TOTAL-LIABILITY-AND-EQUITY> 34,666,783
<SALES> 81,318,775
<TOTAL-REVENUES> 81,318,775
<CGS> 76,424,745
<TOTAL-COSTS> 76,424,745
<OTHER-EXPENSES> 206,319
<LOSS-PROVISION> 292,528
<INTEREST-EXPENSE> 6,566,915
<INCOME-PRETAX> (28,166,026)
<INCOME-TAX> 0
<INCOME-CONTINUING> (28,166,026)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,166,026)
<EPS-BASIC> (.95)
<EPS-DILUTED> (.95)
</TABLE>
