U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL
BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
Virtualmoney, Inc.
(Name of Small Business Issuer in its charter)
Minnesota 41-1961048
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
15300 37th Avenue North, Suite A-310
Plymouth, Minnesota 55446
(Address of principal executive office) (Zip Code)
Issuer's telephone number (763) 383-1438
Securities to be registered under Section 12(g) of the Act:
Common Shares
Charles Clayton
527 Marquette
Minneapolis, Minnesota 55402
(612) 338-3738
(Agent for Service)
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ITEM 1. DESCRIPTION OF BUSINESS
The technology is now available to substantially protect consumers,
businesses and governments from the destructive effects of inflation and
deflation. This can be achieved through the use of real financial instruments,
which are defined in real (or constant) monetary units and real rates of
interest. The introduction of real financial instruments into a nominal monetary
system is a challenging task. Simply stated, most people do not think in terms
of real monetary units and real rates of interest. As such, we need to create a
conceptual bridge, which will allow participants in the marketplace to see the
benefits of using real financial instruments in traditional, nominal monetary
terms. This will ultimately require sophisticated financial software, which will
track real financial instruments in multiple monetary phases.
The use of real financial instruments, represents the introduction of a
real monetary system; which will compete with our current nominal monetary
system. While this competition is expected to be vigorous and challenging,
management believes that the final outcome is predictable. If properly
introduced, then real financial instruments will outperform nominal financial
instruments over time. This will lead to a conversion in the marketplace, from
the current use of nominal financial instruments, to the widespread use of real
financial instruments. This represents nothing less than a paradigm shift from
our current nominal monetary paradigm to the coming real monetary paradigm. The
financial opportunities arising from this paradigm shift will be substantial.
The problem is where to begin?
The use of real financial instruments is based upon the simple truth;
that everyone is better off, when we define our financial transactions in real
monetary units. Initially, these real monetary units, represented by an abstract
financial formula; can be converted to nominal monetary units for actual
payment. This suggests the need for a private currency unit, which will begin to
simplify the process of using real financial instruments -- by eliminating the
constant need for monetary conversions. The issuance of such a private currency
must meet certain requirements, including: (a) it must be readily convertible
back to the nominal currency unit without any substantial penalty or discount,
(b) it must maintain a constant level of purchasing power over time and (c) it
must be backed by assets that are themselves self-adjusting for inflation and
deflation.
Virtualmoney, Inc. (d/b/a Virtualmoney.com) was incorporated on January
10, 2000 for the expressed purpose of issuing a private currency that is
asset-backed and self-adjusting for inflation and deflation. This private
currency will be issued in monetary units of Millennium Dollars(TM), as defined
below. The introduction, distribution and circulation of this monetary unit, and
the resulting private currency, constitute the business of the Company.
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A. The Monetary Product(s):
The issuing of the private currency involves three distinct phases,
including (1) the introduction of the monetary unit, (2) the issuance of
promise(s)-to-pay defined in the monetary unit and finally (3) the issuance of
the private currency as an asset-backed real monetary equivalent. It is expected
that the monetary unit, the promise(s)-to-pay and the private currency will all
find concurrent uses in the marketplace.
Phase I: The Monetary Unit
The Millennium Dollar(TM) (1.00 MR$) will be defined as equaling the
purchasing power of the United States Dollar (USD or $1.00) on the
base-line-date (BLD) of January 1, 2000. This can be expressed as follows:
1.00 MR$ = $1.00
on the BLD of 1/1/2000
Thereafter, the fluctuating exchange rate between the MR$ and the USD will be
measured by the percentage change in the Consumer Price Index for All Urban
Consumers (CPI-U). This can be expressed as follows:
Where: CPI-U(1) = the reference CPI-U on the BLD, and
CPI-U(2) = the current CPI-U
Then: 1.00 MR$ x (1 + (CPI-U(2) - CPI-U(1) )) = # USD
-----------------------
CPI-U(1)
Inasmuch as it is impossible to know the rate of inflation for the current
month, until the data has been properly tabulated by the Bureau of Labor
Statistics (BLS); it is necessary to use an earlier CPI-U reference number.
Therefore, the Millennium Dollar(TM) will use the CPI-U reference number for
October, 1999 for the inflationary adjustment for January, 2000, and so on. (The
Treasury Inflation Protection Securities, issued by the U.S. Treasury; use the
same inflation index, and the same October reference number for the January
inflationary adjustment.) By using this earlier CPI-U reference number, we can
then project the daily inflationary adjustment for the upcoming month; which can
then be distributed for use in the marketplace.
Phase II: The Promise-to-Pay
Utilizing the Millennium Dollar(TM) monetary unit, the Company will
then offer and promote the use of this monetary unit over the Internet in the
form of a promise-to-pay. The promise-to-pay will be delivered as a secure
e-mail addressed to the recipient from the Company. The sender of the MR$ e-mail
must first tender
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the appropriate amount of USD to the Company, which will deposit the amount in a
trust account with an FDIC-insured bank. In this manner, the customer's funds
will not be commingled with the Company's funds, but will be held separate and
apart from the Company's funds. These funds will then be invested in U.S.
Treasuries and other cash equivalents during Phase II of the Company's
development; in such a manner, that any and all requests to convert the MR$ back
to USD can be easily met by the Company.
Phase III: The Private Currency
The creation of a private currency, as an asset-backed real monetary
equivalent; requires an asset that is self-adjusting for inflation and
deflation. Historically, countries often used gold to back the issuance of a
currency, but there is not enough gold in the world to provide the adequate
reserves for even the United States' economy. However, the second-best hedge
against inflation has always been improved real estate, which also tends to
increase in volume with the growth of a country's population. Therefore, by
placing Real Mortgages(TM) that are self-adjusting for inflation and deflation
on improved real estate, we have an asset that can be created in substantial
quantities. It has been estimated that there are about $6 trillion of mortgages
in the United States alone, more than enough to create an asset-backed currency
for this country.
Any such asset-backed private currency, which is directly linked to the
U.S. Dollar; should initially enjoy a global market for its usage. In fact, the
global tendency, of marketplace participants to prefer payment in USD, is a
subtle acknowledgment of the desire for a currency that is real (or constant) in
nature. This is simply Gresham's Law, or conversely Adam Smith's invisible hand,
taking effect; whereby marketplace participants are serving their own best
interests by demanding, and even hoarding, the good currency. More than anything
else, this tendency of economic self-preservation will be the driving force
behind the marketplace's acceptance of the Millennium Dollar(TM).
The Company does not predict that the Millennium Dollar(TM) will become
a universal currency, despite its initial global appeal. The reason is that
inflation and deflation tend to be local phenomena, which are tied to the
government's fiat currency. Hence, it is best to create an asset-backed currency
in each country, which is then linked to the local currency via the locally
accepted inflation index. In fact. the Company has only been granted an
exclusive license for the technology to create an asset-backed real monetary
equivalent that is linked to the USD. Ultimately, the Company expects the
Millennium Dollar(TM) to compete with other asset-backed real monetary
equivalents from other countries, if not also with similar financial products
here in the United States. The saving grace is the size of the market for such
private currencies, which must be measured globally in tens of trillions of
dollars over the coming century. (See: The Licensed Technology.)
Nor does the Company predict that any such asset-backed currency will
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replace the government's fiat currency, since the fiat currency used in the
short term, such as an hour, day or week, is essentially a real currency; since
the impact of inflation on such a short period of time is so minimal. Rather,
the introduction of asset-backed currencies will signal the evolution of our
monetary systems to a higher level. It will create complex adapting systems,
that are capable of making decentralized adjustments over time. In effect, our
monetary systems will evolve from three-dimensional systems; whereby fiat
currencies do not recognize fluctuations in their purchasing power over the
passage of time - which make them ill-equipped to make adjustments; to
four-dimensional monetary systems, capable of making adjustments daily, or even
hourly, as we move through Einstein's space-time continuum. By using private
currencies, which are asset-backed and self-adjusting for inflation and
deflation; investment portfolios will automatically adjust for inflationary and
deflationary changes; thereby creating sounder financial institutions.
Ultimately, this will lead to lower real rates of interest, which will benefit
everyone in society.
The introduction of our monetary unit and private currency is a
step-by-step process, which inherently leads to the development of still other
real financial instruments. After the Company's management segregates the amount
of capital that will be necessary to meet the projected demands for conversion
of the MR$ back to the USD, then the remaining funds will be used to fund the
origination of Real Mortgages(TM). These mortgages will then be securitized into
Real Mortgage-Backed Securities(TM) (RMBS) to back the issuance of the private
currency as an asset-backed real monetary equivalent. Then the Company's
customers will begin to have the benefits of using Real Mortgages(TM). At the
same time, a significant shift occurs, since the securitization process of the
RMBS will move this activity off of the Company's balance sheet. This will
occur, since new legal entities will be established for this purpose. Such
entities will be established as bankruptcy-remote entities, thereby moving their
securities to a higher level of security for the benefit of the Company's
customers. It will also allow the Company to obtain institutional-quality credit
ratings on the issuance of its private currency. The securitization process is
expensive, hence, it can only be accomplished in quantities of $50 million or
more. As such, the Company will not be able to utilize asset-backed
securitization, until such time as the appropriate volume of Millennium
Dollar(TM) distribution has been achieved - over-and-above the Company's
liquidity requirements for the monetary conversions.
The Company estimates that it will be able to offer Real Mortgages(TM)
at a 5% real rate of return. Assuming nominal fixed-rate mortgages are at 8%
over 30 years, then the homeowners would see a reduction in their first year
mortgage payment of 27%. Thereafter, the homeowner's Real Mortgage(TM) payment
will increase at the rate of inflation in nominal dollars, but will be fixed in
Millennium Dollars(TM). This will encourage homeowners to lobby their employers
for compensation set in Millennium Dollars(TM). The homeowners' requests will
then encourage the employer to begin pricing his company's goods and services in
Millennium Dollars(TM), and so on.
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The RMBS will have two streams of cash flow over time, including the
real-interest-only (RIO) stream, and the real-principal-only (RPO) stream. It
will be possible to strip these into RIO strips and an RPO strips. The RPO
strips can then be stripped again into the nominal-principal-only (NPO) stream
and the accrued-interest-only (AIO) stream. In order to create a liquid market
for the RMBS, and hence for the Real Mortgages(TM); it will be necessary to
create a liquid market for the AIO strips. In effect, the AIO strip will be
adjusted up or down by the percentage change in the CPI-U index, such that the
purchasing power of the RPO strip remains constant. This makes the RMBS RPO
strip capable of fulfilling the Company's monetary contract with the general
public, that it will maintain the constant purchasing power of the Millennium
Dollar(TM) monetary unit.
It is expected that the asset-backed real monetary equivalents will be
properly registered with the Securities and Exchange Commission as fixed-income
securities. It is also expected that the private currency will receive a "AAA"
credit rating from the appropriate credit rating agencies. In essence, the
Millennium Dollar(TM) monetary unit will evolve to become a private currency,
that is 100% backed by assets for the protection of its users. Inasmuch as the
assets will be RMBS, secured by Real Mortgages(TM), which are in turn secured by
improved real estate; it is believed that the inherent ability of improved real
estate to adjust to inflationary and deflationary pressures will flow through to
the mortgages and securities to protect the holders of the private currency.
B. The Monetary Service(s):
In addition to introducing a new monetary unit and a private currency,
the Company will also serve as a monetary transfer agent. Initially, it will
function over the Internet to provide for the transfer of the MR$
promise(s)-to-pay, which will be performed via secure e-mail transmissions. It
is expected that each such transmission will be accompanied by a certificate,
similar in nature to the certificates issued by companies such as VeriSign; for
the purpose of authenticating the sender and the recipient of private e-mail.
Subsequently, as the private currency is developed as an asset-backed
real monetary equivalent, the Company will establish itself as a securities
transfer agent. This will allow various forms of financial institutions to
purchase the private currency to properly back financial products and services
that are defined in the Millennium Dollar(TM) monetary unit. As such, the
Company envisions that its business will begin by the offering of retail
financial products and services to the general public over the Internet; but
that its subsequent growth will be as a wholesaler and transfer agent of the
private currency to other financial institutions. This will allow these other
financial institutions to benefit from the offering of real financial products
and services defined in the Millennium Dollar(TM) unit.
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C. The Exclusive License:
The introduction by a major country of real financial instruments,
which are priced at a margin over the prevailing rate of inflation as measured
by an agreed upon inflation index; dates back to 1981, when the Thatcher
Administration in Great Britain began to offer government bonds indexed to
inflation. Today, there are reportedly 29 countries around the world that have
markets for government indexed-bonds. Even the United States Treasury began to
offer indexed bonds in January, 1997 with the issuance of Treasury Inflation
Protection Securities (TIPS). To date, the U.S. Treasury has issued over $108
billion in TIPS.
The Liquidity Problem
The issuance of similar financial instruments in the private sector has
largely stalled, which is due primarily to the highly illiquid nature of the
government indexed bond market(s). Currently, the TIPS are trading at about a
4.00% real yield, despite the fact that the historical real yield on U.S.
Treasuries is about 2.10% (according to data from Ibbotsons' Stocks Bonds Bills
and Inflation.) Fixed-income instruments in the private sector are typically
priced off the U.S. Treasury Index. This means that the extra 190 basis points
(or 4.00% - 2.10%) on the TIPS is effectively pricing real financial instruments
in the private sector out of the marketplace. (Hence, the issuance of Real
Mortgages(TM) would be priced off the TIPS, and so on in other countries.) This
is unfortunate, since real financial instruments can offer substantial benefits
to both borrowers and investors.
Real financial instruments are typically structured to compensate the
investor in two ways. The real rate of interest (or the fixed margin over the
inflation rate) is paid on a cash basis, while the inflationary adjustment is
added to the outstanding principal amount. This accruing interest is then paid
when the government bond comes to term; or, in the case of mortgages, it is
amortized over the remaining life of the instrument. In either case, this
accruing interest factor (represented by the AIO strip) is effectively phantom
income in the current year. In the United States, the Internal Revenue Service
has decreed that the accruing interest is taxable for tax-paying entities on a
current basis. This effectively eliminates all tax payers as investors in real
financial instruments.
Ironically, the accruing interest also diminishes the interest of many
tax exempt, or tax deferred entities, such as pension funds. Pension funds
purchase fixed income instruments in order to meet their obligation to issue
timely pension checks to their pensioners. Inasmuch as the accruing interest on
real financial instruments diminishes the amount of the current cash
distributions, the pension funds would have to purchase a greater amount of real
financial instruments to meet their timely obligations. At the same time, the
pension fund managers know that they can obtain higher returns in the stock
market, which diminishes the appetite of the pension funds for real financial
instruments.
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Finally, if one goes to sell a real financial instrument at mid-term,
the buyer is likely to view the accrued interest as being similar to a
zero-coupon bond. As such, the new investor will substantially discount the
accrued interest. Altogether, these three factors work to make the government
indexed-bond market illiquid, thereby driving up the real yields and pricing the
private sector out of the market.
As such, the successful issuance of real financial instruments in the
private sector is dependent upon the creation of a liquid market for the AIO
strips in both the government and the private sector. Unfortunately, this is
more complicated than it appears at first. The complication arises from the fact
that each AIO strip, that is stripped off the original certificate; then begins
to earn accrued interest itself in subsequent time periods. Hence, the accruing
interest on the AIO strips must then be stripped; and so on, until the
instrument goes to full term. This creates a geometric progression, whereby the
number of strippings can double each payment period.
Where RMBS are concerned, assuming the underlying mortgages are paid
monthly over a 360-month term; the total number of strippings for each initial
certificate could reach as high as 5.87 x 10107. In order to give one an idea of
just how big this number is: scientists estimate that the total number of
electrons, protons and neutrons in the known universe is on the order of 1 x
1079. In essence, the task of creating a liquid market for the accruing interest
on real financial instruments appears to be an administrative nightmare.
Apparently for this reason, no one has created a liquid market for the
accruing interest. Nor do institutional investors care to engage in
interest-rate swaps. Such swaps are not viable, since no one knows how to price
the future stream of accruing interest; for to do so, would require a crystal
ball, that could see the fluctuation rate of inflation and deflation over time.
To date, Wall Street has not mastered this skill.
The Licensed Technology
However, Virtualmoney.com has obtained an exclusive license from Real
Monetary Systems, Inc. (RMSI) for the use of certain technology for the issuance
of an asset-backed real monetary equivalent indexed to the USD. The technology
is set forth in an 1,891-page patent application, which was filed with the U.S.
Patent and Trademark Office on October 6, 1999. This technology involves a
number of processes, which are collectively referred to as the Real
Monetization(TM) process. The Real Monetization(TM) process will be carried out
by sophisticated financial software (i.e. Real Monetary Software(TM)); which
includes a process for implementing the stripping, and then accounting for the
respective ownership of the AIO strips over time. This is the critical
technology that is required for the successful introduction of real financial
instruments into our nominal monetary marketplace.
Concurrently, RMSI has, or will shortly, issue exclusive licenses to
other
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corporations for the use of the Real Monetization(TM) process for (1) the
development of the Real Monetary Software(TM), (2) the creation of a liquid
market for the TIPS and then (3) for the a liquid market for the origination and
securitization of Real Mortgages(TM) in the United States.
Virtualmoney.com will be working with these other companies to resolve
the problems, associated with the introduction of real financial instruments
into our current nominal monetary marketplace; by means of applying the Real
Monetization(TM) process. Management believes that this will allow for the
creation of liquid markets for real financial instruments in both the private
and government sector. It is expected that the preferred mode of payment on
these real financial instruments will be the Millennium Dollar(TM).
ITEM 2. PLAN OF OPERATION
A. Market Factors
The Product
The Company's mission is to introduce, distribute and circulate a
private currency, which will be denominated in a monetary unit (the Millennium
Dollar(TM)) that is self-adjusting for inflation and deflation. The Company will
begin this effort by offering monetary transfer services in the form of
promises-to-pay over the Internet, which are defined in this monetary unit.
Subsequently, the Company will begin to issue the private currency, which will
eventually be an asset-backed security properly registered with the state and
federal securities commissions for public distribution. It is expected that this
fixed-income security will accrue a rate of interest equal to the rate of
inflation, as evidenced by the underlying assets; which can then be used as an
asset-backed real monetary equivalent. It is also expected that the private
currency, once fully developed, will receive an institutional-quality credit
rating of "AA" or "AAA".
The Market for the Private Currency
While the monetary unit, the promise-to-pay and private currency will
be introduced initially on a retail basis over the Internet, it is expected that
the Company will ultimately wholesale its private currency to financial
institutions. This will allow such institutions to begin offering a variety of
other financial instruments defined in real terms. It is estimated by the
Company's managers, that the potential market for a private currency should be
roughly proportional to the size of our monetary markets; especially since the
use of cash (or the government's fiat currency) is estimated at less than 10% of
all financial transactions in the United States. All other transactions are in
monetary equivalents, such as checks and credit card transfers; which represent
the retail competition and/or wholesale customer base for the Company's private
currency.
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In reality, substantially all other forms of monetary equivalents could
be defined in the Company's private currency unit without affecting the issuers'
profit margins. In fact, the profit margins for offering real financial products
and services defined in Millennium Dollars(TM) will actually be higher, since
the Company will eventually redirect its income-sharing program to the
institutions offering such products and services. This will create a new profit
center for them, which will be in addition to their current profit centers.
As an example, most banks struggle to earn one percent (1.0%) on their
assets, after operating expenses. The Company will be in a position to share 100
basis points (or 1.0%) of the investment income generated by the assets backing
the Millennium Dollars(TM) with the banks in return for their offering real
monetary products and services to their customers in Millennium Dollars(TM).
This will effectively double their return on assets, since they can then charge
all of their normal fees and margins on the real financial products and services
that they offer. At the same time, the loans they make in Millennium Dollars(TM)
will be safer, since they will be self-adjusting for inflation and deflation.
B. The Company's Commitments
The Monetary Contract
While the definitive terms of the Company's Monetary Contract with the
public are still being worked out, they can be loosely defined as follows:
The Company will issue promises-to-pay, and eventually a private
currency, which will be defined in the Millennium Dollar(TM) monetary unit; and
will offer monetary transfer services over the Internet for the distribution and
circulation of these instruments. The Company will represent and warrant that
all such monetary transfers will be backed by financial assets, which are
substantially capable of insuring the constant purchasing power of the
Millennium Dollars(TM) so created.
As such, the Company is committed to meet the demand for Millennium
Dollars(TM) at the equivalent nominal dollar conversion price, as determined by
the multiplier of one plus the percentage change in the Consumer Price Index for
All Urban Consumers from the Base-Line-Date of January 1st, 2000 (utilizing the
reference CPI-U index number for October, 1999). Concurrently, the Company shall
stand ready to convert any and all Millennium Dollars(TM) back into nominal
dollars at the equivalent price, less a reasonable discount to cover the cost of
funds dedicated for this service; provided only, that the Company shall be
prohibited from paying more for the Millennium Dollars(TM) than the proportional
net value of the assets backing them.
In addition, the Company will escrow the funds necessary to pay the
federal income tax due and owing in the United States on the inflationary
adjustment of
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the Millennium Dollars(TM), based upon the average marginal tax rate applied to
interest income as determined by the Internal Revenue Service. The goal being in
all of this to create a private currency unit that substantially holds a
constant level of purchasing power over time as measured by the percentage
change in the CPI-U from the Base-Line-Date.
While there may be some price-volatility in the underlying assets
during the early development of the Company, management believes that adequate
measures can be taken over time to protect the general public. In particular,
the inflationary impact of changes in the CPI-U will be reflected monthly,
rather than being averaged over a longer time period. This means that we can
experience an annual rate of zero inflation in one month, and nine percent
inflation the next month; but still average 3.5% inflation over 12 months. This
may cause some short-term fluctuations in the assets as they are regularly
marked-to-the-market. This will average out over time, thereby minimizing this
problem.
There may be fluctuations estimated to range from three to five percent
during the first year or two, which could span one-to-three month periods. For
this reason, the Company may be required to increase its discount rate during
such periods, so that the ongoing users of the Millennium Dollars(TM) are not
punished by any short-term conversions. In addition, the Company will dedicate
25 basis points of the interest earned on the outstanding assets into a sinking
fund to cover this potential problem, but this fund may require a few years of
operations before it can smooth out the price volatility envisioned. Ultimately,
management believes that this problem will be resolved by insurance.
Monetary Services
The Company will begin its operations by offering the monetary unit,
the promises-to-pay and its private currency over the Internet via secure e-mail
transmissions. Such transmissions will be accompanied by certificates, such as
those offered by VeriSign, for the purpose of authenticating the respective
identities of the Company and its customers.
Any customer wishing to use the Company's monetary services must begin
by purchasing a promise to pay defined in Millennium Dollars(TM). This can be
done by forwarding the appropriate amount of nominal dollars to the Company in
any of several ways, including by credit card transfers, direct deposits or even
by paper check via the U.S. Post Office. Once the funds have been verified, the
Company will issue a secure e-mail to the specified recipient; effectively
announcing that we have money for the recipient.
The recipient will then have the choice of reserving this Millennium
Dollar(TM) amount with the Company for the issuances or other promises to pay,
or conversely by requesting the issuance of a check denominated in nominal
dollars, which should provide them with usable funds in five to seven days. It
is expected
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that most recipients will accept the Millennium Dollars(TM) and open an account,
since they will have funds that can be utilized immediately. In addition, they
can pass on the cost of the conversion of the Millennium Dollars(TM) back into
nominal dollars to the recipient of the monetary transfer. In essence, this
means that each monetary transfer defined in Millennium Dollars(TM) is a
marketing event for the Company, whereby we may be able to engage a new customer
for our monetary products and services.
C. Operational Requirements
Software Systems
The software development required by the Company will include (a) Web
site development, (b) the development of secure monetary transfers via e-mail,
(c) and the development of certain data bases. The databases will be used to
track (i) the Millennium Dollar(TM) transfers, and (ii) the Company's common
stock ledger. The development of the initial systems is expected to take 60 to
90 days, however the development and/or improvement of such systems is expected
to be an ongoing task of the Company.
In the event that the demand for the Company's products and services
outstrips the Company's systems, then it may have to impose a temporary
moratorium on the expansion of its services. In essence, the Company will begin
with a beta system, which must be perfected over time. The experience, the
Company will receive from the early interaction with the public, will be crucial
in determining the final development of these software systems. In effect, the
Company's users will participate in the development of these systems, by
critiquing them on an ongoing basis. Given the speed with which technology is
being developed on the Internet, this is becoming the preferred way to do
business. In fact, it is recommended in the book entitled: How to Launch a
Killer App, published by the Harvard Business School Press.
The Real Monetization(TM) process, which will be used primarily to
create a liquid market for the accruing interest on the real financial
instruments, will be carried out by Real Monetary Software(TM). As such, it will
not be utilized until the Company begins to invest in the Treasury Inflation
Protection Securities and the Real Mortgages(TM). The development of this
software has been exclusively licensed by Real Monetary Systems, Inc. to Real
Monetary Software, Inc., which will sub-license the software to the Company. The
Company has the use of the first generation of this software in the form of a
working model, which will be sufficient to meet the Company's needs for
approximately two-to-three years. By then, it is expected that Real Monetary
Software, Inc. will have completed the next generation of this software.
Ultimately, this software is expected to evolve, from specialized software for
asset-backed securitization of real financial instruments, to become a real
monetary platform for other e-commerce applications.
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D. The Virtual Corporation
Site Status & Personnel Compensation
The Company will initially function as a virtual corporation with its
Internet location being lodged in one or more computers functioning as servers.
The Company currently has no plans to establish a physical office site, although
such a site appears to be inevitable with the growth of the Company. Most of the
work being performed on the Company's behalf is at the homes and/or offices of
the officers, employees and advisors; who are participating in the formation of
the Company.
At this time, the Company has only two full time employees, including
Thomas W. Tripp, the Chief Executive Officer/President and Robert E. Nisen the
Chief Financial Officer/Treasurer; who currently work out of the CEO's personal
residence. In addition, the Company has a number of advisors in a variety of
areas such as economics, management, fund raising, software systems &/or
computer hardware, education, banking, real estate and psychology. The
engagement of services is limited by the Company's limited funding, as such
employees and advisors are typically asked to work for restricted stock
currently valued at one dollar ($1.00 per share). It is not always possible to
engage the desired personnel in this fashion. As such, other arrangements must
sometimes be made.
The CEO's annual compensation is $90,000, and the CFO's compensation is
$45,000; prior to the establishment of any annual bonus plan. There will be an
exception to this method of compensation, where the engagement of college
students may require cash compensation; but where the relative degree of
compensation is substantially less than that of the officers and advisors. The
Company intends to engage college students whenever feasible in the development
of its software systems and Web page development. This is where the best,
uncommitted talent resides; but, it is a learning experience for both the
college students and the Company. By the very nature of its products and
services, Virtualmoney.com will be a learning corporation.
E. The Marketing Program
Income Sharing
The Company believes that the offering of a private currency can be
very profitable, since the private currency (as well as the promises-to-pay)
generate a stream of nominal dollars. These nominal dollars are then invested in
fixed-income assets, which will back the Millennium Dollars(TM). As a result,
any earned interest income, over-and-above the inflationary adjustment, becomes
income for the Company (subject to the income tax due on the inflationary
adjustment of the Millennium Dollars(TM)). Inasmuch as the Millennium
Dollars(TM) should be substantially backed by real financial instruments, such
as the TIPS and Real
13
<PAGE>
Mortgage-Backed Securities; once we have provided the liquidity necessary for
the monetary conversions; then the income generated will range from 400 to 500
basis points (4.0% to 5.0%) on the assets. This is huge, since a typical
suburban bank may attempt to earn about 250 basis points between its cost of
funds and its lending rate.
This means that the Company is in the position of sharing a portion of
this income as an incentive to the users of the Millennium Dollars(TM). For this
purpose, the Company has dedicated 100 basis points of this income for an
income-sharing program, which may be enacted in any of several ways. The 100
basis points could be shared with financial institutions, based upon their
average daily balances of Millennium Dollars(TM). Conversely, the 100 basis
points could be allocated to an affinity group as a fund raising project,
whereby the affinity group would encourage its membership to open Millennium
Dollar(TM) accounts with the Company. However, the most prudent use of this
allocation may be to compensate those involved in a viral network marketing
program. It is even possible that all three methods could be used
simultaneously, provided only that there is no cross-over in the allocation of
the 100 basis points. It is also possible that we may begin with the viral
network marketing, and then convert to one of the other methods. This could be
achieved by the Company eventually purchasing the stream of income-sharing in
return for a block of the Company's publicly registered common stock
Viral Network Marketing
The Company will market its product and services over the Internet by
means of viral network marketing. The viral marketing will occur naturally,
since every time an e-mail is issued to a non-participating third party it will
be a marketing opportunity for the Company to convert this third party to a
user. Hence, the payment, of ten bills by one user over the course of one month,
may result in ten marketing opportunities.
In order to provide an incentive to promote the use of the Millennium
Dollars(TM), the Company will have an income-sharing program that will allocate
100 basis points (or 1.00%) annually on the outstanding balance of the assets
backing the private currency. These funds will be distributed via a network
comprised of five levels, based upon the number of new Millennium Dollar(TM)
accounts that are opened on each level. (This program will deal exclusively with
the development of accounts for the promise-to-pay operations, and will not
apply to the later distribution of the asset-backed real monetary equivalent;
which will typically be wholesaled to financial institutions by Company officers
and/or broker/dealers.)
The Stock Swap
Inasmuch as the long-term goal of the Company is to reduce the real
rate of interest on real financial instruments over time, the Company will
reserve the right to purchase the income-sharing stream in return for ten
percent of the Company's stock; subject to the proper registration of said stock
in advance with the state and
14
<PAGE>
federal securities commissions. It is the Company's belief that the swap of the
income-sharing stream for stock will be in the best interests of all parties.
For an example demonstrating how such a stock swap might occur, please see:
Projecting the Stock Swap at One Billion Millennium Dollars(TM) in Circulation
The Company may also elect to complete the stock swap in stages, each time the
volume of Millennium Dollars(TM) hits a new level.
The details of the stock swap are still being determined, subject to
the approval of the Company's legal counsel and the Board of Directors. (As an
alternative solution, the Company may also establish a declining level of
income-sharing over time; which would be tied to the decline in the real rate on
the Real Mortgages(TM) being funded.) The stock swap would enhance the
capitalized value of the Company, since the converted income stream should
initially increase the Company's earnings before taxes. In fact, the Company's
goal is to earn 100 basis points on the outstanding assets, before taxes; which
is equivalent to the 100 basis points set aside for the income-sharing program.
Hence, the total conversion of the income-sharing stream could effectively
double the Company's earnings before taxes. This should make up for any
dilution, the stock swap may cause, to existing shareholders.
(The Real Mortgages(TM) will be originated and securitized by the Real
Mortgage Corporation, which will have an exclusive license from Real Monetary
Systems, inc. for this purpose. The Company will initially establish the real
rate of interest on the Real Mortgages(TM), and resulting RMBS; since the
Company will be creating the market for them by using them to back the
Millennium Dollars(TM). In addition, please note that Thomas W. Tripp is the
founder of, and that he and his family hold a majority ownership in, each of
these affiliated companies. Tripp was also the inventor, who originally applied
for the pending patent, which sets forth the Real Monetization(TM) process(es).
Tripp has assigned this pending patent to Real Monetary Systems, Inc. in return
for its financial support.)
F. Financial Factors
Revenues
It is expected that Company revenues will commence with the first sale
of promises-to-pay, which are defined in the Millennium Dollar(TM) unit. The
revenues will be predominantly the nominal dollar funds received for the
Company's issuance of the promises-to-pay. It is expected that revenues may
begin slowly. However, it is not uncommon for successful Internet companies to
begin slowly, but to see their user base double each month. This may actually be
advantageous, since it will give the Company more time to upgrade its systems.
Nonetheless, the consistent doubling of the user base each month can generate a
sizeable company in about 18 months.
Finally, companies, such as Hot Mail and PayPal, which have benefited
by
15
<PAGE>
viral marketing by means of the distribution of their e-mails; have demonstrated
the ability to grow much faster. The Company's management believes that the
Company's revenue growth will initially be driven by the viral marketing,
coupled with the incentive created by the network distribution of the
income-sharing stream. Subsequently, the Company believes that it will also be a
major wholesaler of its Private Currency to other financial institutions, which
may then share in the 100 basis points dedicated to the income-sharing program;
either directly as part of the program, or indirectly after the program has been
terminated.
The Asset-Backing
The nominal dollar funds received from the Company's users will be
deposited in an FDIC-insured bank in a trust account established for this
purpose. The funds will not be commingled with the Company's funds. These funds
will initially be invested in U.S. Treasury Bills and other cash equivalents, so
that any and all demands for the conversion of the Millennium Dollars(TM) to
nominal dollars can be properly met on a timely basis.
Inasmuch as short-term Treasuries are being rolled over via a Treasury
Bill ladder, they are effectively self-adjusting for inflation over time. At
this time, the average annual yield on short-term Treasuries (30 to 90 days) is
sufficient to cover the inflationary adjustment, the estimated tax on the
inflationary adjustment with a small balance for operational expenses. As an
example, a 30-60-90 day Treasury Bill ladder established on May 8, 2000 would
appear as follows:
Treasury Bill Ladder:
Maturity Days to
Date: Maturity: Yield:
6/8/2000 31 5.38%
7/6/2000 59 5.69%
8/10/2000 94 6.04%
------
Total: 17.11%
Average: 5.70%
As the first tranche of Treasury Bills (i.e. the 6/8/2000 T. Bills) are
paid off, then the recaptured funds would be reinvested in 90 day Treasury
Bills, and so on. Over time, this will increase the yield on the portfolio,
since the longer-term Treasury Bills (i.e. the 8/10/2000 T. Bills) paying a
6.04% yield will replace the shorter term T. Bills paying only 5.38% return, and
so on. This should increase the average return on the T. Bill ladder to about
6.00%. However, the Treasury Bill
16
<PAGE>
ladder should also provide the Company with a high degree of liquidity with
which to meet unexpected levels of monetary conversions.
As the Company's managers feel that adequate reserves of cash
equivalents have been set aside, then a portion of the funds will be invested in
Treasury Inflation Protection Securities (TIPS); which may be purchased in one
thousand dollar increments at a fixed real margin (or yield) over the rate of
inflation as measured by the Consumer Price Index for all Urban Consumers
(CPI-U). Inasmuch as the CPI-U will also be used to determine the inflationary
adjustments on the Millennium Dollar(TM), it will be possible to lock-in a
stream of revenue equal to the real yield on the TIPS purchased. Assuming the
TIPS were purchased on May 8, 2000, then the yield may appear as follows:
Treasury Inflation Protection Securities
Accrued
Rate: Maturity: Asked: *Yield: Principal
3.625% 7/02 $99.56 3.831% 1054
Estimated Rate of Inflation: 3.697% (3/99 - 3/00)
------
Est. Effective Nominal Yield: 7.528%
*Real yield to maturity on accrued principal.
By shifting a portion of the funds out of Treasury Bills and into the
TIPS, we can begin to increase the total yield on the investment portfolio from
the projected 6.00% on a mature Treasury Ladder to about 7.50% on the 26-month
TIPS. Perhaps more importantly, we have locked-in a real yield of 3.831% on the
TIPS over-and-above the inflationary adjustment that will occur. In other words,
we have begun to separate the real-interest-only (RIO) payment stream from the
real principal-only (RPO) payment stream. This can be shown as follows:
26-Month TIPS
3.831% RIO Strip
3.697% RPO Strip
7.528% Est. Effective Nominal Return
This will allow us to substantially fulfill our monetary contract to
maintain the constant level of purchasing power for the Millennium Dollar(TM) by
dedicating the RPO strip for this purpose. While the Millennium Dollars are
jointly backed by both the RPO and RIO Strips, the stream of income generated by
the RIO Strip is a residual stream that will be allocated to the Company for as
long as the Millennium
17
<PAGE>
Dollars(TM) remain in circulation. This leaves us with the income from the RIO
strip as gross revenues for the Company, prior to covering the tax incurred on
the inflationary adjustment.
As more Millennium Dollars(TM) are placed in circulation, then the
Company will begin to use a portion of the funds to invest in Real
Mortgages(TM). This will begin to extend the benefits available by the use of
real financial instruments to the Millennium Dollar(TM) users. It is expected
that the Real Mortgages(TM) will initially be offered at a 5.0% real rate of
interest. Once again, this will help to increase the overall yield on the
investment portfolio. A comparison of the Real Mortgage(TM) versus a traditional
nominal fixed-rate mortgage would appear as follows:
Nominal Real
Mortgage: Mortgage(TM):
Nominal Fixed-Rate: 8.0% N/A
Real Rate: N/A 5.0%
Inflationary Adjustment: N/A 3.0%
----
Effective Nominal Rate: 8.0%
Less Inflation: -3.0%
------
Effective Real Rate: 5.0%
Initially, the returns on the Real Mortgage(TM) and a nominal
fixed-rate mortgage appear to be very similar, but there is a substantial
difference. The real rate on the Real Mortgage(TM) floats above inflation,
thereby protecting the investor. Conversely, the Real Mortgage(TM) also factors
the inflationary premium out of the amortizing rate, since it uses the real rate
of interest to amortize the mortgage. This has a major impact on the borrower's
payments:
Nominal Real
Mortgage: Mortgage(TM):
Principal Amount: $100,000 $100,000
Amortizing Rate: 8.0% 5.0%
Term in Months: 360 360
Initial Monthly Payment: $733.76 $536.82
This represents a 26.84% reduction in the borrower's first year
mortgage
18
<PAGE>
payments. Nonetheless, the payment on the nominal mortgage is fixed in nominal
dollars, while the payment on the Real Mortgage(TM) will increase with the rate
of inflation over time. However, the payments in real, or Millennium
Dollars(TM), on the Real Mortgage(TM) would be fixed; or conversely, if the
borrower's income keeps up with inflation, then the percentage of income
allocated to his or her mortgage payment would be fixed. Ultimately, the Real
Mortgages(TM) will be securitized into Real Mortgage-Backed Securities(TM)
(RMBS), which will allow us to create a liquid market for the accruing interest
factor. The creation of a market with greater liquidity for real financial
instruments should also allow us to force down the real rate of interest over
time. By doing so, we should be able to create substantial demand for the Real
Mortgage(TM), as well as achieving a highly competitive position in the
marketplace.
Finally, a portion of the funds used to purchase the Millennium
Dollars(TM) will also be set aside in a cash account for the purpose of
converting the Millennium Dollars(TM) back into nominal dollars on demand. The
cost of setting aside this amount of cash will be recovered by the Company
offering to redeem the promises-to-pay, defined in Millennium Dollars(TM), at a
small discount. Assuming the discount is one percent (1.0%), and assuming that
the funds allocated for this purpose are turned over on a monthly basis; then
the Company will earn 12.0% on this portion of the funds.
Taken altogether, the sources of corporate income and the projected
budget for operations would appear as follows, once all of these investment
alternatives have been realized:
Sources of Corporate Income Generated from
Investing the Proceeds of the MR$ Sales
Asset Percent Estimated
Investment: of Funds: Return: Total:
Treasury Bills: 10% x 6.0% = .600%
*TIPS: 15% x 7.0% = 1.125%
*RMBS 50% x 7.5% = 3.750%
Cash: 25% x 12.0% = 3.000%
-------
(for MR$ Conversions)
*After securitization expenses. Total: 8.475%
Less the MR$ Inflationary Adjustment - 3.687%
------
Available for Corporate Income: 4.788%
19
<PAGE>
Budget for Corporate Operations - Allocation
Based Upon the Percentage Return on Investments
Income/Obligation: Allocation: Total:
Income: 4.788%
Expenses:
Est. Tax on Inflationary
*Adjustment at 21% MTB: - .980%
Sinking Fund for
Price Volatility: - .250%
Income Sharing: - 1.000%
Operations: - 1.558% 3.788%
------
Earnings Before Taxes: 1.000%
Corporate Taxes: - .400%
Earnings After Taxes: .600%
*Actually, 26.582% including tax at 21% on the income used to pay the
tax.
ITEM 3. DESCRIPTION OF PROPERTY
None
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There are presently 3,849,133 shares of the company's common shares
outstanding. The following table sets forth the information as to the ownership
of each person who, as of this date, owns of record, or is known by the company
to own beneficially, more than five per cent of the company's common stock, and
the officers and directors of the company.
20
<PAGE>
Shares of Percent of
Name Common Stock ownership
--------------------------------------------------------------------------------
Thomas W. Tripp 1,798,208 48%
15300 37th Avenue North
Plymouth, Minnesota
Real Monetary Systems, Inc. 919,242 25%
15300 37th Avenue North
Plymouth, Minnesota
Marcia Tripp, Trustee 819,928 22%
19080 Broadmoore Drive
Eden Prairie, Minnesota
Robert E. Nisen 40,980 1%
P.O. Box 430
Biwabik, Minnesota
Michael W. NcNeely 12,800 1%
14676 77th Place N.
Maple Grove, Minnesota
Constance Stack 5,000 1%
2740 Overlook Ave. N.
Bloomington, Minnesota
Reese L. Doffing 5,000 1%
4670 222md Street E.
Hampton, Minnesota
Richard L. Parry 5,000 1%
5916 Amy Drive
Edina, Minnesota
Ken K. Lee 5,700 1%
6677 Cherokee Trail W.
Eden Prairie, Minnesota
Bonnie L. Norsted-Meitzner 5,000 1%
199 Coon Rapids Blvd
Coon Rapids, Minnesota
Kathryn Newby 5,000 1%
3551 Owasso Street
Shoreview, Minnesota
Directors and Officers 1,842,508 49%
as a group
21
<PAGE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The executive officers and directors of the company, with a brief
description are as follows:
Name Age Position
---- --- --------
Thomas W. Tripp 51 President, Director
Robert E. Niesen 63 CFO, Secretary, Director
Michael W. McNeely 51 Director
Constance Stack 51 Director
Reese L. Doffing 50 Director
Richard L. Parry 65 Director
Ken K. Lee 38 Director
Bonnie L. Norsted-Meitzner 51 Director
Kathryn Newby 39 Director
Thomas W. Tripp, Mr. Tripp is the President and a Director of the
Company. He was the founder and President of Real Mortgage Corporation in 1992,
and remains its President. Mr. Tripp has a BA in Economics from Harvard
University.
Robert E. Nisen, Mr. Nisen is CFO, Secretary and a Director. He was the
President of Biwabik State Bank until 1988. Since that time he has been a
financial and accounting consultant and a part time loan broker for Citizens
Mortgage, Inc. He has a BA in Business and Economics from the University of
Minnesota Duluth.
Michael W. McNeely, Mr. McNeely is a Director. Mr. NcNeely is a
realtor, and has been since 1977; he is a partner licensed with Counselor
Realty.
Constance Stack, Ms Stack is a Director. Ms Stack has a BS in Adult
Learning from Metropolitan State University, a MS in Community Health Education
from
22
<PAGE>
Mankato State University and a Diploma in Nursing from Augsburg College. From
1991 to the present she has been Faculty Program Coordinator, Minnesota State
Colleges and Universities Center for Teaching and Learning.
Reese L. Doffing, Mr. Doffing is a Director. Mr. Doffing has a BS from
St. John's University. He was Chief Executive Officer of Community Bankers
Service Corporation from 1992 to 1998, Senior Vice President of Independent
Community Bankers of Minnesota from 1979 to 1998, and at present is Account
Executive, Heartland Payment Systems Community Banking Program.
Richard L. Parry, Mr. Parry is a Director. Mr. Parry has a AB from
Dartmouth College, an MBA from Kent State University and a PhD from Ohio State
University. From 1989 to the present he has been a consultant to small
businesses.
Ken K. Lee, Mr. Lee is a Director. Mr. Lee has a BS in Computer
Engineering from Iowa State University and an MBA from the College of St.
Thomas. From 1987 to the present he has been COO of Bluewater Information
Convergence, Inc.
Bonnie L. Norsted-Meitzner, Ms Norsted-Meitzner is a Director. She has
a BA from Metropolitan State University and a Masters in Psychology from St.
Mary's College. From 1989 to the present she has been a licensed psychologist at
Family Based Therapy Associates.
Kathryn Newby, Ms Newby is a Director. She was self employed as a
business administrator from 1986 to 1996, as a teller at Norwest Bank in 1996,
as a registered representative for Workman Securities from 1997 to 1999, and at
this time is a registered representative for Investors Capital Corporation.
ITEM 6. EXECUTIVE COMPENSATION
There are no officers or directors that received compensation in excess
of $60,000 or more during the last year.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company entered into a license agreement in January, 2000 with Real
Monetary Systems, Inc. where it licensed software and technology in exchange for
1,200,000 shares of the common stock of the Company, and other considerations.
Thomas W. Tripp is the majority shareholder of both companies. The agreement was
made by the boards of directors of both companies, and each company had a
separate attorney review the agreement.
23
<PAGE>
ITEM 8. LEGAL PROCEEDINGS
None
ITEM 9. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock has not traded at this time.
There are 105 holders of the common stock of the Company. There have
never been any dividends, cash or otherwise, paid on the common shares of the
Company.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
Name Date Shares Cost
REN Corporation 1/00 12,500 $12,500
Russell Wivell 1/00 10,000 $10,000
Greg and Lora Reid 1/00 20,000 $20,000
Patrick and Kathleen McCardle 6/00 20,000 $20,000
Michael and Carole Baker 6/00 15,000 $15,000
Russell Wivell 6/00 13,000 $13,000
Roger Bielke 6/00 50,000 $50,000
Kathyrn Newby 6/00 1,133 $1,133
The registrant believes that all transactions were transactions not
involving any public offering within the meaning of Section 4(2) of the
Securities Act of 1933, since (a) each of the transactions involved the offering
of such securities to a substantially limited number of persons; (b) each person
took the securities as an investment for his own account and not with a view to
distribution; (c) each person had access to information equivalent to that which
would be included in a registration statement on the applicable form under the
Act; (d) each person had knowledge and experience in business and financial
matters to understand the merits and risk of the investment; therefore no
registration statement need be in effect prior to such issuances.
ITEM 11. DESCRIPTION OF SECURITIES
The company has authorized 10,000,000 shares of common stock, no par
value. Each holder of common stock has one vote per share on all matters voted
upon by the shareholders. Such voting rights are noncumulative so that
shareholders holding more than 50% of the outstanding shares of common stock are
able to elect all members of the Board of Directors. There are no preemptive
rights or other rights of subscription.
24
<PAGE>
Each share of common stock is entitled to participate equally in
dividends as and when declared by the Board of Directors of the company out of
funds legally available, and is entitled to participate equally in the
distribution of assets in the event of liquidation. All shares, when issued and
fully paid, are nonassessable and are not subject to redemption or conversion
and have no conversion rights.
Risk Factor - Penny Stock Regulation. Broker-dealer practices in
connection with transactions in "penny stocks" are regulated by certain penny
stock rules adopted by the Securities and Exchange Commission. Penny stock
generally are equity securities with a price of less than $5.00 (other than
securities registered on certain national securities exchanges or quoted on the
Nasdaq system, provided that current price and volume information with respect
to transactions in such securities is provided by the exchange or system). The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document that provides information about penny stocks and the risks
in the penny stock market. The broker-dealer must also provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction, and monthly account
statements showing the market value of each penny stock held in the customer's
account. In addition, the penny stock rules generally require that prior to a
transaction in a penny stock the broker-dealer make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level of trading
activity in the secondary market for a stock that becomes subject to the penny
stock rules. If the Company's securities become subject to the penny stock
rules, investors in this offering may find it more difficult to sell their
securities.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Minnesota Statutes, contain an extensive indemnification provision
which requires mandatory indemnification by a corporation of any officer,
director and affiliated person who was or is a party, or who is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was a member, director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a member,
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses, including attorneys' fees,
and against judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted, or failed to act, in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. In some instances a court must approve such
indemnification.
25
<PAGE>
ITEM 13. FINANCIAL STATEMENTS
Please see the attached Financial Statements.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Please see the attached Financial Statements
(b) Exhibits:
3. Articles of Incorporation and bylaws
26
<PAGE>
VIRTUALMONEY, INC.
(A Development Company)
FINANCIAL STATEMENTS
PERIOD FROM INCEPTION (JANUARY 10, 2000) TO
APRIL 30, 2000
TABLE OF CONTENTS
Page
----
Independent Auditors' Report.................................................1
Financial Statements:
Balance Sheet..............................................................2
Statement of Operations....................................................3
Statement of Stockholders' Equity..........................................4
Statement of Cash Flows....................................................5
Notes to Financial Statements..............................................6
<PAGE>
CALLAHAN, JOHNSTON & ASSOCIATES, LLC
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
--------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and
Stockholders of Virtualmoney, Inc.
(A Development Stage Company)
Plymouth, Minnesota
We have audited the accompanying balance sheet of Virtualmoney, Inc. (d/b/a
Virtualmoney.com) as of April 30, 2000, and the related statements of
operations, stockholders' equity, and cash flows for the period from January 10,
2000 (inception), to April 30, 2000. 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 in accordance with generally accepted auditing standards.
Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Virtualmoney, Inc. as of April
30, 2000, and the results of its operations and its cash flows for the period
from January 10, 2000 (inception), to April 30, 2000, in conformity with
generally accepted accounting principles.
As described in Note 2 to the financial statements, the ultimate recoverability
of investments in the development stage and patent costs is dependent on future
profitable operations, which presently cannot be determined.
/s/ Callahan, Johnston & Associates, LLC
CALLAHAN, JOHNSTON & ASSOCIATES, LLC
Minneapolis, Minnesota
May 18, 2000
--------------------------------------------------------------------------------
7850 METRO PARKWAY, SUITE 207, MINNEAPOLIS, MN 55425
TELEPHONE: (952)858-7207 FAX: (952)858-7202
EMAIL: [email protected]
<PAGE>
VIRTUALMONEY, INC.
(A Development Stage Company)
BALANCE SHEET
APRIL 30, 2000
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Current assets:
Cash $ 17,394
Notes receivable - related party 1,018
Prepaid expenses:
Legal retainer 4,000
Directors fees 17,500
----------
Total current assets 39,912
----------
Furniture and equipment 430
Less accumulated depreciation 22
----------
Net fixed assets 408
----------
Other assets:
Investment - related party 7,000
Organization costs, net of accumulated
amortization of $25 478
License agreement, net of
accumulated amortization of $10,000 590,000
----------
Total other assets 597,478
----------
----------------------------------------------------------------------------------
Total assets $ 637,798
==========
----------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities $ --
----------
Stockholders' equity:
Common stock, no par value; authorized
8,000,000 shares, issued: 3,750,000 690,477
Deficit accumulated during the
development stage (52,679)
----------
Total stockholders' equity 637,798
----------
----------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 637,798
==========
----------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of
these financial statements.
2
<PAGE>
VIRTUALMONEY, INC.
(A Development Stage Company)
STATEMENT OF OPERATIONS
PERIOD FROM DATE OF INCEPTION (JANUARY 10, 2000)
THROUGH APRIL 30, 2000
<TABLE>
<S> <C>
Revenues $ --
-----------
Expense:
Amortization 10,025
Depreciation 22
Office and administrative 2,019
Professional and consulting fees 36,460
Rent 3,129
Telephone 71
Travel and entertainment 1,058
-----------
Total expense (52,784)
-----------
Net loss before other income (52,784)
Other income:
Interest income 105
-----------
Net loss $ (52,679)
===========
Basic earnings (loss) per share $ (.02)
===========
Weighted average number of shares outstanding 3,208,401
===========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
3
<PAGE>
VIRTUALMONEY, INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Deficit
------------------------ During
Number of Development
Shares Amount Stage Total
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Issuance of founders stock,
January 14, 2000 2,403,000 $ -- $ -- $ --
Issuance of stock at $1 per share
in January and February 2000,
net of issuance costs of $4,273 42,500 38,227 -- 38,227
Issuance of stock for services and
future services, at $.50 per share
January through April 2000 104,500 52,250 -- 52,250
Issuance of stock for license
agreement at $.50 per share 1,200,000 600,000 -- 600,000
Loss January 10, 2000 to April 30, 2000 -- -- (52,679) (52,679)
---------- ---------- ---------- ----------
3,750,000 $ 690,477 $ (52,679) $ 637,798
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
4
<PAGE>
VIRTUALMONEY, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
PERIOD FROM DATE OF INCEPTION (JANUARY 10, 2000)
THROUGH APRIL 30, 2000
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $ (52,679)
Adjustments to reconcile net loss to cash flows from
operating activities:
Depreciation 22
Amortization 10,025
Stock issued for services 34,750
Notes receivable - related party (1,018)
Prepaid expenses (4,000)
----------
Net cash flows from operating activities (12,900)
----------
Cash flows from investing activities:
Purchases of furniture and equipment (430)
Incurrence of organization costs (503)
Purchase of investment - related party (7,000)
----------
Net cash flows from investing activities (7,933)
----------
Cash flows from financing activities:
Proceeds from common stock 38,227
----------
Increase in cash 17,394
Cash - beginning of period --
----------
Cash - end of period $ 17,394
==========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
5
<PAGE>
VIRTUALMONEY, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION (JANUARY 10, 2000) TO
APRIL 30, 2000
1. Summary of Significant Accounting Policies and
Other Information
Company
Virtualmoney, Inc. (d/b/a Virtualmoney.com) was formed under the laws of
the State of Minnesota on January 10, 2000. The Company has obtained an
exclusive license to use the Real Monetization(TM) process for the
purpose of issuing an asset-backed real monetary equivalent (the
Millennium Dollar(TM)) that is defined in terms of the United States
Dollar ($1.00 or USD). Specifically, the Millennium Dollar(TM) will be
defined as equaling the purchasing power of the USD on the base line
date of January 1, 2000, using the Consumer Price Index for All Urban
Consumers (CPI-U) Reference Number for October 1999. As such, the
Millennium Dollar(TM) will fluctuate with inflation and deflation over
time, as measured by the percentage change in the CPI-U. The Company
will stand ready to repurchase the Millennium Dollars(TM) at a price
sufficient to cover the expense incurred in providing this liquidity. In
addition, the Company will initiate and maintain monetary transfer
services over the Internet, composed of secured e-mail transmissions,
such that users of the Millennium Dollar(TM) will be able to use it as a
virtual currency.
Furniture and Equipment
Furniture and equipment are recorded at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of five
years. Expenditures for maintenance and repairs are charged to
operations when incurred. Deduction is made for retirements resulting
from renewals or betterments.
Depreciation expense was $22 from inception to date
(Continued)
6
<PAGE>
VIRTUALMONEY, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION (JANUARY 10, 2000) TO
APRIL 30, 2000
1. Summary of Significant Accounting Policies and
Other Information (Continued)
Intangible Assets
Organization costs are carried at cost and are being amortized over
sixty months using the straight-line method.
An intangible asset was recorded at the fair value of the common stock
issued to enter into the Millennium Dollar(TM) license agreement. This
intangible asset is being amortized over ten years using the
straight-line method.
Stock-Based Consideration
The Company has applied the fair value-based method of accounting for
employee and nonemployee stock-based consideration and/or compensation
in accordance with FASB Statement 123.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
which requires the use of the "liability method" of accounting for
income taxes. Accordingly, deferred tax liabilities and assets are
determined based on the differences between the financial statement and
tax bases of assets and liabilities, using enacted tax rates in effect
for the year in which the differences are expected to reverse.
The Company's net operating loss carryforward is fully allowed for
at April 30, 2000. See Note 5.
(Continued)
7
<PAGE>
VIRTUALMONEY, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION (JANUARY 10, 2000) TO
APRIL 30, 2000
1. Summary of Significant Accounting Policies and
Other Information (Continued)
Concentrations, Risks and Uncertainties
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles 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 reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Notes Receivable - Related Party
Notes receivable - related party consists of amounts advanced to
Real Monetary Systems, Inc., a related party through shared
management and licenses of the Millennium Dollar~. These amounts
bear interest at 8%, are unsecured, and due on demand. The Company
feels all amounts are collectible. While the ultimate amount
collectible may differ, management believes that any collection
loss will not have a material impact on the Company's financial
position. Due to uncertainties in the collection process, however,
it is at least reasonably possible that management's estimate of
the collectibility will change during the next year. That amount
cannot be estimated.
Investment - Related Party
At April 30, 2000, the Company owned 3,500 shares of common stock
with a historical cost of $7,000. Although the market value is not
readily determinable, management believes the fair value of this
investment is equal to its carrying value, see Note 3.
(Continued)
8
<PAGE>
VIRTUALMONEY, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION (JANUARY 10, 2000) TO
APRIL 30, 2000
1. Summary of Significant Accounting Policies and
Other Information (Continued)
Concentrations, Risks and Uncertainties
Long-Lives Assets
In accordance with SFAS 121, Accounting For The Impairment Of
Long-Lived Assets And For Long-Lived Assets To Be Disposed Of, the
Company reviews its long-lived assets and intangibles related to
those assets periodically to determine potential impairment by
comparing the carrying value of the long-lived assets outstanding
with estimated future cash flows expected to result from the use of
the assets, including cash flows from disposition. Should the sum
of the expected future cash flows be less than the carrying value,
the Company would recognize an impairment loss. An impairment loss
would be measured by comparing the amount by which the carrying
value exceeds the fair value of the long-lived assets and
intangibles. To date, management has determined that no impairment
of long-lived assets exists.
Earnings Per Share
The Company has implemented FASB 128: Earnings Per Share. FASB 128
replaces the presentation of primary EPS with basic EPS. Basic EPS
excludes dilution and is computed by dividing net income by the
weighted-average number of common shares outstanding for the year.
Diluted EPS reflects the potential dilution from stock options and
warrants and is computed using the treasury stock method. Under the
treasury stock method stock options are assumed to have been exercised
at the beginning of the period if the exercise price exceeds the
average market price during the period. Stock options and warrants are
excluded in the EPS calculation due to their antidulitive effect.
Weighted-average shares for basic EPS
inception (January 10, 2000) to April 30, 2000 3,208,401
=========
2. Development Stage Company
From inception to April 30, 2000, the Company is deemed to be in the
development stage. To date the Company has devoted the majority of its
efforts to: raising capital; entering into the Millennium Dollar(TM)
license agreement; and researching and articulating the plan of
operations for the purpose of introducing the Millennium Dollar(TM) and
thereafter for providing monetary transfer and conversion services via
the Internet. Planned principal operations have not yet commenced and
the first revenues are not anticipated until the fourth quarter.
The Company is presently attempting to: create the Company's Web Site;
formalize an income-sharing program involving viral network marketing
for early participants; prepare for the issuance of Millennium
Dollar(TM) monetary units in the form of "promises-to-pay" via secure
e-mails over the Internet; and preparing the databases required for (a)
the ownership and transfer of the Millennium Dollars(TM), (b) the
investment of the USD, received in the distribution and utilized for
the conversion of the Millennium Dollars(TM), and (c) the ownership and
transfer of the Company's common
(Continued)
9
<PAGE>
VIRTUALMONEY, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION (JANUARY 10, 2000) TO
APRIL 30, 2000
stock, as well as the ongoing efforts to fund the Company and engage
key personnel. Ultimately, the Company feels that it will be able to
gain acceptance for the Millennium Dollar(TM), and its monetary
transfer services, whereby the Company expects to generate revenues
from (a) the investment income earned upon the USD assets, primarily
U.S. Treasuries, backing the Millennium Dollar(TM), as well as (b) from
the currency spread charged for the conversion of the Millennium
Dollar(TM) promises-to-pay back into USD. It is expected that these
combined operations will generate net revenues (after the inflationary
adjustment, but before operating expenses and income- sharing) of about
four percent (4.0%) per annum on the outstanding Millennium Dollars(TM)
in circulation. As such, it is expected that the Company can achieve
profitable operations and thereby realize assets and settle obligations
in the normal course of operations. No estimate can be made of the
range of loss that is reasonably possible should the Company be
unsuccessful.
3. Related Party Transactions
Millennium Dollar(TM) License Agreements
On February 24, 2000, the Company entered into a license agreement
with Real Monetary Systems, Inc. (RMSI) for the exclusive rights to
sponsor the issuance of an asset-backed real monetary equivalent
(the Millennium Dollar(TM)) that is defined in the terms of the
United States Dollar ($1.00). As consideration for this license the
Company agreed to:
* Issue RMSI 1,200,000 shares of unregistered common stock
in the Company with a fair value at issuance of $600,000, and
* to pay RMSI a royalty of 7-1/2 basis points (.075%) per annum
on the outstanding Millennium Dollar(TM) principal balance; which
may be calculated in either Millennium Dollars(TM), or the
corresponding accrued nominal value in United States Dollars.
RMSI has applied for patent protection and will use its best
efforts to complete the pending patent application. No warranty has
been made regarding the validity of any pending patent rights or
claims. The acquired licensed trade secrets are for the use of
certain processes, which will be utilized for the introduction and
maintenance of an asset-backed real monetary equivalent defined in
United States Dollars. Initially, these processes may be carried
out by the first generation of Real Monetary Software(TM), which is
composed of certain spread sheet files; all of which the Company is
authorized to use and amend as needed.
(Continued)
10
<PAGE>
VIRTUALMONEY, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION (JANUARY 10, 2000) TO
APRIL 30, 2000
3. Related Party Transactions (Continued)
Millennium Dollar(TM)License Agreements (Continued)
Nonetheless, the future development of the Real Monetary
Software(TM) will be exclusively licensed to Real Monetary
Software, Inc. (RMSOFT), subject to a contractual agreement that
the use of the Real Monetary Software(TM) must be in conjunction
with an exclusive license issued by RMSI with respect to a given
type of real financial instrument. The terms and conditions of the
Company's use of the stand-alone version of the Real Monetary
Software(TM) are still being worked out with RMSOFT, as are the
terms and conditions of the license by and between RMSI and RMSOFT.
Nonetheless, the granting of the exclusive license by RMSI to
develop the Real Monetary Software(TM), will be contingent upon
RMSOFT's granting of a license for the software to the Company. One
purpose of this licensing structure is to standardize the software,
as well as to minimize the development and maintenance costs, which
may then be shared by various licensed users over time.
Furthermore, the software itself is not material, until such time
as a sufficient volume of real financial instruments have been
issued and outstanding; since the critical function of the software
is to assist in the creation of a liquid market for the accruing
interest that is inherent in real financial instruments. The
Company's license is limited to the use of the technology for the
issuance of the Millennium Dollar(TM) as previously defined.
Nonetheless, it is expected to have a close working relationship
with other companies licensed by RMSI to create: (a) the stand-
alone software, (b) the liquid market for the Treasury Inflation
Protection Securities and (c) for the liquid market for Real
Mortgage-Backed Securities. The Company will begin to generate
a market for the products and services of these other companies, as
it begins to succeed in the distribution and maintenance of the
Millennium Dollar(TM) in the marketplace. Any improvements, made by
the Company with respect to the licensed trade secrets and
software, shall remain the sole property of RMSI. Hence, any and
all improvements, created by individual licensees, may then be
distributed to all licensees at the sole discretion of RMSI. Once
again, the goal being to standardize the development of the
software, thereby creating a coherent real monetary system for the
benefit of all Millennium Dollar(TM) users.
(Continued)
11
<PAGE>
VIRTUALMONEY, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION (JANUARY 10, 2000) TO
APRIL 30, 2000
3. Related Party Transactions (Continued)
Prepaid Directors Fees
The Company issued 35,000 shares of its common stock valued at
$17,500 to directors as an advance toward future directors fees.
These shares are subject to prorata recall in the event that the
director's services to the Company are terminated for any reason.
Notes Receivable Related Party
The Company has advanced amounts to Real Monetary Systems, Inc.,
the licensor of the Millennium Dollar(TM), under two demand, open
ended, promissory notes. These notes are unsecured and bear
interest at 8% per annum.
Interest income of $8 has been recognized on these notes from
inception to April 30, 2000.
Investment - Related Party
The Company's founder and president has granted the Company an
option to acquire up to 45,000 shares of Real Monetary Systems,
Inc. (RMSI) common stock from him at $2 per share. This option
expires February 16, 2001. Through April 30, 2000, the Company had
acquired 3,500 shares of RMSI common stock at a historical cost of
$7,000. RMSI is a privately held company with limited operations.
Although the market value of the investment in RMSI is not readily
determinable, management believes it is equal to its carrying
value.
Subsequent to April 30, 2000, the Company has continued to acquire
shares in RMSI from its President.
Office Space
The Company presently offices in the apartment of its president and
largest stockholder under a month-to-month agreement. For
(Continued)
12
<PAGE>
VIRTUALMONEY, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION (JANUARY 10, 2000) TO
APRIL 30, 2000
use of these offices the Company pays the monthly rental on this
apartment of $1,043.
Rental payments on this apartment from inception to April 30, 2000
totaled $3,129.
4. Supplemental Cash Flow Information
Cash paid during the year for:
Inception
To Date
---------
Interest $ --
====
Income taxes $ --
====
Summary of Non Cash Activity:
The Company issued 2,403,000 shares of founders' common stock on
January 14, 2000 with no stated value.
The Company issued 104,500 shares of common stock valued at $52,250
toward services rendered and/or services to be rendered to the Company.
The Company issued 1,200,000 shares of common stock for the Millennium
Dollar(TM) license agreement valued at $600,000. See Note 3.
5. Income Taxes
The Company has fully allowed for its net operating carryforwards as
follows:
Deferred tax asset relating to net operating
loss carryforwards $ 20,000
Valuation allowance (20,000)
--------
Deferred tax asset $ --
========
At April 30, 2000, the Company has carryforwards available to offset
future taxable income as follows:
Federal State
--------- ---------
2015 $ 69,000 $ 69,000
========= =========
13
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: July 7, 2000 Virtualmoney, Inc.
/s/
-----------------------------------------
Thomas W. Tripp, President, Director
/s/
-----------------------------------------
Robert W. Nisen, CFO, Secretary, Director
/s/
-----------------------------------------
Michael W. McNeely, Director
/s/
-----------------------------------------
Constance Stack, Director
/s/
-----------------------------------------
Reese L. Doffing, Director
/s/
-----------------------------------------
Richard L. Parry, Director
/s/
-----------------------------------------
Ken K. Lee, Director
/s/
-----------------------------------------
Bonnie L. Norsted-Meitzner, Director
/s/
-----------------------------------------
Kathryn Newby, Director
