UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: MAY 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _____________________
Commission File Number: 000-14356
VIRTUALSELLERS.COM, INC.
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(Exact name of registrant as specified in its charter)
Canada 911353658
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(State or other jurisdiction (I.R.S Employer
of incorporation or organization) Identification No.)
Suite 1000 - 120 North LaSalle Street, Chicago, IL 60602
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(Address of principal executive offices) (Zip Code)
(312) 920-9999
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(Registrant's telephone number, including area code)
Not applicable
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(Former name, former address and former fiscal year,
if changed since last report)
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
As of June 30, 2000, there were 127,131,127 shares of the Registrant's Common
Shares issued and outstanding.
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PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
DISCLOSURE
To: The Shareholders of
VirtualSellers.com, Inc.
It is the opinion of management that the interim financial statements for the
quarter ended May 31, 2000 include all adjustments necessary in order to ensure
that the financial statements are not misleading.
Chicago, Illinois /s/ Dennis Sinclair
Date: July 14, 2000 Director of the Company
Consolidated Financial Statements of
VIRTUALSELLERS.COM, INC.
(Expressed in U.S. dollars)
Three months ended May 31, 2000 and 1999
(Unaudited)
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VIRTUALSELLERS.COM, INC.
Consolidated Balance Sheets
(Expressed in U.S. dollars)
(Unaudited)
May 31, February 29,
2000 2000
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<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,693,370 $ 447,844
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 478,210 72,029
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,075 50,850
Prepaid expenses and advances . . . . . . . . . . . . . . . . . . . . . . . . . 197,538 242,310
3,410,193 813,033
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,038,797 1,926,857
$ 5,448,990 $ 2,739,890
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Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities. . . . . . . . . . . . . . . . . . . . $ 822,989 $ 693,250
Stockholders' equity:
Common shares, no par value: (note 2)
Authorized:
200,000,000 common shares
Issued and outstanding:
126,881,128 shares at May 31, 2000 and 123,001,503 shares at February 29, 2000. 106,483,500 102,492,038
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (101,857,499) (100,445,398)
4,626,001 2,046,640
$ 5,448,990 $ 2,739,890
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See accompanying notes to consolidated financial statements.
On behalf of the Board:
/s/ Dennis Sinclair /s/ Mel Baillie
Director Director
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VIRTUALSELLERS.COM, INC.
Consolidated Statements of Operations and Deficit
(Expressed in U.S. dollars)
(Unaudited)
Three months ended May 31,
2000 1999
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<S> <C> <C>
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 504,811 $ 76,598
Costs and expenses:
Direct costs. . . . . . . . . . . . . . . . . . . . . . . . . 165,182 20,890
Selling, general and administrative expenses. . . . . . . . . 1,645,829 381,273
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . 113,819 4,825
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1,924,830 406,988
Loss before other income (expense). . . . . . . . . . . . . . (1,420,019) (330,390)
Other income (expense):
Sale of trade name. . . . . . . . . . . . . . . . . . . . . . - 975,000
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . 7,918 75,700
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7,918 1,050,700
Net income (loss) for the period. . . . . . . . . . . . . . . $ (1,412,101) $ 720,310
Net income (loss) per common share (note 1(b)) . . . . . . . $ (0.01) $ 0.01
See accompanying notes to consolidated financial statements.
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VIRTUALSELLERS.COM, INC.
Consolidated Statements of Stockholders' Equity
(Expressed in U.S. dollars)
(Unaudited)
Number of Common
Common Share Accumulated
Shares Amount Deficit Total
------------ ------------- -------------- ------------
<S> <C> <C> <C> <C>
Balance, February 28, 1999. . . . . . . . . . . . . . . . . . 77,097,110 95,524,122 (95,752,168) (228,046)
Shares issued during the year:
For employees' and directors' compensation. . . . . . . . . . 7,541,888 2,496,669 - 2,496,669
Issued on acquisition of VirtualSellers . . . . . . . . . . . 500,000 50,000 - 50,000
Issued on acquisition of Call Direct. . . . . . . . . . . . . 1,200,000 202,716 - 202,716
Exercise of CCAA warrants . . . . . . . . . . . . . . . . . . 495,525 - - -
Conversion of 2000 convertible debentures . . . . . . . . . . 11,605,000 1,125,835 - 1,125,835
For services received . . . . . . . . . . . . . . . . . . . . 5,644,335 580,654 - 580,654
For cash pursuant to private placements . . . . . . . . . . . 18,668,837 2,590,493 - 2,590,493
Shares returned and cancelled . . . . . . . . . . . . . . . . (51,191) - - -
Issued on acquisition of equipment. . . . . . . . . . . . . . 300,000 87,000 - 87,000
Share issue costs . . . . . . . . . . . . . . . . . . . . . . - (165,451) - (165,451)
Loss for the year . . . . . . . . . . . . . . . . . . . . . . - - (4,693,230) (4,693,230)
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Balance, February 29, 2000. . . . . . . . . . . . . . . . . . 123,001,504 $102,492,038 $(100,445,398) $ 2,046,640
Shares issued during the year:
Exercise of CCAA warrants . . . . . . . . . . . . . . . . . . 1,170,060 - - -
For cash pursuant to private placements . . . . . . . . . . . 1,693,340 4,233,350 - 4,233,350
For employees' and directors' compensation. . . . . . . . . . 1,000,000 200,000 - 200,000
For settlement of debt. . . . . . . . . . . . . . . . . . . . 16,224 8,112 - 8,112
Share issue costs (note 4). . . . . . . . . . . . . . . . . . - (450,000) - (450,000)
Loss for the year . . . . . . . . . . . . . . . . . . . . . . - - (1,412,101) (1,412,101)
------------------------------------------------------------- ------------ ------------- -------------- ------------
Balance, May 31, 2000 . . . . . . . . . . . . . . . . . . . . 126,881,128 $106,483,500 $(101,857,499) $ 4,626,001
------------------------------------------------------------- ------------ ------------- -------------- ------------
See accompanying notes to consolidated financial statements.
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VIRTUALSELLERS.COM, INC.
Consolidated Statements of Cash Flows
(Expressed in U.S. dollars)
(Unaudited)
Three months ended May 31,
2000 1999
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<S> <C> <C>
Cash provided by (used in):
Operations:
Net income (loss) for the year. . . . . . . . . . . . . . . . $ (1,412,101) $ 720,310
Items not involving cash:
Non-cash compensation expense . . . . . . . . . . . . . . . . 200,000 -
Non-cash services and purchases . . . . . . . . . . . . . . . 8,112 104,821
Depreciation and amortization . . . . . . . . . . . . . . . . 113,819 4,825
Change in non-cash operating working capital:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . (406,181) (82,147)
Prepaid expenses and advances . . . . . . . . . . . . . . . . 44,772 2,838
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . 9,775 -
Accounts payable and accrued liabilities. . . . . . . . . . . 129,739 (130,276)
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(1,312,065) (620,371)
Financing:
Issuance of common shares for cash. . . . . . . . . . . . . . 4,233,350 -
2000 convertible debentures issued. . . . . . . . . . . . . . - 432,600
Share issue costs . . . . . . . . . . . . . . . . . . . . . . (450,000) -
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3,783,350 432,600
Investments:
Acquisition of equipment. . . . . . . . . . . . . . . . . . . (225,759) (19,600)
Cash acquired on acquisition. . . . . . . . . . . . . . . . . - -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (12,527)
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(225,759) (32,127)
Increase (decrease) in cash and cash equivalents. . . . . . . 2,245,526 1,020,844
Cash and cash equivalents, beginning of year. . . . . . . . . 447,844 75,763
Cash and cash equivalents, end of year. . . . . . . . . . . . $ 2,693,370 $1,096,607
Non-cash transactions and supplemental disclosures - note 5.
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VIRTUALSELLERS.COM, INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
Three months ended May 31, 2000 and 1999
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of presentation:
These unaudited interim consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America. Except as disclosed in note 17 of the Company's annual audited
consolidated financial statements as at February 29, 2000, these principles do
not differ materially from accounting principles generally accepted in the
Canada.
The unaudited interim consolidated financial statements presented to
shareholders as at May 31, 1998 and for the three months then ended and the
audited consolidated financial statements presented to shareholders as at
February 28, 1998 and for the years ended February 28, 1998 and 1997 were
prepared under Canadian generally accepted accounting principles and reported in
Canadian dollars. A reconciliation from Canadian GAAP to US GAAP was included
in the notes to the consolidated financial statements. During fiscal 2000, the
Company became a domestic issuer for Securities and Exchange Commission
reporting requirements and consequently, the Company changed its financial
statement presentation from Canadian GAAP and Canadian dollars to US GAAP and US
dollars. These changes have been retroactively applied and prior periods
presented restated in accordance with US GAAP and US dollars as the reporting
currency.
These consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All subsidiaries were acquired from unrelated
parties and have been accounted for using the purchase method. Their results of
operations have been included from the respective effective dates of
acquisition. All significant intercompany balances and transactions have been
eliminated.
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<CAPTION>
Canadian subsidiaries United States subsidiaries
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<S> <C>
Canadian-American Communications Inc. . . . . Northnet Telecommunications Inc.
Canadian Northstar Transmission Systems Ltd.. eCommerce Solutions Inc.
Preferred Telemanagement Inc. ("PTI")
CAM-NET Cellular Inc.
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VIRTUALSELLERS.COM, INC.
Notes to Consolidated Financial Statements, page 2
(Expressed in U.S. dollars)
Three months ended May 31, 2000 and 1999
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(b) Net income (loss) per common share:
Basic net income (loss) per common share is computed based on the weighted
average number of common shares outstanding during the period, which were are
follows:
2000 125,468,491
1999 80,486,209
Diluted earnings per share for 1999 is $0.01. Diluted earnings per share has
not been presented for 2000 as the impact of outstanding convertible securities
would be to reduce the loss per share.
2. SHARE CAPITAL:
(a) Authorized:
200,000,000 common stock without par value
150,000,000 class A preference stock without par value
150,000,000 class B preference stock without par value
(b) Commitments to issue common shares:
The Company has committed to issue 13,000,000 shares to former creditors under a
reorganization plan as disclosed in note 3. As at May 31, 2000, 9,849,022
(February 29, 2000 - 8,678,862) shares have been issued to creditors leaving an
outstanding commitment to issue 3,150,978 (1999 - 4,321,138) shares.
(c) Warrants and options:
At May 31, 2000, the Company has 361,710 share purchase warrants outstanding
which expire on April 26, 2001. Each warrant entitles the holder to purchase
one common share for CDN $1.50. The Company also has 1,000,000 share purchase
warrants outstanding which expire on June 30, 2001. Each warrant entitles the
holder to purchase one common share for CDN $1.00. The Company also has 77,255
warrants outstanding which expire on September 8, 2000. Each warrant entitles
the holder to purchase one common share for no additional consideration. These
warrants were issued to creditors of CallDirect to settle outstanding
indebtedness. The Company has 100,000 stock options outstanding at an exercise
price of $1.28, expiring January 31, 2001 These options were originally granted
in fiscal 1997.
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VIRTUALSELLERS.COM, INC.
Notes to Consolidated Financial Statements, page 3
(Expressed in U.S. dollars)
Three months ended May 31, 2000 and 1999
(Unaudited)
3. SEGMENTED INFORMATION:
The Company has three operating segments - a call center division, a catalogue
division ("CallDirect") and an e'commerce division ("Virtualsellers.com"). The
call center and e'commerce segments are located in the United States and the
catalogue segment is located in British Columbia, Canada. The e'commerce and
catalogue segments were acquired in fiscal 2000. The Company had one operating
segment in 1999 - the Call Center. Segmented information for the three months
ended May 31, 2000 is as follows:
OPERATING SEGMENTS:
2000
----
Call Center Catalogue e'commerce Segment
Segment Segment Segment Eliminations Total
Gross revenue $ 75,806 $ 116,678 $ 312,327 $ 504,811
Segment loss $ (85,766) $ (5,658) $ (605,334) $ (696,758)
Corporate (715,343)
Loss for the year $ (1,412,101)
Segment assets $ 178,596 256,680 $ 2,039,609 $ $ 2,474,885
Corporate assets 2,974,105
Total assets $ $ 5,448,990
Equipment additions:
Equipment $ (20,877) $ (2,969) $244,864 $ $ 221,018
Corporate 4,741
$ 225,759
Depreciation and amortization expense:
Equipment $ 13,866 $ - $ 99,953 $ - $ 113,819
Corporate assets -
$ 113,819
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VIRTUALSELLERS.COM, INC.
Notes to Consolidated Financial Statements, page 4
(Expressed in U.S. dollars)
Three months ended May 31, 2000 and 1999
(Unaudited)
3. SEGMENTED INFORMATION (CONTINUED):
GEOGRAPHIC SEGMENTS:
MAY 31, 2000
--------------
United Segment
Canada States Eliminations Total
Gross revenue $ 116,678 $ 388,133 $ $ 504,811
Location of assets:
Equipment $ 173,223 $ 1,856,574 $ - $ 2,038,797
4. RELATED PARTY TRANSACTIONS:
Included in accounts receivable is $280,000 (1999 - $nil) due from employees of
the Company. Payments totalling $450,000 were made to the Company's President
(and Director) and Concept 10 Inc., a wholly-owned subsidiary of the Company's
President (and Director), during the three months ended May 31, 2000 of $450,000
(1999 - $nil) for services rendered in connection with a private placement of
common shares.
5. NON-CASH TRANSACTIONS AND SUPPLEMENTAL DISCLOSURES:
The Company had the following material non-cash transactions:
2000 1999
---- ----
Issuance of shares for:
Employee and director compensation $ 200,000 $ -
Settlement of debt 8,112 -
Services received - 104,821
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$ 208,112 $ 104,821
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6. SUBSEQUENT EVENT - ACQUISITION OF THE BUSINESS OF SULLIVAN PARK, LLC:
On June 1, 2000, the Company acquired the business of Sullivan Park, LLC which
is comprised of an internet services business involved in the development of
on-line stores in Los Angeles, California. The Company will issue common shares
at a market value of $2,700,000 in share consideration and assume up to $16,285
in current debt of the vendor for total proceeds of $2,716,875. The shares will
be issued no later than one year from the date of acquisition
<PAGE>
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (All numbers in U.S. Dollars unless
otherwise stated)
VIRTUALSELLERS.COM
With the addition of designers and software programmers for rapid application
development, the Company has increased its production and technical
capabilities, which has resulted in increased revenue during the quarter ended
May 31, 2000. A year ago the Company was developing websites for approximately
$100 to $500 per website and today is developing websites and other solution
applications for anywhere between $12,000 and $150,000 per website or other
application. Many new website and application development clients are turning
into e-commerce transaction processing clients. The Company expects its
revenues will continue to increase with some seasonal variations. There
is an additional $400,000 of work in progress that is not reflected in the
revenue for this quarter. The Company only reports on work completed but
this $400,000 is scheduled for completion in the next quarter.
The Company's marketing strategy for both its services business and software
business is solution oriented. With 300 existing customers, the Company has the
customer base to give it the feedback required to continue development and
target new clients that will utilize its TAME software.
John Urbanowicz has been hired to assist with the management of the
VirtualSellers.com division. Mr. Urbanowicz brings over 20 years experience in
international business technology, management, client interaction and consulting
in connection with projects involving warehousing, distribution and logistics
for multi-site business operations. His direct and
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managerial experience includes design, development, implementation, and
subsequent system management from both a technical and business perspective.
The successful implementation of the EMC storage devices has improved
VirtualSellers.com's standing as an ASIP (Applications Services Infrastructure
Provider). These improvements assist in the sales process by enabling the
development and management of mission critical business applications for the
higher caliber of clients that are now being targeted by VirtualSellers.com's
sales efforts. This advance added a vital element to the equation of
development, storage and delivery of mission critical business applications. As
the size of VirtualSellers.com's projects and clients continue to increase, the
Company will ensure that its infrastructure offerings will be scaleable with its
technology demands by continuing to adopt and implement new hardware and
software technologies.
The successful implementation of the Rockwell ACD and CTI system has improved
Virtualsellers.com's call center experience for both consumers and customer
service representatives. Improved tracking, reporting and monitoring tools have
allowed management to improve staffing procedures to maximize individual staff
members productivity. The increased features of the system have improved the
Virtualsellers.com's abilities to answer more calls for more businesses all
while providing a customized contact experience for each consumer.
The new technology has also allowed Virtualsellers.com to provide a new level of
inbound telemarketing services to businesses that utilize offline advertising
such as television and radio. With the new system, VirtualSellers.com can offer
customized call answering solutions without the need for staff augmentation and
with minimal training requirements for the existing customer service staff.
NORTHSTAR TELESOLUTIONS
NorthStar TeleSolutions ("NorthStar") has been providing services to cable
television and other businesses for over 2 years. These services include 24
hours a day, 7 days a week transaction processing, customer service, centralized
billing, payment processing, order entry, order fulfilment, help desk services,
dispatch functions, customer and technical support, dispatching, bill
collections and marketing.
NorthStar has put together a package of services that can improve the customer
service and billing operation of many different companies and service providers.
NorthStar will provide all of these services for a flat per subscriber monthly
rate so that these businesses can utilize the service realizing it to be a cost
effective solution.
In order to continue it's expected growth, NorthStar made significant capital
expenditures to upgrade it's technology including the purchase of a new Lucent
Definity Prologix phone system. This new system will enable NorthStar to
accommodate the changing needs of cable, internet and telephone service
providers as well as provide additional revenue streams for ancillary services.
NorthStar has significantly increased it's marketing budget for this first
quarter. NorthStar's marketing plan includes the use of direct mail,
telemarketing, bill inserts, magazine
<PAGE>
advertisements and exhibiting at trade shows. In addition, NorthStar has chosen
strategic partners that will provide marketing to their existing clients that
fit NorthStar's business model.
CALLDIRECT
CallDirect has completed rearranging it's management to a lean functional team
and completed the first quarter at a near break even position. CallDirect's
e-commerce website is accessible directly through www.CallDirect.com or through
www.VirtualSellers.com.
The website is presently being enhanced to provide product pricing in both US
and Canadian dollars. This should be fully functional during the second
quarter. CallDirect has regenerated its wholesale division which should show
results also in the third quarter.
CallDirect is preparing a joint advertising campaign in the magazine family
business during the second quarter with Plantronics. Additionally, CallDirect
will test a mail out in conjunction with the NorthStar also during the second
quarter. The production and publication of CallDirect's next catalog will be
completed during the second quarter for release early in the third quarter.
TAME
The Company has implemented significant upgrades and improvements to the
internal structure of TAME which are currently in final testing. The Company
initially focused on the linux/unix versions of the TAME software, although
specific improvements were also added to the Windows NT operating system as
well. The Company now has implemented a server version of TAME that executes on
an Apache server a fast CGI process or to improve through put and uses the
SmartHeap (Microquill) libraries so that the Company may offer high performance
SMP (Semetrical Multi-Processor) support without the typical memory contention
problems associated with the standard libraries. In conjunction with this work,
a general enhancement of the TAME software is allowing the Company to open up
its architecture by modularizing the system. These developments provide the
stage for its current XML applications and subsequent developments.
Currently there are major paradigm shifts within the internet marketplace
including the enthusiastic interest of XML by corporations and because of the
broad range of support from the large systems vendors. The Company is
positioning itself to be a player in that market, especially in the linux/unix
marketplace. In addition to its current TAME XML based scripting capabilities,
the Company will include support for standards based XML systems such as SOAP
(Simple Object Access Protocol) and associated methods. In conjunction with
this, the Company plans to exploit SOAP functionality on the client side of TAME
with the development of some SOAP aware TAME Objects.
SUBSEQUENT EVENTS
The revenue for the quarter only reflects work completed and does not include
any revenue from work in progress or the business acquired from Sullivan Park
LLC. Much of the work in progress involves developing websites and other
application solutions that may lead to an increase in the e-commerce transaction
processing services. As the existing clients' websites and other application
solutions are completed, the Company anticipates that it will continue to
<PAGE>
successfully market its e-commerce transaction processing services to these
clients. TAME has been implemented in the Company's services business enlarging
its ability to serve clients with a rapid application development (RAD)
scenario.
The sale of licences of the TAME software is a longer sales cycle than initially
contemplated but the Company continues to increase its awareness and use of the
TAME software as more than 500 TAME trial licences have been downloaded since
the end of the year. Many have been with larger corporations who are presently
evaluating applications or developing applications using the TAME software. As
a result, the Company anticipates that large orders for licences or its TAME
software will be forthcoming in the short term.
Since TAME is best marketed as a solutions language platform or a rapid
application development platform enabling developers to work faster with
dissimilar databases, operating systems or other languages, the Company
anticipates the present market will expand for TAME as more business to business
and wireless solutions are required.
RESULTS OF OPERATIONS
Three Months Ended May 31, 2000 Compared to Three Months Ended May 31, 1999
--------------------------------------------------------------------------------
Revenues for the three months ended May 31, 2000 ("Quarter 2000") of $504,811
increased $428,213, an increase of 559% from the revenues of $75,598 for the
three months ended May 31, 1999 ("Quarter 1999"). For Quarter 1999, the only
source of operating revenue came from the Call Center division in Indiana. For
Quarter 2000, the acquisitions of CallDirect and Virtualsellers.com have
increased the Company's operating revenue sources to three distinct operations.
The Company acquired Virtualsellers.com effective April 23, 1999, but did not
record any revenues from acquisition until the second quarter of fiscal 2000.
Revenues for the Quarter 2000 of $312,237 compare to revenues from acquisition
to December 31, 1999 of $124,170. Virtualsellers.com generates revenue from the
e-commerce transaction processing and website development, maintenance and
hosting services to businesses. The increase in revenues is due to an increase
in the investments made in fiscal 2000 including an increase in the number of
the Company's employees and an increase in infrastructure costs.
At the Call Center, the quarter revenues increased to $75,806 compared to
$75,598 for Quarter 1999. The Call Center generates revenue providing
transaction processing and backroom services including inbound and outbound
telemarketing , customer and technical support, customer order entry,
centralized billing and collection, order fulfilment, customer dispatch
functions and other related services. The slight increase in revenues from 1999
is due to an increase in the number of cable service customers which has been
offset by lower monthly fees which have declined due to competitive pressures.
The Company acquired CallDirect effective May 15, 1999 but did not record any
revenues from this acquisition until the second quarter of fiscal 2000.
Revenues for the Quarter 2000 of $116,678 compare to revenues from acquisition
to December 31, 1999 of $247,526. CallDirect generates revenue primarily from
the resale of telephone related equipment and secondly, from the resale of
products such as multimedia, entertainment, travel, security and computer
<PAGE>
accessories for offices and residences. The increase in annualized revenues is
due to more focused marketing and sales efforts.
Direct product costs in Quarter 2000 were $165,182, compared to direct costs of
$20,890 in Quarter 1999, an increase of $144,292. This increase was due to the
acquisition of CallDirect. The Call Center division and Virtualsellers.com
primarily sell services and thus, have no direct product costs. The gross
margin earned on the products sold by CallDirect was approximately 42%.
Selling, general and administrative expenses increased to $1,645,829 from
$381,273 in Quarter 1999, an increase of $1,264,556 or 332%. Selling, general
and administrative expenses at the Call Center division increased from $137,392
to $163,516. The increase is due to an increase in the number of the Call
Center's customers which increased the number of employees required to service
the customers and related costs such as telephone, rent and office costs.
Selling, general and administrative expenses at CallDirect were $61,944,
consisting primarily of payroll costs, office rent, telephone, printing and
postage and delivery expenses. Selling general and administrative expenses at
Virtualsellers.com were $836,517, consisting primarily of payroll costs, office
rent, telephone and internet fees. Corporate general and administrative
expenses increased to $583,852 from $243,881. The increase is due primarily to
an increase in cash expenses including compensation paid to officers and
directors, marketing, travel and entertainment expenses and other administrative
expenses.
Depreciation and amortization increased from $4,825 to $113,829, an increase of
$109,004 or 2,259%. The increase is due to the acquisition of the CallDirect
and Virtualsellers.com and additions of computer hardware and software at
Virtualsellers.com since acquisition.
Other income (expense) decreased from income of $1,050,700 in Quarter 1999 to
income of $7,918 in Quarter 2000, an decrease of $1,049,600. The decrease is
due to an unusual items recorded in Quarter 1999 - $975,000 received on the sale
of the "Suncom" trade name and which was not repeated in Quarter 2000.
For Quarter 2000, the Company recognized a loss of $1,412,101 or $0.01 per share
compared to a net income of $720,310 or $0.01 per share for the Quarter 1999.
The increase in the loss is due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
As at May 31, 2000, the Company has net working capital of $2,587,204 and
capital assets of $2,038,797 for net equity of $4,626,001. The Company does not
have any long-term debt nor other long-term obligations.
During Quarter 2000, the Company used $1,312,065 in cash to fund operations,
used $225,759 in cash to fund investing activities which consisted primarily of
capital asset additions at Virtualsellers.com and received $3,783,350 in cash
from financing activities for a net increase in cash of $2,245,526. Cash at May
31, 2000 was $2,693,370.
The Company has historically funded operations through the issuance of common
shares of the Company or through the issuance of convertible debentures which
are convertible into common
<PAGE>
shares of the Company. The Company expects to fund future operations and
investments through the issuance of common shares.
The Company estimates its cash requirements for capital asset additions for the
remainder of fiscal 2001 to be less than $200,000. The Company also estimates
that cash flow from operations will be positive in fiscal 2001, commencing in
the second quarter. The Company will continue to search for appropriate
acquisitions to compliment its existing operations. Where possible, the Company
will pay for acquisitions through the issuance of common shares of the Company.
On May 19, 2000, the Company acquired the business of Sullivan Park, LLC which
is comprised of an internet services business involved in the development of
on-line stores in California. The Company will issue common shares at a market
value of $2,700,000 and assume up to $16,285 in current debt of the vendor for
total proceeds of $2,716,875.
FORWARD LOOKING STATEMENTS
----------------------------
Much of the information included in this Quarterly Report on Form 10-Q includes
or is based upon estimates, projections or other "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 and are subject to the "safe harbor"
created by those sections. When used in this document, the words "expects",
"anticipates", "intends", "plans" and similar expressions are intended to
identify other forward-looking statements. While such forward-looking
statements, and any assumptions upon which they are based, are made in good
faith and reflect the Company's current judgment regarding the direction of its
business, actual results will almost always vary, sometimes materially, from any
estimates, predictions, projections, assumptions, or other future performance
suggested herein. Those forward-looking statements also involve certain risks
and uncertainties. Factors, risks and uncertainties that could cause or
contribute to such differences include those specific risks and uncertainties
discussed below and those discussed in the Company's Form 10-K Annual Report for
the year ended February 29, 2000. The cautionary statements made in this
document should be read as being applicable to all related forward-looking
statements wherever they appear in this document.
Specifically, the projections and expectations in connection with the TAME
software could be affected by a number of factors, which could have an adverse
effect on the Company's ability to generate revenue and on its continued
operations. Those factors include acceptance of the TAME software by end users,
developers and the computer software community in general, continued use of the
Internet and computers as a tool for conducting business and other financial
situations. The completion of the licensing program of TAME may be affected by
the ability of the Company to develop and implement an acceptable license
agreement by that time. In addition, the success of TAME will depend on the
ability of the Company to protect the intellectual property rights associated
with TAME. While the Company has applied for patent protection of TAME, no such
protection has yet been obtained or granted. There is no assurance that such
registration or protection will be available, and therefore the Company may have
little or no protection for its intellectual property assets, comprising a
significant asset of the Company.
<PAGE>
The Company's TAME software and its other intellectual property is important to
the Company's continued operations and success. The Company's efforts to
protect this intellectual property may not be adequate. Unauthorized parties
may infringe upon or misappropriate its TAME software. In the future,
litigation may be necessary to protect and enforce the Company's intellectual
property rights or to determine the validity and scope of its intellectual
property, which could be time consuming and costly. The Company could also be
subject to intellectual property infringement claims as the numbers of
competitors grows. These claims, even if not meritorious, could be expensive
and divert the Company's attention from its continued operations. If the
Company becomes liable to any third parties for such claims, it could be
required to pay a substantial damage award or to develop comparable
non-infringing intellectual property and systems.
The markets in which the Company compete are characterized by rapidly changing
technology, evolving technological standards in the industry, frequent new
websites, services and products and changing consumer demands. The Company's
future success will depend on its ability to adapt to these changes and to
continuously improve the performance, features and reliability of its service in
response to competitive services and products and the evolving demands of the
marketplace, which it may not be able to do. In addition, the widespread
adoption of new Internet, networking or telecommunications technologies or other
technological changes could require the Company to incur substantial
expenditures to modify or adapt its services or infrastructure, which might
impact its ability to become or remain profitable.
The Company anticipates that it will be necessary to continue to invest in and
continue to develop the TAME software on a timely basis to maintain its
competitiveness. Significant capital expenditures may be required to keep its
technology up to date. Investments in technology and future investments in
upgrades and enhancements to software may not necessarily maintain the Company's
competitiveness. The Company's business is highly dependent upon its computer
and software systems, and the temporary or permanent loss of such equipment or
systems, through casualty, operating malfunction or otherwise, could have a
material adverse effect upon the Company.
In connection with the continued expansion and success of the operations of
VirtualSellers.com, there are a number of factors which could have an adverse
effect on the Company's ability to generate revenue and continue such
operations. Continued use of the Internet as a way of carrying on business is
crucial to the continued success of VirtualSellers.com. The Company's success
is dependent upon achieving significant market acceptance of its website,
products and services by business who want to retain their products and services
over the internet. It cannot guarantee that such businesses will accept
VirtualSellers.com, or even the Internet, as a replacement for traditional
methods of retailing their products and services. Market acceptance of
VirtualSellers.com depends upon continued growth in the use of the Internet
generally and, in particular, as a method of business selling and retailing
their products. The Internet may not prove to be a viable channel for these
services because of inadequate development of necessary infrastructure, such as
reliable network backbones, or complimentary services, such as high-speed modems
and security procedures for the transmission of confidential and private
information, the implementation of competitive technologies, government
regulation or other reasons. Failure to achieve and maintain market acceptance
of VirtualSellers.com would seriously harm the Company's business.
<PAGE>
The revenues expected to be generated by the operation of the CallCenter and
CallDirect could be affected by a number of factors, which could have an adverse
effect on the Company's ability to generate revenue and on its continued
operations. Those factors include: any changes in the demands for the services
offered by the Call Center or the products offered by CallDirect, the loss of
any significant clients of either the Call Center or CallDirect, increased
competition in either of these industries, any problems encountered with the
Call Center's sophisticated and specialized telecommunications, network and
computer technology.
ITEM 3 Quantitative and Qualitative Disclosure about Market Risk
Not applicable.
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings
On May 23, 2000, the lawsuit commenced by Stephen Meade on November 19, 1999
(the "Meade Lawsuit") in the Illinois Circuit Court of Cook County Department,
Chancery Division, against Dorothy A. Tomek, Kevin A. Weilgus, Dennis Sinclair,
Michael Krawitz, VirtualSellers.com, Inc. (an Illinois corporation) and the
Company was settled. The Meade Lawsuit, which was in connection with the
acquisition of certain assets of VirtualSellers.com, Inc. by the Company, was
first reported in the Company's Form 10-Q Quarterly Report, filed on January 14,
2000. As reported in the Company's Annual Report on Form 10-K, filed June 14,
2000, all parties to the Meade Lawsuit agreed to settle and dismiss the Meade
Lawsuit with prejudice against Mr. Meade. The settlement does not require that
the Company or Dennis Sinclair pay any consideration to Mr. Meade or any other
party.
On May 16, 2000, Cary Berman commenced a lawsuit against the Company in the
Illinois Circuit Court of Cook County, County Department, Chancery Division (the
"First Berman Lawsuit"). Mr. Berman, a former employee of the Company, claims
that he is entitled to:
(a) 250,000 common shares in the capital of the Company issued to him on
August 11, 1999 as compensation for services provided to the Company;
(b) a further $20,000 worth of common shares at $0.13 per common share as
part of a private placement conducted by the Company; and
(c) damages in the amount of $200,000, as he was unable to sell certain
common shares owned by him on the open market as of May 5, 2000.
With respect to the first claim, the Company has not received an adequate
explanation as to why Mr. Berman issued the 250,000 common shares to himself.
With respect to the second claim, the Company asserts that since the private
placement was oversubscribed, it had the right to reject any subscriptions made
by any investor. In addition, both the private placement offering memorandum
and the subscription agreement in connection with the private placement clearly
indicated that the Company reserved the right to reject any subscription or
terminate the offering without notice. Accordingly, the Company believes that
this claim has no merit whatsoever. With respect to the last claim, the Company
issued the common shares to Mr. Berman on May
<PAGE>
11, 1999 and accordingly, the Company advised Mr. Berman that he could not sell
any shares under Rule 144 until expiry of the one year hold period (which
expired on May 11, 2000).
In response to the Company's discovery that Mr. Berman issued 250,000 common
shares to himself, it commenced a lawsuit against Cary J. Berman in the Supreme
Court of British Columbia (the "Second Berman Lawsuit") on May 19, 2000. The
Company alleges that without its knowledge, Mr. Berman prepared a treasury order
directing the Company's transfer agent to issue a share certificate for 250,000
common shares in Mr. Berman's name (the "Disputed Shares"). Upon learning of
the issuance of the Disputed Shares, the Company demanded that Mr. Berman return
the share certificate representing the Disputed Shares as it has not received an
adequate explanation as to why such shares had been issued. Despite demand, Mr.
Berman has refused to return the Disputed Shares. The Company therefore claimed
the following relief:
(a) an interim order directing that the Company's transfer agent, Montreal
Trust Company, hold the Disputed Shares and make no transfers with respect to
the Disputed Shares pending further order of the Supreme Court of British
Columbia or written agreement of the parties;
(b) an order requiring that Mr. Berman deliver the Disputed Shares to the
Company for cancellation; and
(c) in the alternative, damages against Mr. Berman in the amount of
$750,000, being the price that the Company's common stock traded on the
over-the-counter bulletin board at the date the Second Berman Lawsuit was
commenced ($3.00 per share), multiplied by the number of Disputed Shares
(250,000).
The Company is currently in negotiations with Mr. Berman in an effort to settle
the First Berman Lawsuit and the Second Berman Lawsuit.
ITEM 2 Changes in Securities and use of Proceedings
Recent Sales of Unregistered Securities
During the quarter ended May 31, 2000, the Company issued the following
securities, none of which were registered under the Securities Act of 1933:
On March 7, 2000, the Company issued 1,170,060 common shares to one of its
creditors, Alcatel USA, Inc., pursuant to the conversion of a warrant issued to
Alcatel USA, Inc. in connection with the CCAA Proceedings, as described in the
Company's Annual Report on Form 10-K, filed June 14, 2000 (the "CCAA
Proceedings"). The warrant and the common shares were issued pursuant to
Section 3(a)(10) of the Securities Act of 1933.
On March 14, 2000, the Company issued an aggregate of 2,074 common shares at a
deemed price of $0.50 per common share in an offshore transaction relying on
Regulation S promulgated under the Securities Act of 1933 to a former creditor
of CallDirect Enterprises, Inc., which indebtedness was assumed and settled by
the Company in connection with the acquisition of certain assets of CallDirect
Enterprises, Inc.
<PAGE>
On May 1, 2000, the Company issued 1,000,000 common shares at a deemed price of
$0.20 per common share to Todd Garey, pursuant to the Employment Agreement
between the Company and Mr. Garey, relying on Section 4(2) of the Securities Act
of 1933.
On May 11, 2000, the Company issued 5,999 common shares to one of its creditors,
Lunny Communications Group Inc., pursuant to the conversion of a warrant issued
to Lunny Communications Group Inc. in connection with the CCAA Proceedings. The
warrant and the common shares were issued pursuant to Section 3(a)(10) of the
Securities Act of 1933.
On May 11, 2000, the Company issued an aggregate of 8,151 common shares at a
deemed price of $0.50 per common share in an offshore transaction relying on
Regulation S promulgated under the Securities Act of 1933 to a former creditor
of CallDirect Enterprises, Inc., which indebtedness was assumed and settled by
the Company in connection with the acquisition of certain assets of CallDirect
Enterprises, Inc.
ITEM 3 Defaults Upon Senior Securities
Not applicable.
ITEM 4 Submission of Matters To A Vote Of Security Holders
Not applicable.
ITEM 5 Other Information
None.
ITEM 6 Exhibits and Reports on Form 8-K
Reports on Form 8-K
On June 15, 2000, the Company filed a Form 8-K with respect to the acquisition
of Sullivan Park LLC ("Sullivan Park"). Pursuant to an Asset Purchase Agreement
(the "Asset Purchase Agreement"), dated for reference May 19, 2000, between the
Company, Sullivan Park and Edward W. Sharpless ("Sharpless"), the Company
acquired all of the property, assets and undertakings of the internet services
development business carried on by Sullivan Park. The closing date of the Asset
Purchase Agreement, as agreed by the parties, was June 1, 2000.
Exhibits
The following exhibits are incorporated by reference into this Form 10-Q from
reports previously filed by the Company with the Securities and Exchange
Commission:
Exhibit
Number Exhibit Title
------ --------------
2 Plan of acquisition, reorganization, arrangement, liquidation or
succession
<PAGE>
2.1 Asset Purchase Agreement between the Company, Sullivan Park
LLC and Edward W. Sharpless, dated for reference May 19, 2000
3 Articles of Incorporation and Bylaws
3.1 Certificate of Continuance, dated January 11, 1991
3.2 Certificate of Amendment, dated June 14, 1995
3.3 Certificate of Amendment, dated September 14, 1995
3.4 Certificate of Amendment, dated December 22, 1995
3.5 Certificate of Amendment, dated March 23, 1999
3.6 Certificate of Amendment, dated May 31, 1999
3.7 Certificate of Amendment, dated July 18, 1997
3.8 By-laws of the Company
10 Material Contracts
10.1 Joint Venture Agreement between the Company and IMC
(Internet Marketing Consortium)/Cable Print Network Marketing,
Inc., dated March 14, 2000
10.2 Co-operative Marketing Agreement between the Company and
Rockwell Electronic Commerce Corporation, dated March 15,
2000
27 Financial Data Schedule
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
VIRTUALSELLERS.COM, INC.
By: /s/ Dennis Sinclair
Dennis Sinclair, President/Director
Date: July 13, 2000
By: /s/ Mel Baillie
Mel Baillie, Director
Date: July 13, 2000
By: /s/ Grayson Hand
Grayson Hand, Director
Date: July 14, 2000
By: /s/ Greg Burnett
Greg Burnett, Director
Date: July 13, 2000
By: /s/ Kevin Wielgus
Kevin Wielgus, Secretary
Date: July 14, 2000
