SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
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For the Fiscal Year Ended May 31, 1999 Commission file number 33-23430-D
VIRTUAL ENTERPRISES, INC.,
(formerly, The Toen Group, Inc.)
(Exact name of registrant as specified in its charter)
Nevada
(State of other jurisdiction of incorporation
or organization)
84-1091272
(I.R.S. Employer Identification No.)
4695 MacArthur Court, Suite 530, Newport Beach, California 92660
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (949)475-6755
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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
Check if disclosure of delinquent filers in response to item 405 of
Regulation S-B is not contained in this form and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenues for most recent fiscal year: $382,798.
State the aggregate market value of voting stock held by nonaffiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: As of July 31, 1999, $3,037,647.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: As of July 31, 1999, there
were 15,919,372 shares of common stock outstanding.
Documents Incorporated by Reference: None
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TABLE OF CONTENTS
Page
PART I
Item 1. Business ........................................................1
Item 2. Properties.......................................................3
Item 3. Legal Proceedings................................................3
Item 4. Submission of Matters to a Vote of Security Holders..............3
PART II
Item 5. Market for Company's Common Equity and Related Stockholder
matters ........................................................4
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................5
Item 7. Financial Statements.............................................6
Item 8. Change in and Disagreements With Accountants.....................7
PART III
Item 9. Directors and Executive Officers.................................7
Item 10. Executive Compensation...........................................9
Item 11. Security Ownership of Certain Beneficial Owners and Management...11
Item 12. Certain Relationships and Related Transactions...................13
PART IV
Item 13. Exhibits and Reports on Form 8-K.................................13
Index to Consolidated Financial Statements and Schedules.........F-1
[VEI\10KSB\53199.10K]-3
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PART I
ITEM 1. BUSINESS
History
Virtual Enterprises, Inc., (formerly, The Toen Group, Inc.) (the
"Company") was incorporated in the State of Colorado on June 10, 1988 for the
purpose of searching for, evaluating and acquiring an interest in one or more
business opportunities. On December 3, 1989, the Company completed a public
offering of its stock pursuant to a Registration Statement on Form S-18 filed
with the Denver Regional Office of the Securities and Exchange Commission
("SEC"). The Company, through an underwriter, sold a total of 50,000,000 shares
of the its no par value common stock and redeemable common stock purchase
warrants ("Warrants") which entitle the holders to purchase 162,000,000
additional shares of common stock at a later date.
On March 9, 1990, the Company completed an agreement to exchange its
common stock for all of the issued and outstanding capital stock of Sunbelt
Media Group Inc. ("Sunbelt"). Pursuant to the terms of the agreement with the
shareholders of Sunbelt, the Company issued 278,400,000 shares of its common
stock in exchange for all the outstanding shares of common stock of Sunbelt
following which Sunbelt became a wholly-owned subsidiary of the Company. From
March 1990 to October 1992 Sunbelt owned, operated, and provided programming to
low power television stations and related businesses. The Company discontinued
the Sunbelt business in October 1992 and sold all the assets associated with the
operation of Sunbelt to William J. Kitchen ("Kitchen") in consideration of 1)
Kitchen's forgiveness of notes and other obligations owed to Kitchen by the
Company; and 2) Kitchen's assumption of miscellaneous debts of Sunbelt. Pursuant
to the sale, Kitchen also re-conveyed back to the Company 98,795,000 shares of
the its common stock for cancellation. Since October 1992 the Company has not
had any revenues or operations.
On August 31, 1992 Jeffrey Paul Stroud ("Stroud") acquired 173,995,000
shares of the Company's common stock, representing 51% of the then issued and
outstanding shares, from Kitchen. Stroud also acquired the Warrants from
Kitchen. In March 1993 Stroud sold the 173,995,000 shares of the Company's
common stock and the Warrants.
In September 1994, the Company's shareholders voted to effect a 1 for
1000 reverse split of the Company's issued and outstanding common stock. The
split was implemented through a merger with a newly formed Nevada corporation.
The accompanying financial statements have been retroactively restated to
reflect the merger including the change from no par value common stock to $.01
par value common stock. In connection with the merger and reverse split, the
Company's authorized number of shares was reduced from 785,000,000 to
50,000,000. There are presently outstanding Warrants to purchase 668,000 shares
of common stock, at $5.00 per share.
Effective October 8, 1996, the Company's Articles of Incorporation were
amended to change the name of the Company from The Toen Group, Inc. to Virtual
Enterprises, Inc.
On May 5, 1999, the Company entered into an Asset Purchase Agreement
and Plan Of Reorganization (the "Agreement") with Metroplex Web Inc., a Texas
corporation ("Metroplex") whereby the Company acquired certain assets, property,
business interests and intellectual rights owned by Metroplex for securities
consisting of Ten Million (10,000,000) shares of the Company's $.01 par value
common stock, causing Metroplex shareholders to have voting control and become
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the principal stockholders of the Company. As a result of the change in control
of the Company, generally accepted accounting principles required the
acquisition to be accounted for as a recapitalization of Metroplex. Accordingly,
the consolidated financial statements reflect the historical assets, liabilities
and operations of Metroplex for the periods presented. In June 1998, Metroplex
acquired Intellesell, Inc. ("Intellesell"). Intellesell operated in the web
development and web hosting business.
The Company's day-to-day business affairs are handled by the Company
President and management of Metroplex. As of the filing date of this Report the
Company had 32 employees. Current management is pursuing additional business
opportunities, but no assurance can be given that the Company will be successful
in acquiring any business opportunities, or if acquired, what revenues might be
provided from such operations.
As used herein, the term "Company" refers to Virtual Enterprises, Inc.,
(formerly The Toen Group Inc.), MetroplexWeb, Inc., a wholly owned Nevada
corporation ("MWI") and successor in interest to the assets of Metroplex and
Intercon, Inc., a wholly owned Nevada Corporation ("Intercon"). The Company
currently maintains its executive offices at 4695 MacArthur Court, Suite 530,
Newport Beach, California 92660, and its telephone number is (949) 475-6755.
At the date of acquisition of its assets, Metroplex was a provider on
the Internet of local city guides, local advertising and innovative edge
e-commerce applications. The Company intends to integrate its local Metroplex
city guides with distribution capabilities to offer web site design, hosting,
e-commerce merchandise, electronic coupons and other transactions to a broader
audience of consumers, both domestically and internationally.
The Metroplex city guides provide up-to-date information regarding arts
and entertainment events, community activities, recreation, business, shopping,
professional services and news/sports/weather to consumers in metropolitan
areas. The Company owns and operates the city guides on the Internet thru it
website - www.metroplexweb.com - through numerous direct links from banners and
event profiles.
Each local Metroplex city guide primarily consists of original content
developed and designed specifically for the Web by the Company. The service is
typically organized by categories, such as arts and entertainment, restaurants
and bars, community, shops and services, sports and outdoors, hotels and
tourism, local news and professional services. Within most of the Metroplex city
guides, consumers can search neighborhood-shopping areas, obtain maps, contact
community organizations and vendors by e-mail, and shop business inventories
with a click of the mouse. The Company creates original and locally focused
content that can be accessed using targeted, sophisticated searches across all
content residing on a Metroplex City site. In contrast, many search engines and
navigational guides access pre-existing content from third-party Web sites that
may be incomplete or out of date. In its owned and operated markets, the Company
offers a broad array of updated, local content that is relevant to consumers.
The Company also designs and produces custom-built Web-sites and
performs related services for local and regional businesses, aggregates them in
a local city guide environment and provides these businesses with the ability to
regularly update and expand their sites. The typical site offers local and
regional businesses the opportunity to reach and interact with targeted
consumers. The Company builds its city guides with the involvement of local
government, community and volunteer associations, business and professional
groups, educational institutions and local media companies. In addition, content
generated by consumers through e-mail enhances the sense of community in the
Metroplex City sites.
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Operating Strategy
The Company's business strategy is to develop and operate Internet
related web-hosting, website design and marketing, and Internet telephony
services through MWI, Intercon or other majority-owned or wholly-owned
subsidiaries.
The Company's strategy also includes the investment in other Internet
companies, either directly or by the Company's subsidiaries, both domestic and
internationally.
The Company is currently in the process of seeking the acquisition of,
or merger with, additional business entities in the internet related or
telecommunications fields.
Recent Developments
Consistent with its operating strategy, on July 23, 1999, the Company
entered into a Memorandum of Understanding with Anyuser.Net ("Anyuser") of
Seoul, Korea, whereby the Company intends to invest $3 million into Anyuser to
acquire approximately 47% of the total issued and outstanding common stock of
Anyuser. Anyuser has developed proprietary Internet and data/video/voice
switching software for one touch video communicating over the Internet. Under
the agreement, Anyuser will provide hardware and market video Internet services
in the Asian market and the Company will obtain exclusive licensing for
Anyuser's products including the exclusive right to market the Web Video Phone
and services in the North and South American marketplace. Anyuser will license
and market the Company's products in the Asian market, including the Metroplex
city guides, web design, web hosting and e-commerce products. Royalty payments
will be made by the parties for licensed products.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in shared leased
premises of approximately 2,000 square feet in Newport Beach, California. These
premises are provided to the Company under an Advisory and Management Agreement
with NuVen Advisors, Inc. ("NuVen"), an affiliate.
The Company conducts substantially all of its operations in a leased premise
approximating 6,000 square feet in Addison, Texas.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information
Following the completion of the public offering on November 30, 1989
and until September 6, 1990, the Company's common stock was traded on the
over-the-counter market until trading ceased on September 6, 1990. On April 26,
1999, trading resumed and quotes were maintained on the bulletin board by the
National Association of Securities Dealers, Inc.
At July 31, 1999, the Company's outstanding securities consisted of
15,919,372 shares of $.01 par value common stock and 668,014 redeemable common
stock purchase warrants.
The expiration of the Warrants has been extended to December 31, 2000.
Each Warrant currently entitles the holder to purchase at a price of $5.00, one
share of the Company's common stock and holders of the Warrants have no voting,
preemptive, liquidation, dividend or other rights. The Warrants became subject
to redemption by the Company on September 15, 1989 for $.00001 per Warrant, upon
30 days written notice to the warrantholders. The Warrants are redeemable only
in the event of a current effective registration statement.
The following table sets forth the range of the high and low sales
reported for the common stock since trading resumed on May 5, 1999:
High Low
---- ---
Quarter ended May 31, 1999 3.00 .14
The above prices were obtained from the Financial Web. The prices shown
in the above table represent inter-dealer quotations without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.
On May 31, 1999 and currently, there are broker-dealers publishing quotes for
the common stock.
(b) Holders
The approximate number of holders of record of each class of equity
securities of the Company as of July 31, 1999, was as follows:
NUMBER OF
TITLE OF CLASS RECORD HOLDERS
- --------------------------- --------------
$.01 Par Value Common Stock 38
Warrants 29
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(c) Dividends
The Company has never declared or paid a cash dividend on its common
stock. The Company does not intend to pay a cash dividend in the foreseeable
future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The consolidated financial statements presented herein reflect the
acquisition of Metroplex on May 5, 1999. As the acquisition resulted in a change
of control of the Company, generally accepted accounting principles required
that the transaction be accounted for as a recapitalization of Metroplex. The
accompanying consolidated financial statements reflect the historical operations
of Metroplex for the two years in the period ended May 31, 1999. The
accompanying consolidated financial statements include the operations of the
Company from May 5, 1999, the date of the reverse acquisition. On June 30, 1998,
Metroplex entered into an asset purchase agreement with InteleSell. The
acquisition was accounted for as a purchase. InteleSell develops, designs and
hosts internet web pages. The accompanying consolidated financial statements
include the operations of Intelesell from July 1, 1998. Therefore, the results
of operations presented are substantially those of Metroplex for the years ended
May 31, 1999 and 1998.
Results of Operations
Year Ended May 31, 1999 Compared to Year Ended May 31, 1998
Revenues for the year ended May 31, 1999, were $383,000 versus $247,000
in 1998, a 54.7% increase over the prior year. Revenues increased as the Company
continued to expand its operations, as well as fiscal 1999 included the
operations of Intellesell for only eleven months. The Company's revenues from
web development were $326,000 for the current year versus $218,000 in 1998. The
Company's revenues from hosting fees were $57,000 for the current year versus
$29,000 in 1998. The Company recognizes hosting fee revenues over the term of
the contract, usually one year. This increase can be attributed to the customers
obtained from InteleSell and the Company's emphasis on expanding its operations
during the current year.
Expenses were $1,841,000 in fiscal 1999 compared to $734,000 in fiscal
1998, an increase of 151%. The increase was primarily attributable to an
increase in marketing and sales efforts resulting from a full year of city mall
operation, as well as expansion into additional cities. Increased sales efforts
required additional production and support staff for web page design and
support. Included in the current year expenses is $236,000 for the value of
stock issued to certain officers and employees of Metroplex for services
rendered.
Liquidity and Capital Resources.
As of May 31, 1999, the Company had a working capital deficiency of
$387,000, a decrease of $290,000 from May 31, 1998. The decrease was
attributable to the continued accrual of professional, consulting, and advisory
services incurred but not paid during fiscal 1998.
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The Company had no cash balances at May 31, 1999. The limited available
cash balances are a direct result of the Company having negative capital
resources and losses from operations during both fiscal year 1999 and 1998. On
June 6, 1999, the Company issued 8% notes payable totaling $250,000, due and
payable June 6, 2000. As an inducement to obtain the financing, the Company
issued 200,000 shares of its common stock. Management estimates the value of
such shares at $200,000 which will be amortized to interest costs over the next
12 months.
The Company's plan is to seek additional sources of capital and new
operating opportunities. Management believes that $1 to $3 million is needed to
fund sale, marketing, and product development. In addition, the Company is
seeking the funds necessary to acquire the interest in Anyuser and other
opportunities. In the interim, the Company's existence is dependent on
continuing financial support from an affiliate. Furthermore, the Company intends
to utilize its common stock for future financial support to finance its needs.
There are no assurances that the Company will be successful in completing an
offering sufficient to meet its operating needs. Such conditions raise
substantial doubt about the Company's ability to continue as a going concern
unless substantial funds can be raised through debt or equity capital. As such,
the Company's independent accountants have modified their report to include an
explanatory paragraph with respect to the uncertainty.
The Company has no commitments for capital expenditures or additional
equity or debt financing and no assurances can be made that its working capital
needs can be met.
Impact of Year 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. If any of the
Company's computer programs that had time-sensitive software were to recognize a
date using "00" as the year 1900 rather than the year 2000, it could result in a
system failure or miscalculations causing disruption of normal business
activities.
Based on a recent and ongoing assessment, the Company has determined
that all of its operating software and systems are year 2000 compliant. It has
further determined that it will not be required to modify the software or
replace portions of the software that has been sold to customers so that
customers' computer systems will function properly with respect to dates in the
year 2000 and thereafter.
The Company has initiated communications with its significant suppliers
and major customers and determined that it will not experience any significant
operational problems from any third party's failure to remedy their own Year
2000 issues.
The costs of the project to become year 2000 compliant have not been
material to the Company.
ITEM 7. FINANCIAL STATEMENTS
Financial Statements are referred to in Item 13(a), listed in the Index
to Financial Statements and filed and included elsewhere herein as a part of
this Annual Report on Form 10-KSB.
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
As previously reported, on May 15, 1999, the auditing practice of Kang,
Yu & Jun, CPA's, resigned as the Company's independent accountant. Kang, Yu &
Jun previously issued an unqualified report dated September 25, 1998, for the
fiscal years ended May 31, 1998 and 1997 assuming the Company will continue as a
going concern, which did not contain any adverse opinion or disclaimer of
opinion, or any qualification as to uncertainty, audit scope or accounting
principles. Due to the acquisition of Metroplex, the Company reports under a new
basis of accounting which consists of the historical assets, liabilities and
operations of Metroplex for the periods presented. Accordingly, the independent
auditors report for 1998 of Kang, Yu & Jun is not included. There were no
disagreements with Kang, Yu & Jun on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure during
the period from March 31, 1995 to the date of their resignation.
On June 29, 1999, the auditing practice of McKennon Wilson & Morgan,
LLP was engaged to perform the audits of the Company for the years ended May 31,
1999 and 1998 in connection with the new basis of accounting.
The decision to change principal independent accountants was made by
the Company's Board of Directors.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
(a) Identification of Directors and Executive Officers.
The following table furnishes the information concerning the directors
and executive officers of the Company as of May 31, 1999. The directors of the
Company are elected every year and serve until their successors are elected and
qualify.
Period Served as Officer Period Served
Name Age Director Position as Officer
- ------------ --- ------------------ -------- ------------------
Fred G. Luke 52 6-17-93 to Present President 6-17-93 to Present
(b) Business Experience.
The Company has no audit, compensation or nominating committees. No
family relationships exist between any of the officers or directors.
The officers of the Company are chosen by and serve at the pleasure of
the Board of Directors.
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The following is a brief account of the business experience during the
past five years of each director and executive officer of the Company, including
principal occupations and employment during that and the name and principal
business of any corporation or other organization in which such occupation and
employment were carried on.
Fred G. Luke. Mr. Luke has been Chairman of the Board and President of
the Company since June, 1993. Mr. Luke has over twenty-seven (27) years
of experience in domestic and international financing and the
management of privately and publicly held companies. Since 1982, Mr.
Luke has provided consulting services and has served, for brief periods
lasting usually not more than six months, as Chief Executive Officer
and/or Chairman of the Board of various publicly held and privately
held companies in conjunction with such financial and corporate
restructuring services. In addition to his position with the Company,
Mr. Luke currently serves as Chairman and Chief Executive Officer of
NuOasis Resorts, Inc., (formerly, Nona Morelli's II, Inc.) ("NuOasis
Resorts"), Chairman and former President of Group V Corporation
(formerly, NuOasis Gaming, Inc.) ("Group V"), Chairman and President of
NuVen Advisors, Inc., formerly New World Capital, Inc. ("NuVen
Advisors"), Chairman and President of Hart Industries, Inc. ("Hart"),
and Chairman and President of Diversified Land & Exploration Co.
("DL&E"). DL&E is a publicly traded independent natural resource
development company engaged in domestic oil and gas exploration,
development and production. Prior to 1995, DL&E was a 90% owned
subsidiary of Basic Natural Resources, Inc. ("BNR"). From 1991 through
1994, Mr. Luke served as the President and a Director of BNR. Hart was
formerly in the environmental services busines, and is a public company
which was formerly traded on NASDAQ or the OTC Bulletin Board. Neither
Hart nor DL&E have ongoing operations. NuOasis is a publicly traded
(OTC Bulletin Board) diversified holding company with overseas gaming
and domestic pasta production subsidiaries. NuVen Advisors provides
managerial, acquisition and administrative services to public and
private companies including the Company, NuOasis and Hart pursuant to
independent Advisory and Management Agreements. NuVen Advisors, which
is controlled by Fred G. Luke, as Trustee of the Luke Family Trust, is
an affiliate of the Company. NuVen Advisors is a stockholder of Hart,
DL&E and NuOasis, and beneficial stockholder of the Company. Mr. Luke
also served from 1973 through 1985 as President of American Energy
Corporation, a privately held oil and gas company involved in the
operation of domestic oil and gas properties. From 1970 through 1985
Mr. Luke served as an officer and Director of Eurasia, Inc., a private
equipment leasing company specializing in oil and gas industry
equipment. Mr. Luke received a Bachelor of Arts Degree in Mathematics
from California State University, San Jose in 1969.
(c) Identification of Certain Significant Employees.
There are no employees other than the executive officers disclosed
above who make or are expected to make, significant contributions to the
business of the Company, the disclosure of which would be material.
(d) Family Relationships.
None.
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(e) Compliance with Section 16(a) of the Securities Exchange Act.
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Officers and directors, and greater than
ten-percent shareholders are required by Securities and Exchange Commission
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on review of the copies of such forms furnished to the
Company, or representations that no Forms 5 were required or filed, the Company
believes that during fiscal year 1997, all Section 16(a) filing requirements
applicable to its officers, directors, and greater than ten-percent beneficial
owners were complied with.
ITEM 10. EXECUTIVE COMPENSATION
(a) Summary Compensation Table.
The following summary compensation table sets forth in summary form the
compensation received during each of the Company's last three completed fiscal
years by the Company's President and four most highly compensated officers (the
"Named Executive Officers"). There were no executive officers who were
compensated in excess of $100,000 during fiscal year 1999.
<TABLE>
<CAPTION>
Name and Principal Fiscal Salary Other Annual Options
Position Year ($) Compensation($) Granted (#)(2)
- -------------------------- ------ --------- ---------------- --------------
<S> <C> <C> <C> <C>
Fred G. Luke 1999 4,500(1) - -
Chairman and President 1998 54,000(1) - -
(6-93 to Present) 1997 54,000(1) - 750,000
</TABLE>
(1) The dollar value of base salary (cash and non-cash).
(2) Except for stock option plans, the Company does not have in effect any
plan that is intended to serve as incentive for performance to occur
over a period longer than one fiscal year.
(b) Stock Options
There were no options granted during fiscal year 1999 to the Company's
Named Executive Officers. The following table sets forth in summary form the
aggregate options exercised during fiscal year 1999 and the May 31, 1999 value
of unexercised options for The Company's Named Executive Officer.
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<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money
Option/SAR's at Fiscal Options/SAR's at Fiscal
Year-End (#) Year-End ($)
Shares
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
- ---------------------------- ------------------ ------------ ----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Fred G. Luke, President
and Director - - 750,000 Exercisable $750,000(2)(3)(4) Exercisable
NuVen Advisors, Inc.(1) - - 100,000 Exercisable - (3)(5) Exercisable
Steven Dong, former CFO - - 100,000 Exercisable $ 90,000 (3)(4) Exercisable
</TABLE>
(1) The Luke Family Trust (the "Luke Trust") owns 100% of NuVen Advisors,
formerly New World. Fred G. Luke, as Co- Trustee of the Luke Trust
determines the voting of such shares and, as a result, may be deemed to
control the Luke Trust.
(2) Exercise price for Mr. Luke's options are 110% of net book value on August
1, 1995 of the Company. Since the Company had a negative book value on
August 1, 1995, the exercise price is deemed to be $.01 per share. Mr.
Luke's options expire on December 31, 1999 unless extended by the Company.
(3) The value of unexercised options in the money as of year end was deternined
based upon the average bid and ask price on May 28, 1999 which was the last
trading day prior to the year end. Such value used was $1 per share.
(4) The option to Mr. Luke and Mr. Dong, expire on December 31, 1999, unless
extended by the Company.
(5) The option to NuVen will expire 60 days after the termination date of the
Advisory and Management Agreement, which is June 30, 2001. The expiration
date of the option will be extended automatically upon extension of the
Advisory agreement.
(c) Long Term Incentive Plans.
None.
(d) Compensation of Directors
The Company has no standard arrangement for the compensation of
directors or their committee participation or special assignments. There was no
compensation paid to any directors during fiscal year 1999.
(e) Contracts with Named Executive Officer and other Officers and Directors.
Effective February 1, 1995, the Company and NuVen, entered into a three
year Advisory and Management Agreement for the engagement of NuVen to perform
advisory services on behalf of the Company. Pursuant to such agreement, the
Company is obligated to pay NuVen $60,000 annually in monthly installments of
$5,000. Under the terms of such agreement, the Company has granted NuVen an
option to purchase 100,000 shares of the Company's common stock exercisable at a
price of $1.00 per share. The option vested on the date of the agreement.
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Effective July 1, 1998 the Company amended its Advisory and Management
Agreement with NuVen. The amended terms require the Company to pay NuVen, for
services rendered, $10,000 a month for an annual total of $120,000 through June
30, 2001.
In August 1995, the Company entered into an Employment Agreement with
Fred G. Luke, the Company's Chairman and President. The terms of the Employment
Agreement call for Mr. Luke to receive approximately $54,000 per year
retroactive to June 1, 1994, for five (5) years as a base salary; grants him an
option to purchase 750,000 shares of the Company's common stock at an exercise
price of 110% of the book value per share on August 1, 1995; and requires the
Company to purchase life insurance coverage, reimburse him for vehicle expenses,
and provide fringe benefits. No cash payments were made to Mr. Luke but the
Company expensed $54,000 during fiscal 1998 and 1997 and had $199,458 due to Mr.
Luke as of May 31, 1998. As discussed further the agreement was cancelled
effective June 30, 1998; however, Mr. Luke will provide similar services to the
Company under the amended Advisory and Management Agreement with NuVen.
Effective June 30, 1998, in connection with the execution of termination
agreements and settlement of amounts due, the Company issued to officers,
employees and consultants 4,270,000 shares of common stock. Such shares were in
full settlement of amounts due to NuVen, Luke and others pursuant to their
consulting and advisory agreements. NuVen and Mr. Luke received 2,000,000 and
900,000 shares, respectively pursuant to such distribution.
(f) Report on Repricing of Options
During fiscal year 1999, the Company has not adjusted or amended the
exercise price of stock options.
(g) Change in Control.
On May 5, 1999, the Company entered into an Asset Purchase Agreement and
Plan of Reorganization (the "Agreement") with Metroplex Web Inc., a Texas
corporation ("Metroplex") whereby the Company acquired certain assets, property,
business interests and intellectual rights owned by Metroplex for securities
consisting of Ten Million (10,000,000) shares of the Company's $.01 par value
common stock, causing Metroplex to have voting control and become the principal
stockholder of the Company, owning 63% of the common stock outstanding at May
31, 1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
(a) Beneficial owners of five percent (5%) or greater of the Company's
Outstanding Voting Securities.
The following sets forth information with respect to ownership by
holders of more than five (5%) of the Company's outstanding voting securities
known by the Company.
[VEI\10KSB\53199.10K]-3
11
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of Beneficial
Title of Class of Beneficial Owner Interest Percent of Class(1)
- -------------------------- --------------------------------------- ------------------- -------------------
<S> <C> <C> <C>
$.01 par value MetroplexWeb, Inc.
Common Stock 15280 Addison Road, Suite 250 10,000,000 62.8% (1)
Addison, Texas 75001
NuVen Advisors, Inc.
4695 MacArthur Court, 530 1,921,725 12.1% (1)(2)
Newport Beach, Ca. 92660
Fred G. Luke
4695 MacArthur Court, Suite 530 960,000 6.0% (1)(2)
Newport Beach, Ca. 92660
</TABLE>
(1) Based upon 15,919,372 common shares outstanding.
(2) Does not give effect to unexercised options outstanding in the amount
of 100,000 shares and 750,000 for NuVen Advisors, Inc. and Mr. Luke,
respectively.
The following sets forth information with respect to the Company's
Common Stock beneficially owned by each Officer and Director, and by all
Officers and Directors as a group. No Officer or Director personally owns any of
the Company's Redeemable Common Stock Purchase Warrants.
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of Beneficial
Title of Class of Beneficial Owner Interest Percent of Class(4)
- ----------------------- ----------------------------------------- ----------------- -------------------
<S> <C> <C> <C>
$.01 par value Fred G. Luke
Common Stock 4695 MacArthur Court, Suite 530 1,710,000(1) 10.1 %
Newport Beach, CA 92660
NuVen Advisors, Inc.(2)
4695 MacArthur Court, Suite 530 2,021,725(3) 12.0 %
Newport Beach, CA 92660
All Officers and Directories as a group 3,731,725 22.1%
</TABLE>
(1) As of the date of this Report, 960,000 shares are held by Mr. Luke,
with 750,000 shares subject to stock options held.
(2) The Luke Family Trust (the "Luke Trust") owns 93% of NuVen Advisors,
formerly New World. Fred G. Luke, as Co- Trustee of the Luke Trust
determines the voting of such shares and, as a result, may be deemed to
control the Luke Trust.
(3) As of the date of this Report, 1,921,725 shares are held by NuVen, with
100,000 shares subject to stock options held.
(4) Number of shares deemed outstanding as of May 31, 1999 includes 950,000
of shares deemed outstanding for in the money or at market stock
options
[VEI\10KSB\53199.10K]-3
12
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions With Management and Affiliates.
As noted in Item 10(e), effective June 30, 1998, the employment
agreement with Mr. Fred Luke, President of the Company was terminated. The
services of Mr. Luke subsequent to June 30, 1998 were provided to the Company
under the Advisory and Management Agreement with NuVen Advisors, Inc. Effective
July 1, 1998, the Company amended its Advisory and Management Agreement with
NuVen Advisors, Inc. increasing the monthly fee from $5,000 per month to $10,000
per month. The amount due NuVen for services in fiscal 1999 was satisfied by the
issuance of additional shares of common stock.
(b) Certain Business Relationships.
There are no employees other than the executive officers disclosed
above who make, or are expected to make, significant contributions to the
business of the Company, the disclosure of which would be material.
(c) Indebtedness of Management.
None.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Financial Statements:
The Financial Statements are included elsewhere herein and are indexed
on Page F-1, "Index to Financial Statements."
(b) 8-K Reports:
During fiscal 1999, the Company filed Form 8-K's as follows:
1) On May 21, 1999 reporting the Asset Purchase Agreement and
Plan of Reorganization with MetroplexWeb, Inc. and that the
client-auditor relationship between Virtual Enterprises, Inc.
and Kang, Yu & Jun had ceased.
2) On July 6, 1999 reporting the appointment of the auditing firm
of McKennon, Wilson & Morgan LLP to serve as the independent
auditor for the Company for the 1999 fiscal year.
3) On July 8, 1999, a Form 8-K/A was filed to amend the Form 8-K
previously filed on May 21, 1999.
4) On July 20, 1999, a Form 8-K/A presenting the audited
financial statements of MetroplexWeb, Inc.
[VEI\10KSB\53199.10K]-3
13
<PAGE>
(c) Exhibits:
Exhibit
Number Description
------- -------------------------------------------------------------
3 Articles of Incorporation and Bylaws [incorporated herein by
reference to Exhibit 3.1 and 3.2 of Company's Registration
Statement on Form S-18 (No. 33-23430-D)].
4(a) Warrant Agreement and form of Warrant Certificate
[incorporated herein by reference to Exhibit 4.6 of Company's
Registration Statement on Form S-18 (No. 33-23430-D)].
4(b) Specimen Redeemable Common Stock Purchase Warrant
[incorporated herein by reference to Exhibit 4.2 of Company's
Registration Statement on Form S-18 (No. 33-23403-D)].
10(a) Advisory and Management Agreement with NuVen Advisors, Inc.
[incorporated herein by reference to Exhibit 10(d) to Form
10-KSB for fiscal year ended May 31, 1995]
10(b) Amended Advisory and Management Agreement with NuVen Advisors,
Inc. effective June 30, 1998
10(c) Asset Purchase Agreement and Plan of Reorganization between
Virtual Enterprises, Inc. and Metroplex Web, Inc., dated May
5, 1999.
16(a) Letter dated May 15, 1999 from the accounting firm of Kang, Yu
& Jun confirming that the client-auditor relationship between
Virtual Enterprises, Inc. and Kang, Yu & Jun has
ceased.[Incorporated by reference to Exhibit 16(a) to Form
8-K/A filed July 8, 1999].
23.(a) Consent of Independent Accountants
27 Financial Data Schedule [Exhibit included herein]
[VEI\10KSB\53199.10K]-3
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VIRTUAL ENTERPRISES, INC.
(formerly, The Toen Group, Inc.)
(Company)
Date: August 30, 1999 By: /s/ Fred G. Luke
----------------------------------
Fred G. Luke,
Chairman of the Board
and President
[VEI\10KSB\53199.10K]-3
15
<PAGE>
Exhibit 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-8 (File No. 333-68615)
of Virtual Enterprises, Inc. of our report dated August 19, 1999 appearing on
page F-2 of this Form 10-KSB
/s/ McKennon, Wilson & Morgan, LLP
- ---------------------------------------
McKennon, Wilson & Morgan, LLP
Irvine, California
August 25, 1999
[VEI\10KSB\53199.10K]-3
16
<PAGE>
EXHIBIT 10(b)
AMENDED ADVISORY AND MANAGEMENT AGREEMENT WITH NUVEN ADVISORS, INC.
EFFECTIVE JUNE 30, 1998
FIRST AMENDMENT TO
ADVISORY AGREEMENT
This First Amendment (the "Amendment") to the Advisory Agreement
effective February 1, 1995 (the "Advisory Agreement") is entered into by and
between NuVen Advisors Inc., a Nevada corporation ("NuVen") and Fred Gordon Luke
("Luke") in his individual capacity and as the sole officer, director and
shareholder of NuVen (collectively, Nuven and Luke shall be referred to herein
as "Advisor") and Virtual Enterprises, Inc. ("Virtual"), a Nevada corporation is
hereby amended effective to the date of the agreement between the parties which
was on or about July 1, 1998.
WHEREAS, pursuant to the Advisory Agreement, Advisor was to perform
certain Services (as defined in the Advisory Agreement) which was to
automatically terminate on January 31, 1998; provided, however, that failure of
the parties, or any one of them to serve notice of termination, the agreement
would continue on a month-to-month basis, and such agreement had been
automatically extended since January 31, 1998; and,
WHEREAS, Advisor provided the Services as required under the Advisory
Agreement to the satisfaction of the Company, as evidenced by the parties'
agreement on or about July 1998 to amend the agreement as set forth herein and
by the execution of this Amendment, to extend the term of the Advisory Agreement
and modify the Services and Compensation to Advisor, all in accordance to the
terms of this Amendment.
NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the Company and Advisor
mutually agree as follows:
1. Notwithstanding paragraph 3 of the Advisory Agreement, the Termination
Date of the Advisory Agreement shall be June 30, 2001.
2. Notwithstanding paragraph 3 of the Advisory Agreement, the parties
herein agree that, effective June 30, 1998, all outstanding obligations
of the Company to Advisor or Luke for Services performed were satisfied
by the issuance of shares of common stock of the Company.
3. Notwithstanding paragraph 4 of the Advisory Agreement, the parties
herein agree that the monthly compensation to Advisor is herein amended
to increase from $5,000 per month to $10,000 per month.
4. Notwithstanding paragraph 3 of the Advisory Agreement, the parties
agree that the Option granted by the Company to Advisor to purchase
shares of the Company's common stock at a purchase price of One Dollar
($1.00) per share, is hereby extended through the revised date of
Termination. And, further, it is agreed that Advisor may exercise its
right to purchase the Option Shares in the manner prescribed in the
Option for a period of 60 days subsequent to Termination of the
Advisory Agreement.
Except as modified by this Amendment or other written amendment, modification or
agreement signed by both the Company and Advisor, the terms and conditions of
the Advisory Agreement not modified herein shall remain in full force and effect
as stated therein.
[VEI\AGR:NUADVAM]-2
17
<PAGE>
A facsimile, telecopy or other reproduction of this instrument may be executed
by one or more parties hereto and such executed copy may be delivered by
facsimile or similar instantaneous electronic transmission device pursuant to
which the signature of or on behalf of such party can be seen, and such
execution and delivery shall be considered valid, binding and effective for all
purposes. At the request of any party hereto, all parties agree to execute an
original of this instrument as well as any facsimile, telecopy or other
reproduction hereof.
NuVen Advisors Inc.
By: /s/ Fred G. Luke
----------------------------------
Fred G. Luke,
individually and as President
of NuVen Advisors, Inc.
Virtual Enterprises, Inc.
a Nevada corporation,
By: /s/ Fred G. Luke
----------------------------------
Fred G. Luke
[VEI\AGR:NUADVAM]-2
18
<PAGE>
EXHIBIT 10(c)
ASSET PURCHASE AGREEMENT AND PLAN OF REORGANIZATION BETWEEN
VIRTUAL ENTERPRISES, INC. AND METROPLEX WEB, INC., DATED MAY 5, 1999
ASSET PURCHASE AGREEMENT
AND PLAN OF REORGANIZATION
This ASSET PURCHASE AGREEMENT AND PLAN OF REORGANIZATION (the
"Agreement") is made effective this 5th day of May, 1999, by and between Virtual
Enterprises Inc., a Nevada corporation ("Purchaser") and Metroplex Web Inc., a
Texas corporation ("Seller").
WHEREAS, Purchaser desires to acquire certain assets, property,
business interests and intellectual rights owned by Seller, as more fully
described in Exhibit "A" attached hereto and incorporated herein (collectively
referred to as the "Assets"), for securities consisting of Ten Million
(10,000,000) shares of its $.01 par value common stock (the "Purchaser's
Shares"), causing Seller to have voting control and become the principal
stockholder of Purchaser; and
WHEREAS, Purchaser and Seller desire to adopt this Agreement to
consummate the proposed transaction as a tax-free reorganization and merger in
accordance with the provisions of Section 368(a)(1)(C) of the Internal Revenue
Code (the "Code"), all in the manner in compliance with the Code and subject to
the terms and conditions as hereinafter set forth.
IN CONSIDERATION of the mutual promises contained herein, the benefits
to be derived by each party hereunder and other good and valuable consideration,
the receipt and sufficiency of which are hereby expressly acknowledged,
Purchaser and Seller agree as follows:
1. Sale of Assets
On the basis of the representations and warranties herein contained,
subject to the terms and conditions set forth herein, and for the
Purchaser's Shares (as defined herein), Purchaser agrees to issue and
deliver Purchaser's Shares to Seller and Seller agrees to sell,
transfer, assign, convey and deliver to Purchaser all of the assets of
Seller of every type and description, real, personal and mixed,
including, without limitation, those assets on Exhibit "A"; its
business as a going concern; its good will; the claimed exclusive right
to use the name "Metroplex Web", and any names so similar thereto as to
tend to cause confusion on the part of the public; trademarks, trade
names, trade secrets, plans, files, notebooks, and development
activities, production data, shop rights, customer lists and
information related to customers; real estate and interests therein
(including leaseholds and all other interests); machinery and equipment
(including all of Seller's right, title and interest under any
equipment leases and contracts for purchase of equipment); motor
vehicles; supplies; notes and accounts receivable; books and records;
work in process, finished products, and supplies; fixtures; contracts;
claims of every description, including those for refund; any
restrictive covenants and obligations of former officers and employees,
including, without limitation, all rights and interests provided by
invention agreements and assignments and other contracts with
employees; franchises; funds of whatever nature; past present, or
future, escrow, security, and other deposits, if any; and all other
property and rights of every kind and nature, tangible or intangible,
owned by Seller on the date of closing whether or not specifically
referred to in this Agreement.
[VEIAGR:METPLWEB.AGR]-4
19
<PAGE>
2. Purchaser's Shares
The consideration for the purchase of the Assets consists solely of
Purchaser's Shares, which shall be issued and deposited with
Escrowholder (as defined herein) on behalf of Seller within five (5)
business days of the date hereof in denominations of One Hundred
Thousand (100,000) shares. In the event Seller is unable to deliver all
of the Assets, the number of Purchaser's Shares shall be decreased
proportionally to the decrease in the composition and value of the
Assets.
To induce Purchaser to enter into the Agreement, and as additional
consideration for the issuance and delivery of Purchaser's Shares to
the Escrowholder as contemplated herein, Seller agrees, warrants and
covenants that, subsequent to the Closing, Seller, for itself and
behalf of any distributees, will not restrict, block or attempt to
restrain or block the sale, transfer or assignment of any shares of
common or preferred stock of Purchaser presently issued and outstanding
as of the date of this Agreement. Further, Seller agrees, and shall
cause its distributees to acknowledge and accept any distribution of
Purchaser's Shares subject to such covenant and agreement.
3. Assets Retained by Seller: Dissolution of Seller
Seller shall retain its franchise to be a Texas corporation, its stock
transfer books and records, the record books containing the minutes of
meetings of its directors and shareholders, and such other of its
records as have exclusively to do with its organization, existence, or
share capitalization.
Seller agrees to comply with all applicable rules, regulations and
requirements of Section 368 of the Code, including, if necessary,
Seller's dissolution and distribution of Purchaser's Shares to Seller's
equityholders within twelve (12) months of the Closing Date, to enable
Purchaser and Seller to meet, if possible, the standards and
requirements as a tax-free reorganization.
4. Effective Date and Closing
The closing of the transfer and exchange of the Assets for Purchaser's
Shares as contemplated by this Agreement (the "Closing") shall occur
upon the earlier of such date that the parties have satisfied their
respective obligations and covenants contained herein, or May 31, 1999,
but shall have an effective date as of the date set forth above. At the
Closing, Purchaser shall deliver Purchaser's Shares to Seller and
Seller shall deliver the Assets to Purchaser, along with any opinions,
certificates, exhibits, etc. and as stated in this Agreement and as
reasonably requested by the other party.
5. Escrowholder
Within ten (10) business days of execution of this Agreement by the
parties, Purchaser and Seller will agree upon an Escrow Agent
("Escrowholder") who will receive and distribute all necessary
documents and securities being exchanged under this Agreement and
facilitate the Closing. Purchaser, Seller and Escrowholder mutually
agree to execute escrow instructions to be mutually agreed and executed
by the parties within ten (10) business days following the date hereof.
20
<PAGE>
6. Representations and Warranties of Seller
Seller represents and warrants to Purchaser that it (i) it is duly
organized and has the authority under Texas law and the ability to
carry out this Agreement; (ii) it is properly capitalized and Seller's
Financial Statements (as defined herein) are true and correct; (iii) it
can continue to lawfully conduct its business; (iv) it has disclosed to
Purchaser any and all litigation threatened or filed against it, its
officers, directors and affiliates (as defined herein) during the last
five (5) years; (v) it has properly filed any and all necessary tax
returns and accounted for any and all paid taxes due and owing; (vi) it
has disclosed any and all contracts and is not aware of any material
breaches or defaults; (vii) it has identified all directors, officers
and affiliates for the last five (5) years; (viii) it has disclosed all
employee and labor matters; (ix) it has disclosed all real property and
all encumbrances; (x) it has disclosed all assets and liabilities,
intangible and tangible, actual and contingent including but not
limited to trademarks, leaseholds, subsidiaries and permits; (xi) it is
in compliance with all laws, environmental and occupational health and
safety matters; and, (xii) it has disclosed any and all conflict of
interest transactions. Further, Purchaser shall confirm that such
representations and warranties are true and correct at and as of the
date of closing, with the same force and effect as though made at and
as of date hereof, except for changes permitted or contemplated by this
Agreement, or waived in writing by the delivery of the Certificate of
Representations and Warranties in form and substance similar to Exhibit
"B" attached hereto and incorporated herein by reference ("Seller's
Certificate").
7. Representations and Warranties of Purchaser
Purchaser represents and warrants to Seller that (i) it is duly
organized and has the authority under Nevada law and the ability to
carry out this Agreement; (ii) it is properly capitalized and
Purchaser's Financial Statements (as defined herein) are true and
correct; (iii) it can continue to lawfully conduct its business; (iv)
it has disclosed to Seller any and all litigation threatened or filed
against it, its officers, directors and affiliates (as defined herein)
during the last five (5) years; (v) it has properly filed any and all
necessary tax returns and accounted for any and all paid taxes due and
owing; (vi) it has disclosed any and all contracts and is not aware of
any material breaches or defaults; (vii) it has identified all
directors, officers and affiliates for the last five (5) years; (viii)
it has disclosed all employee and labor matters; (ix) it has disclosed
all real property and all encumbrances; (x) it has disclosed all assets
and liabilities, intangible and tangible, actual and contingent
including but not limited to trademarks, leaseholds, subsidiaries and
permits; (xi) it is in compliance with all laws, environmental and
occupational health and safety matters; and, (xii) it has disclosed any
and all conflict of interest transactions. Seller shall confirm at
Closing such representations and warranties, as may be amended from
time to time prior to Closing, in a Certificate of Representations and
Warranties, more fully described in Exhibit "C" attached hereto and
incorporated herein by reference ("Purchaser's Certificate").
21
<PAGE>
8. Transactions and Document Exchange at Closing
At the Closing, the following transactions shall occur and documents
shall be exchanged, all of which shall be deemed to occur
simultaneously:
Purchaser will deliver, or cause to be delivered to Seller:
(i) The documents necessary to issue and deliver Purchaser's
Shares to Seller, or its designee(s) pursuant to this
Agreement, in proper form and substance acceptable to Seller;
(ii) Purchaser's Certificate;
(iii) Certificate of Good Standing dated at or within 30 days of the
date of Closing from the Secretary of State of Nevada;
(iv) Purchaser's Financials;
(v) The opinion of counsel for Purchaser as required herein; and
(vi) Such other documents, instruments, and/or certificates, if
any, as are required to be delivered pursuant to the
provisions of this Agreement, or which are reasonably
determined by the parties to be required to effectuate the
transactions contemplated in this Agreement, or as otherwise
may be reasonably requested by Seller in furtherance of the
intent of this Agreement.
Seller will deliver, or cause the following to be delivered to
Purchaser:
(i) Instruments acceptable to Purchaser conveying to Purchaser all
of Seller's assets and business, including but not limited to
those as identified in Exhibit "A" hereof;
(ii) The Seller's Certificate;
(iii) Seller Financials;
(iv) A Certificate of Good Standing dated at or within 30 days of
the date of the Closing from the Secretary of State of Texas;
(v) Such other documents, instruments, and/or certificates, if
any, as are required to be delivered pursuant to the
provisions of this Agreement, or which are reasonably
determined by the parties to be required to effectuate the
transactions contemplated in this Agreement, or as otherwise
may be reasonably requested by Purchaser in furtherance of the
intent of this Agreement.
22
<PAGE>
9. Conditions Precedent to Obligations of Seller
All obligations of Seller under this Agreement are subject to the
fulfillment, prior to or as of the Closing Date, of each of the
following conditions:
A. Representations and Warranties. Purchaser shall deliver to the
Escrowholder on the Closing Date Purchaser's Certificate, as
may be amended from time to time by mutual agreement between
Purchaser and Seller, confirming the representations and
warranties made herein by Purchaser.
B. No Breach or Default. Purchaser shall have performed and
complied with all covenants, agreements, and conditions
required by this Agreement to be performed or complied with by
it prior to or at the Closing.
C. Issuance and Delivery of Purchaser Shares. Purchaser shall
take all action necessary to effect the issuance and delivery
of Purchaser Shares to the Escrowholder prior to the Closing
Date.
10. Conditions Precedent to Obligations of Purchaser
All obligations of Purchaser under this Agreement are subject to the
fulfillment, prior to or as of the Closing Date, of each of the
following conditions:
A. Action to Transfer Assets. Seller shall have taken all
corporate and other action necessary to transfer to Purchaser
the Assets and all business rights of Seller, including those
acquired following the date hereof, free and clear of any and
all liens except as agreed between Seller and Purchaser in
writing.
B. Approval by Purchaser of Value of Assets. At least fifteen
(15) business days prior to the Closing Date dated not more
than ninety (90) days prior to such delivery date, Seller will
have delivered to Purchaser its financial statements
("Seller's Financials"). Seller further agrees to provide to
Purchaser income statements related to the operations of the
Assets and its business up to and including the Closing, and
any other documents necessary to substantiate the value of the
Assets at or greater than Three Million Dollars ($3,000,000),
hereinafter referred to as the "Net Asset Value". Upon receipt
and review of the Seller Financials, Purchaser shall have ten
(10) business days to raise objections to Seller's Financials,
or information contained in Seller's Financials, which shall
be accomplished by submission of a written list of such
objections to Seller. If there are objections, or if the value
as determined by the Seller's Financials and other materials
provided by Seller, is less than the Net Asset Value, then
Purchaser shall have the option to terminate this Agreement
without penalty. Alternatively, Purchaser may elect, in its
sole discretion, to proceed with Closing in reliance upon a
warranty of title, guarantee of value, or other mutually
acceptable form of assurance to be made by Seller.
23
<PAGE>
C. Approval of Other Instruments and Documents by Purchaser. All
instruments and documents delivered to Purchaser pursuant to
the provisions of this Agreement shall be satisfactory to
Purchaser and its legal counsel. Seller shall provide to
Purchaser prior to Closing evidence satisfactory to Purchaser
that the representations of Seller herein as to the status of
the Agreement, and the Assets are legally created, binding and
duly enforceable.
D. Opinions, Affidavits and Declarations by Seller. Seller shall
have delivered to Purchaser evidence satisfactory to
Purchaser, and its counsel and auditors, dated as at the
Closing Date, verifying that:
(i) Seller is duly organized, validly existing, and in
good standing under the laws of the State of Texas,
and that Seller is not aware of any notice of
termination of its charter or cause for termination;
(ii) Seller has the power to carry on its business as now
being conducted and is duly qualified to do business
in Texas and in any other jurisdiction where required
or where the non-qualification to do business would
have a material adverse affect on the
transferability, marketability, operation or value of
the Assets.
(iii) All action and approvals required in connection to
the creation and transfer of the Assets to Purchaser
have been properly taken, completed or obtained by
Seller, to the extent, if any, that they are
necessary.
(iv) No suit, action, investigation, inquiry, or other
proceeding by any governmental authority or other
person or legal or administrative proceeding shall be
pending or threatened which questions the validity or
legality of the transactions contemplated herein or
which could reasonably be expected materially and
adversely to affect the ability of Seller to complete
the transaction, or which could reasonably be
expected to result in any material liability of
Seller or the impairment of the value of the Assets.
(vi) This Agreement has been duly authorized, executed,
and delivered by Seller and is a valid and binding
obligation of Seller.
(vii) Seller shall use its best efforts to fulfill all
conditions of the Closing including the timely
solicitation of affirmative consent of all third
parties necessary to effect a Closing under this
Agreement.
E. Agreements with Key Personnel. Prior to Closing Purchaser
shall have concluded to its satisfaction employment or
consulting agreements with all key personnel of Seller whom
Purchaser, in its sole discretion, deems necessary to employ
or retain in some capacity to continue the business comprising
the Assets after the Closing Date.
24
<PAGE>
11. Availability of Information
Seller and Purchaser represent that, by virtue of their respective
business activities and economic bargaining power or otherwise, they
have been able to conduct their own due diligence and have had access
to or have been furnished with, prior to or concurrently with the
execution hereof, the information which they consider to be adequate to
make a decision to exchange the Assets for Purchaser's Shares.
12. Review Period
From the date of execution of this Agreement until the Closing Date, or
termination of the Agreement, as provided for herein, Purchaser and
Seller will permit the other's officers, employees, and authorized
representatives to have immediate and full access to the offices,
properties, books, and records of the other, relevant to the
transaction contemplated by this Agreement, and will cooperate with the
other in order to provide and prepare the documents and other materials
necessary to the transaction. Upon discovery of matters in due
diligence or receipt of documents from the other party to this
transaction, each party shall have ten (10) business days in which to
raise objections. Subject to paragraphs 5 and 18 hereof, if an
objection is raised and not resolved to the objecting party's
satisfaction, such approval to not be unreasonably withheld, the other
party shall be entitled to terminate without penalty.
13. Securities Registration
A. Exempt Securities. Seller understands that the Purchaser
Shares issued and transferred pursuant to this Agreement, have
not been or will not be registered under the Securities Act of
1933 (the "Act") but are issued pursuant to exemptions from
registration including but not limited to Regulation D and
Regulation S and Section 4(2) of the Act, and Seller's
reliance on such exemptions in the issuance of the Purchaser
Shares is predicated in part on the representations of Seller
set forth herein and in the Investment Letter in form and
substance satisfactory to Purchaser (the "Investment Letter")
to be executed and delivered to Purchaser at Closing.
B. Sophisticated Investor. Seller represents that it has such
knowledge and experience in financial and business matters and
that it is capable of evaluating the merits and risk of this
transaction, and that it is able to bear the economic risk of
the investment in the shares of Purchaser Shares.
C. Disclosure Documents. Seller has been furnished with a copy of
the Purchaser's Financials which include Purchaser's most
recent Annual Report on Form 10-K and all reports or documents
required to be filed under Sections 13(a), 14(a), and 15(d) of
the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), including but not limited to quarterly
reports on Form 10-Q, current reports on Form 8-K, and proxy
statements. In addition, Seller has been furnished with a
description of Purchaser's capital structure and any material
changes in Purchaser's financial condition that may not have
been disclosed in the Purchaser's Financials on any prior
Exchange Act filings.
25
<PAGE>
D. Seller's Experience. Seller has had the opportunity to ask
questions and receive answers concerning Purchaser and to
obtain any additional information which Purchaser possesses or
can acquire without unreasonable effort or expense necessary
to verify the accuracy of information furnished pursuant to
this Agreement. By reason of Seller's knowledge and experience
in financial and business matters in general, and investments
in particular, Seller represents that it is capable of
evaluating the merits and risks of this transaction and in
bearing the economic risks of an investment in Purchaser's
Shares, and Purchaser in general, and fully understands the
speculative nature of the specific restrictions on resale of
such securities, and the possibility of a total loss in the
value thereof.
E. Restricted Securities. Seller is fully aware that Purchaser's
Shares issued to Seller prior to the filing of a registration
statement will be "Restricted Securities" as defined by Rule
144 of the Securities Act. Seller is further aware of the
specific restrictions on resale of such securities contained
in Rule 144, and that any and all certificates representing
Purchaser's Shares issued and any and all securities issued in
replacement thereof or in exchange therefore, prior to the
filing of a registration statement, shall bear the following
legend:
"The shares represented by this certificate have not
been registered under the Securities Act of 1933 (the
"Act") and are "restricted securities" as that term
is defined in Rule 144 under the Act. The shares may
not be offered for sale, sold, or otherwise
transferred except pursuant to an effective
Registration Statement under the Act or pursuant to
an exemption from registration under the Act, the
availability of which is to be established to the
satisfaction of the Company."
F. Registration Compliance. Seller will not sell, transfer or
otherwise dispose of any of Purchaser's Shares issued or
reserved for issuance hereunder prior to registration except
in compliance with the Securities Act.
14. Contracts to Remain in Full Force and Effect Subsequent to Closing
Except as disclosed pursuant to this Agreement, there are no contracts,
actual or contingent obligations, agreements, franchises, license
agreements, or other commitments between Purchaser and other third
parties which are material to the business, financial condition, or
results of operation of Purchaser, taken as a whole. For purposes of
the preceding sentence, the term "material" refers to any obligation or
liability which by its terms calls for aggregate payments of more than
$10,000; provided, however, that the following material contracts will
be valid and binding obligations of Purchaser with third parties as of
the Closing Date and will survive the Closing:
A. Employment Agreement, as amended, with Fred G. Luke dated 1st
day of August 1999, attached hereto as Exhibit "D"
B. Advisory and Management Agreement with NuVen Advisors dated
1st day of February 1995, as amended, attached hereto as
Exhibit "E"
C. Warrant Agreement and Form of Certificated attached hereto as
Exhibit "F"
D. Consulting Agreement dated June 1, 1997 attached hereto as
Exhibit "G"
26
<PAGE>
E. Option Agreement as part of Consulting Agreement dated 24th
day of April 1996 attached hereto as Exhibit "H"
15. Stockholder Approval
At or before Closing, Purchaser and Seller shall each cause this
Agreement to be approved by the requisite shareholder vote, if and as
required under their respective charters.
16. Covenants Not to Compete
Seller, together with its directors and officers, employees and
entities owned ten percent (10%) or more, directly or indirectly, by
such directors, officers and employees (collectively "Seller's
Affiliates") agree, as follows, that:
A. Seller's Affiliates Shall not Compete. During the
Non-Competition period (as herein defined), other than with
Purchaser's written consent, neither Seller nor Seller's
Affiliates will (i) directly or indirectly own, manage,
control, participate in, lend their names to, act as
consultants or advisors to, or render services to (alone or in
association with any other persons, firm, corporation or other
business organization) any person or entity engaged anywhere
within the continental United States, in any business similar
to or related in any way to the business presently conducted
by Seller utilizing the Assets and that when Purchaser intends
to continue, following the Closing of the transaction
contemplated hereby, (ii) have any interest directly or
indirectly in any business engaged in any business similar to
or related in any way to the business (provided that nothing
herein will prevent Seller's Affiliates from owning in the
aggregate not more than five percent (5%) of the outstanding
stock of any class of a corporation engaged in the business
which is publicly traded, so long as Seller's Affiliates have
not participated in the management or conduct of business of
such corporation), (iii) induce or attempt to induce any other
employee of Seller to leave the employ of Purchaser, or in any
way interfere with the relationship between Purchaser and any
other employee of Purchaser, or (iv) induce or attempt to
induce any customer, supplier, franchisee, licensee, or other
business relation of Purchaser or any affiliate of Purchaser
to cease doing business with Purchaser or any affiliate of
Purchaser, or in any way interfere with the relationship
between any customer, franchisee or other business relation
and Purchaser or any affiliate of Purchaser, without the prior
written consent of Purchaser's Board of Directors. For
purposes of this Agreement, "Non-Competition Period" shall
mean the period commencing as of the Closing Date and ending
on the second anniversary of such Closing Date.
B. Term of Covenant. If, at the time of enforcement of any
provision herein, a court of competent jurisdiction holds that
the restrictions stated herein are unreasonable under
circumstances then existing, the parties hereto agree that the
maximum period or scope reasonable under such circumstances
will be substituted for the stated period or scope.
C. Survival of Covenant. Purchaser and Seller agree that the
covenants made herein shall be construed as an agreement
independent of any other provision of this Agreement, and
shall survive the termination of this Agreement for a period
of two (2) years.
27
<PAGE>
D. Soliciting Customers After Termination of Agreement. Neither
Seller nor Seller's Affiliates shall for a period of two (2)
years immediately following the termination of their
engagement with or employment by Purchaser, either directly or
indirectly:
(i) make known to any person, firm or corporation the
names or addresses of any of the customers of
Purchaser or any other information pertaining to
them; or,
(ii) call, solicit, or take away, attempt to call on,
solicit, or take away any of the customers of
Purchaser on whom Seller or Seller's Affiliates
called on or became acquainted with during its
engagement with Purchaser, either for themselves or
for any other person, firm or corporation.
17. Additional Covenants
Between the date hereof and the Closing Date, or termination hereof,
except with the prior written consent of the other party:
A. Conduct of Business. The business of Seller and the operation
of the Assets shall be conducted only in the usual and
ordinary course and the character of such business shall not
be changed nor any different business be undertaken.
B. No Change in Organization or Capital of Purchaser. Purchaser
shall not change its Articles of Incorporation or Bylaws, or
its authorized or issued shares except as contemplated herein.
C. No Special Settlements. Neither Seller nor Purchaser shall
discharge or satisfy any lien, encumbrance , obligation or
liability, other than current liabilities shown on their
respective financial statements heretofore delivered and
current liabilities incurred since that date, in the ordinary
course of their respective businesses nor shall they mortgage,
pledge or subject to lien or encumbrance any assets, tangible
or intangible, not in the ordinary course of business.
D. No Distribution. Neither Purchaser nor Seller shall make any
payment or distribution to their respective stockholders or
purchase for cash or redeem any shares of their capital stock.
E. Best Efforts. Purchaser agrees to use its best efforts and, at
its sole discretion and expense, following the Closing Date,
using those assets, rights and relationships acquired
hereunder to further the business activities presently
comprising the Assets; provided, however, that Purchaser may,
in its sole discretion, elect to limit or to cease to conduct
such activities if in Purchaser's opinion the economics of the
business activities acquired hereunder following the Closing
Date do not justify continuing such business. Seller
acknowledges that it will have no control or influence over
the Assets or Purchaser's use of the Assets following the
Closing Date.
28
<PAGE>
18. Termination
Purchaser and Seller may terminate this Agreement prior to the
expiration of the Closing Date upon mutual consent. Failing to have
mutual consent, without prejudice to any other remedy to which the
terminating party may be entitled, if any, either party may terminate
this Agreement upon three (3) days written notice on the occurrence of
any one of the following events:
A. By Seller
(i) If Purchaser breaches this Agreement or fails to
provide information required hereunder; or
(ii) If Purchaser has a receiver appointed for its assets
or property, or otherwise becomes insolvent or unable
to timely satisfy its obligations in the ordinary
course of business; or
(iii) If Purchaser institutes, makes a general assignment
for the benefit of creditors, has instituted against
it any bankruptcy proceeding for reorganization for
rearrangement of its financial affairs, files a
petition in a court of bankruptcy, or is adjudicated
a bankrupt; or
(iv) If any of the disclosures made herein or subsequent
hereto by Purchaser to Seller are determined to be
materially false or misleading.
B. By Purchaser
(i) If during the term of this Agreement, Purchaser
determines as a result of its due diligence, that
Seller is unable to deliver the Assets and business
interests as contemplated by this Agreement; or
(ii) If Seller willfully breaches or neglects the duties
required to be performed hereunder; or
(iii) If Seller has a receiver appointed for its assets or
property, or otherwise becomes insolvent or is unable
to timely satisfy its obligations in the ordinary
course of business, institutes, makes a general
assignment for the benefit of creditors, has
instituted against it any bankruptcy proceeding for
reorganization for rearrangement of its financial
affairs, files a petition in a court of bankruptcy,
or is adjudicated a bankrupt; or
(iv) If any of the disclosures made herein or subsequent
hereto by Seller to Purchaser are determined by
Purchaser to be materially false or misleading.
19. Miscellaneous
A. Authority. The officers of Purchaser and Seller executing this
Agreement are duly authorized to do so and each party has
taken all action required by law or otherwise to properly and
legally execute this Agreement.
29
<PAGE>
B. Notices. Any notice under this Agreement shall be deemed to
have been sufficiently given if sent by registered or
certified mail, postage prepaid, addressed as follows:
To Seller: Metroplex Web Inc.
14215 Proton Road
Dallas, Texas 75244
Telephone: (888) 638-7693
Facsimile: (972) 503-8960
To Purchaser: Virtual Enterprises Inc.
4001 S. Decatur, Suite 37, Box 130
Las Vegas, Nevada 89103-5800
With copy to: NuVen Advisors Inc.
6337 So. Highland Drive, #319
Salt Lake City, Utah 84121
Telephone: (801) 277-8755
Facsimile: (801) 277-8755
or to any other address which may hereafter be designated by
either party by notice given in such manner. All notices shall
be deemed to have been given as of the date of receipt.
C. Entire Agreement. This Agreement sets forth the entire
understanding between the parties hereto and no other prior
written or oral statement or agreement shall be recognized or
enforced.
D. Severability. If a court of competent jurisdiction determines
that any clause or provision of this Agreement is invalid,
illegal or unenforceable, the other clauses and provisions of
the Agreement shall remain in full force and effect and the
clauses and provision which are determined to be void, illegal
or unenforceable shall be limited so that they shall remain in
effect to the extent permissible by law.
E. Assignment. Neither party may assign this Agreement without
the express written consent of the other party and any
approved assignment shall be binding on and inure to the
benefit of such successor or, in the event of death or
incapacity, on assignor's heirs, executors, administrators and
successors.
F. Applicable Law. Notwithstanding that this Agreement was
negotiated and is being contracted for in Utah, it shall be
governed by the laws of Nevada, notwithstanding any
conflict-of-law provision to the contrary.
G. Attorneys' Fees. If any legal action or other preceding (not
including arbitration) is brought for the enforcement of or to
declare any right or obligation under this Agreement or as a
result of a breach, default or misrepresentation in connection
with any of the provisions of this Agreement, or otherwise
because of a dispute among the parties hereto, the prevailing
party will be entitled to recover actual attorney's fees
(including for appeals and collection) and other expenses
incurred in such action or proceeding, in addition to any
other relief to which such party may be entitled.
30
<PAGE>
H. No Third Party Beneficiary. Nothing in this Agreement,
expressed or implied, is intended to confer upon any entity or
person, other than the parties hereto and their successors,
any rights or remedies under or by reason of this Agreement,
unless this Agreement specifically states such intent.
I. Facsimile Counterparts. A facsimile, telecopy or other
reproduction of this Agreement may be executed by one or more
parties hereto and such executed copy may be delivered by
facsimile or similar instantaneous electronic transmission
device pursuant to which the signature of or on behalf of such
party can be seen, and such execution and delivery shall be
considered valid, binding and effective for all purposes. At
the request of any party hereto, all parties agree to execute
an original of this Agreement as well as any facsimile,
telecopy or other reproduction hereof.
J. Further Assurances. At any time, and from time to time after
the Closing, each party will execute such additional
instruments and take such action as may be reasonably
requested by the other party to confirm or perfect title to
the Assets and Purchaser's Shares to be transferred hereunder,
or otherwise to carry out the intent and purposes of this
Agreement.
K. Broker's or Finder's Fee: Expenses. Seller and Purchaser
warrant that neither party has incurred any liability,
contingent or otherwise, for brokers' or finders' fees or
commissions relating to this Agreement for which the other
party shall have responsibility. Except as otherwise provided
herein, all fees, costs and expenses incurred by either party
relating to this Agreement shall be paid by the party
incurring same.
L. Confidentiality. Except as may be required by Purchaser under
applicable Federal or State securities rules and regulations,
neither party shall disclose the contents of this Agreement to
any person or entity, including, but not limited to the public
or the media; provided, however: (i) that Seller may make such
disclosures of this Agreement to persons whose third party
consents are necessary for purposes of closing this
transaction, and (ii) that the Purchaser may make such
disclosures of this Agreement to any federal, state or local
agency which Purchaser, in its sole discretion, deems
necessary to know of any or all of the terms of this Agreement
and to any persons whose third party consents are necessary
for purposes of closing this transaction.
M. Amendment or Waiver. Every right and remedy provided herein
shall be cumulative with every other right and remedy, whether
conferred herein, at law, or in equity, and may be enforced
concurrently herewith, and no waiver by any party of the
performance of any obligation by the other shall be construed
as a waiver of the same or any other default then,
theretofore, or thereafter occurring or existing. At any time
prior to Closing, this Agreement may be amended by a writing
signed by all parties hereto.
31
<PAGE>
N. Headings. The section and subsection headings in this
Agreement are inserted for convenience only and shall not
affect in any way the meaning or interpretation of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed the day and year first above written.
"Seller"
Metroplex Web Inc., a Texas corporation
By: /s/ Mark Lindberg
----------------------------------
Name: Mark Lindberg
Title: CEO
"Purchaser"
Virtual Enterprises Inc.,
a Nevada corporation
By: /s/ Fred G. Luke
----------------------------------
Name: Fred G. Luke
Title: President
32
<PAGE>
VIRTUAL ENTERPRISES, INC.
Index to Consolidated Financial Statements
Description Page
Independent Auditors' Report ..............................................F-2
Consolidated Balance Sheet as of May 31, 1999..............................F-3
Consolidated Statements of Operations for the years ended May 31, 1999
and 1998 .................................................................F-4
Consolidated Statements of Stockholders' Equity for the years ended
May 31, 1999 and 1998 ....................................................F-5
Consolidated Statements of Cash Flows for the years ended May 31, 1999
and 1998 .................................................................F-6
Notes to Consolidated Financial Statements.................................F-7
[VEI\FIN:53199FS]-7a
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors VIRTUAL ENTERPRISES, INC.
We have audited the accompanying consolidated balance sheet of Virtual
Enterprises, Inc. (the "Company") as of May 31, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the two-year period ended May 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of May 31, 1999, and the consolidated results of its operations and
its cash flows for each of the years in the two-year period ended May 31, 1999,
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has sustained losses from
operations since its inception. The Company requires substantial financing to
meet its obligations as they become due. These factors raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ McKennon, Wilson & Morgan LLP
---------------------------------------
McKennon, Wilson & Morgan LLP
Irvine, California
August 19, 1999
[VEI\FIN:53199FS]-7a
F-2
<PAGE>
<TABLE>
<CAPTION>
VIRTUAL ENTERPRISES, INC.
Consolidated Balance Sheet
May 31, 1999
<S> <C>
ASSETS
Current assets $ -
Property and equipment, net of accumulated
depreciation of $106,574 230,474
Goodwill, net of accumulated amortization
of $115,519 766,623
Client lists, net of accumulated amortization
of $46,383 206,617
Deposits 9,692
Total assets $ 1,213,406
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and bank overdraft $ 65,433
Accrued compensation to officers 28,000
Accrued consulting fees 158,000
Other accrued liabilities 65,576
Deferred revenue 69,605
------------------
Total current liabilities 386,614
Notes payable to officers 287,133
Total liabilities 673,747
Commitments and contingencies (Note 5)
Stockholders' equity:
Common stock, par value $0.01; 50,000,000 shares
authorized, 15,919,372 shares issued and outstanding 159,194
Additional paid in capital
Accumulated deficit 2,486,345
(2,105,880)
Total stockholders' equity 539,659
Total liabilities and stockholders' equity $ 1,213,406
==================
</TABLE>
See accompanying notes to consolidated financial statements.
[VEI\FIN:53199FS]-7a
F-3
<PAGE>
<TABLE>
<CAPTION>
VIRTUAL ENTERPRISES, INC.
Consolidated Statements of Operations
For The Years Ended May 31, 1999 and 1998
1999 1998
--------------------- ---------------------
<S> <C> <C>
Net revenues $ 382,798 $ 247,421
-------------------- --------------------
Expenses:
Salaries and wages 181,065 258,470
Consulting fees and commissions 691,866 185,512
Common stock issued to employees for
services rendered 235,805 -
Other operating expenses 731,787 289,812
--------------------- ---------------------
Total expenses 1,840,523 733,794
--------------------- ---------------------
Operating loss (1,457,725) (486,373)
Interest expense 118,986 15,571
Other income (862) -
--------------------- ---------------------
Loss before income taxes (1,575,849) (501,944)
Income taxes - -
--------------------- ---------------------
Net loss $ (1,575,849) $ (501,944)
===================== ======================
Basic and diluted earnings per share $ (1.07) $ (2.15)
===================== ======================
</TABLE>
See accompanying notes to consolidated financial statements.
[VEI\FIN:53199FS]-7a
F-4
<PAGE>
<TABLE>
<CAPTION>
VIRTUAL ENTERPRISES, INC.
Consolidated Statements of Stockholders' Equity
For The Years Ended May 31, 1999 and 1998
Common Stock Additional
Paid-In Accumulated
Capital Deficit Total
Shares Amount
--------------- ------------- -------------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Balances, May 31, 1997 5,962 $ 60 $ 440 $ (28,087) $ (27,587)
Shares deemed issued for
equity participation interests of
Metroplex 503,336 5,033 298,061 - 303,094
Net loss for year - - - (501,944) (501,944)
--------------- ------------- -------------------- ----------------- ---------------
Balances, May 31, 1998 509,298 5,093 298,501 (530,031) (226,437)
Shares issued for acquisition of
InteleSell 1,049 10 135,132 - 135,142
Conversion of Metroplex note
payable to InteleSell 7,154,989 71,550 1,209,450 - 1,281,000
Shares issued for services
rendered to Metroplex 1,406,000 14,060 221,745 - 235,805
Shares deemed issued in
satisfaction of preferred
stock of Metroplex 332,000 3,320 327,385 - 330,705
Shares deemed issued for
equity participation interests
of Metroplex 596,664 5,967 353,326 - 359,293
Shares retained by VTUE
shareholders in
recapitalization 5,919,372 59,194 (59,194) - -
Net loss for year - - - (1,575,849) (1,575,849)
--------------- ------------- -------------------- ----------------- ---------------
Balances, May 31, 1999 15,919,372 $ 159,194 $ 2,486,345 $ (2,105,880) $ 539,659
=============== ============= ==================== ================= ===============
</TABLE>
See accompanying notes to consolidated financial statements.
[VEI\FIN:53199FS]-7a
F-5
<PAGE>
<TABLE>
<CAPTION>
VIRTUAL ENTERPRISES, INC.
Consolidated Statement of Cash Flows
For The Years Ended May 31, 1999 and 1998
1999 1998
--------------------- ----------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,575,849) $ (501,944)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 90,273 13,387
Amortization 161,902 -
Issuance of common stock for services rendered by employees 235,805 -
Issuance of common stock for interest 81,000 -
Change in operating assets and liabilities:
Increase in accounts payable 13,014 52,419
Increase in accrued compensation to officers 28,000 -
Increase in accrued consulting fees 158,000 -
Increase in other accrued liabilities 53,662 8,782
Increase in deferred revenue 37,271 32,334
--------------------- ----------------------
Net cash used in operating activities (716,922) (395,022)
--------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (60,288) (57,322)
--------------------- ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of notes payable to officers 82,412 149,250
Issuance of common stock for preferred stock of Metroplex 330,705 -
Issuance of common stock for equity participation interests of 364,093 303,094
--------------------- ----------------------
Metroplex
Net cash provided by financing activities 777,210 452,344
--------------------- ----------------------
Net increase in cash $ - $ -
===================== ======================
Cash paid for:
Interest $ 18,849 $ 9,184
===================== ======================
NON CASH FINANCING ACTIVITIES
Common stock issued for assets of InteleSell $ 135,142 $ -
Note payable issued for acquisition of InteleSell $ 1,200,000 $ -
Conversion of Metroplex note payable to InteleSell, plus accrued
interest into common stock $ 1,281,000 $ -
</TABLE>
See accompanying notes to consolidated financial statements.
[VEI\FIN:53199FS]-7a
F-6
<PAGE>
VIRTUAL ENTERPRISES, INC.
Notes to Consolidated Financial Statements
Note 1 - Organization and History
Virtual Enterprises, Inc. ("VTUE") was formed in June, 1989 as a Colorado
corporation under the name The Toen Group, Inc. VTUE was primarily engaged in
the acquisition, maintenance and operation of television stations in various
states through 1992. From 1992 through May 5, 1999, VTUE had no operations.
Effective October 8, 1996, VTUE's Articles of Incorporation were amended to
change the name from The Toen Group, Inc. to Virtual Enterprises, Inc.
In September 1994, VTUE's shareholders voted to effect a 1 for 1000 reverse
split of its issued and outstanding common stock. The split was implemented
through a merger with a newly formed Nevada corporation and included the change
from no par value common stock to $.01 par value common stock. In connection
with the merger and reverse split, VTUE's authorized number of shares was
reduced from 785,000,000 to 50,000,000.
On May 5, 1999, VTUE acquired the assets and assumed certain liabilities of
MetroplexWeb, Inc. ("Metroplex") for 10,000,000 shares of common stock, valued
at $3,000,000. Metroplex, a Texas corporation was formed on September 12, 1996.
Metroplex is engaged primarily in the development, design, hosting and support
of Internet web pages. Metroplex also creates, designs and administers Internet
malls, where users can search for products and services in their geographical
area known as "virtual cities." Metroplex's operations are primarily located in
Dallas/Forth Worth, Texas and are expanding into other metropolitan cities. The
acquisition of Metroplex is accounted for as a reverse merger as if Metroplex
was recapitalized by VTUE.
On June 30, 1998, Metroplex entered into an asset purchase agreement with
InteleSell, Inc. ("InteleSell"). In connection therewith, Metroplex issued
common stock and notes aggregating $1,335,142 to acquire these assets. The
acquisition was accounted for as a purchase. InteleSell develops, designs and
hosts Internet web pages. See Note 3 for further discussion of this acquisition.
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements at May 31, 1999, include the
accounts of VTUE, Metroplex and InteleSell (collectively, the "Company"). All
intercompany accounts have been eliminated in consolidation.
The accompanying consolidated financial statements reflect the historical
operations of Metroplex for all periods presented. The accompanying consolidated
financial statements include the operations of InteleSell beginning July 1,
1998. The accompanying consolidated financial statements include the operations
of VTUE from May 5, 1999.
Liquidity
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. Since inception, the Company
has generated cash flows from financing activities to fund losses from
operations. The Company, through VTUE, expects to raise equity and/or debt
financing through a private placement of securities. The Company expects to use
the financing to fund losses from operations for the foreseeable future. Losses
from operations are expected to increase due to management's belief that
expanded marketing and sales efforts is required to significantly increase the
Company's revenues. There are no assurances that VTUE will be successful in
obtaining additional funding on terms satisfactory to the Company. These factors
[VEI\FIN:53199FS]-7a
F-7
<PAGE>
VIRTUAL ENTERPRISES, INC.
Notes to Consolidated Financial Statements (Continued)
raise substantial doubt about its ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Property and Equipment
Property and equipment are depreciated over their estimated useful lives using
the straight-line method ranging from three to five years. Additions and
betterments are capitalized. The cost of maintenance and repairs is charged to
expense as incurred. When depreciable property is retired or otherwise disposed
of, the related cost and accumulated depreciation and amortization are removed
from the accounts and any gain or loss is reflected in the consolidated
statements of operations.
The Company periodically reviews the value of its property and equipment for
impairment whenever events or changes in circumstances indicate that the book
value of an asset may not be recoverable. An impairment loss would be recognized
whenever the review demonstrates that the future undiscounted net cash flows
expected to be generated by an asset from its use and eventual disposition are
less than the carrying amount of the asset. Management believes no permanent
impairment has occurred.
Property and equipment are stated at cost, net of accumulated depreciation, and
are comprised of the following at May 31, 1999:
Property and equipment $ 297,007
Furniture and fixtures 37,694
Leasehold improvements 2,847
-----------------
337,048
Less accumulated depreciation (106,574)
$ 230,474
Intangible Assets
Customer lists represent the value of customers acquired from InteleSell on June
30, 1998. The Company assigned the value based on comparable acquisitions of
customer lists in the Company's industry. Management assigned a value of $1,000
per customer acquired, or $253,000. The Company amortizes these costs over its
expected benefit period from the customer. In management's opinion, the expected
benefit period of it's customers acquired is approximately five (5) years, and
accordingly, customer lists are amortized over five (5) years using the straight
line basis. In the event circumstances affecting customer retention change,
management will adjust the period to be benefitted prospectively. During the
year ended May 31, 1999, amortization of customer lists amounted to $46,383.
Goodwill represents the excess of purchase price over the fair value of the net
assets of acquired businesses. Goodwill is stated at cost and is amortized on a
straight-line basis over seven (7) years. The Company assesses the
recoverability of this intangible asset quarterly, by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through projected undiscounted cash flows. The amount of goodwill impairment, if
any, is measured based on projected undiscounted cash flows and is charged to
operations in the period in which goodwill impairment is determined by
management. To date, management has not identified any impairment of goodwill.
During the year ended May 31, 1999, amortization of goodwill amounted to
$115,519.
[VEI\FIN:53199FS]-7a
F-8
<PAGE>
VIRTUAL ENTERPRISES, INC.
Notes to Consolidated Financial Statements (Continued)
Revenue Recognition / Deferred Revenue
Revenue is recognized when earned. The Company's revenue recognition policies
are in compliance with American Institute of Certified Public Accountants,
Statements of Position 97-2 and 98-4, "Software Revenue Recognition". Revenue
from web site development is recorded when the web site is completed and
operational. Web site hosting revenue is recognized ratably over the contract
period. Provisions for losses are recorded for bad debts for credit customers.
The Company generally enters into contracts to host customer web sites for one
year or more. At May 31, 1999 and 1998, the Company deferred $69,605 and
$32,335, respectively of such revenue.
Research and Development
Research and development costs are expensed as incurred. Statement of Financial
Accounting Standards ("SFAS") 86, "Accounting for the Costs of Computer Software
to Be Sold, Leased, or Otherwise Marketed", does not materially affect the
Company.
Advertising Costs
The Company expenses the costs of advertising as incurred.
Provision for Income Taxes
The Company accounts for its income taxes under an asset and liability method
whereby deferred tax assets and liabilities are determined based on temporary
differences between bases used for financial reporting and income tax reporting
purposes. Income taxes are provided based on the enacted tax rates in effect at
the time such temporary differences are expected to reverse. A valuation
allowance is provided for certain deferred tax assets if it is more likely than
not that the Company will not realize tax assets through future operations.
The Company's net deferred tax assets of approximately $441,000 at May 31, 1999,
consist of net operating loss carryforwards amounting to approximately
$1,193,000 for federal income tax reporting purposes, as well as cwertain state
net operating loss carryforwards. At May 31, 1999, the Company provided a
valuation allowance for deferred tax asset totaling $441,000. During the years
ended May 31, 1999 and 1998, the Company's valuation allowance increased
$117,000 and 54,000, respectively.
Loss Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share" ("EPS"). SFAS No. 128 requires dual presentation
of basic EPS and diluted EPS on the face of all income statements issued after
December 15, 1997 for all entities with complex capital structures. Basic EPS is
computed as net income divided by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur from common shares issuable through stock options, warrants and
other convertible securities. The effect of stock options and warrants granted
but not exercised has been excluded in the accompanying consolidated statements
of operations as the effect would have been antidilutive. See Note 6 for
discussion of these stock options and warrants which are antidilutive.
[VEI\FIN:53199FS]-7a
F-9
<PAGE>
VIRTUAL ENTERPRISES, INC.
Notes to Consolidated Financial Statements (Continued)
Estimates
The preparation of consolidated 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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Financial Instruments
At May 31, 1999, the Company has no assets considered financial instruments.
Financial liabilities with carrying values approximating fair value include
accounts payable and accrued liabilities. Notes payable to related parties have
no readily ascertainable fair value since there exists no market for such
instruments.
Reporting Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
This statement establishes standards for reporting the components of
comprehensive income and requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
included in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income includes net income, as well as
certain non-shareholder items that are reported directly within a separate
component of stockholders' equity and bypass net income. The Company had adopted
the provisions of this statement during the current fiscal year, with no impact
on the accompanying consolidated financial statements.
Disclosures about Segments of an Enterprise and Related Information
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" in fiscal year 1999. SFAS No. 131 establishes standards
for reporting information about operating segments and related disclosures about
products, geographic information and major customers. The Company's operations
have been classified into two operating segments: (i) Web Site Development the
Company contracts the design, development and implementation of Internet sites
on the World Wide Web; and (ii) Web Site hosting - the Company provides web
hosting and support services.
The Company's operating segments are differentiated by service type. Summarized
financial information by operating segment is as follows:
1999 1998
------------------- --------------------
Net revenues:
Web Site Development $ 326,000 $ 218,000
Web Site Hosting 57,000 29,000
------------------- --------------------
$ 383,000 $ 247,000
=================== ====================
[VEI\FIN:53199FS]-7a
F-10
<PAGE>
VIRTUAL ENTERPRISES, INC.
Notes to Consolidated Financial Statements (Continued)
Stock-based Compensation
The FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which
defines a fair value based method of accounting for stock-based compensation.
However, SFAS 123 allows an entity to continue to measure compensation cost
related to stock and stock options issued to employees using the intrinsic
method of accounting prescribed by Accounting Principles Board Opinion No. 25
("APB 25"), "Accounting for Stock Issued to Employees". Entities electing to
remain with the accounting method of APB 25 must make pro forma disclosures of
net income and earnings per share, as if the fair value method of accounting
defined in SFAS 123 had been applied. Through May 31, 1999, the Company had no
employee stock options outstanding.
Note 3 - Acquisitions
As discussed in Note 1, on June 30, 1998, Metroplex entered into an asset
purchase agreement with InteleSell to acquire all of the assets owned by
InteleSell. In connection therewith, Metroplex issued 1,049 shares of it's
common stock valued at $135,142 and a note payable of $1,200,000. The $1,335,142
purchase price has been allocated approximately $200,000 to certain property and
equipment, and $253,000 to customer lists based on their estimated fair value.
Metroplex allocated the remaining purchase price of $882,142 to goodwill.
As discussed in Note 1, on May 5, 1999, VTUE acquired the assets of Metroplex
for 10,000,000 shares of common stock valued at $3,000,000. The acquisition of
Metroplex is accounted for as a reverse merger, as if Metroplex was
recapitalized by VTUE.
The unaudited pro forma statement of operations data for the years ended May 31,
1999 and 1998, assuming the acquisition of Metroplex and InteleSell occurred
June 1, 1997, are as follows:
1999 1998
-------------------- ------------------
Revenues $ 387,788 $ 270,871
==================== ==================
Net loss $ (1,810,420) $ (1,082,968)
==================== ==================
The above unaudited pro forma amounts are not necessarily indicative of what the
actual results might have been if the acquisitions had occurred as of the dates
indicated.
Note 4 - Notes Payable
In connection with the acquisition of InteleSell, the Company issued a note
payable of $1,200,000, interest at 8% per annum, due in annual installments of
$96,000, with remaining principal, plus accrued interest due on June 30, 2001.
Interest expense included in operations during fiscal 1999 amounted to
approximately $81,000. On or about May 4, 1999, the noteholders agreed to
convert principal, plus accrued interest into 7,154,989 shares of the Company's
common stock.
[VEI\FIN:53199FS]-7a
F-11
<PAGE>
VIRTUAL ENTERPRISES, INC.
Notes to Consolidated Financial Statements (Continued)
Note 5 - Commitments and Contingencies
Operating Leases
The Company is obligated under certain facility lease agreements to make future
annual minimum rental payments, excluding taxes and common area maintenance
costs, for the years ending May 31 as follows:
Year Ending
May 31,
-----------
2000 $ 113,000
2001 119,000
2002 71,000
-------------------
Total $ 303,000
===================
The lease on the Company's headquarters expires in December 2001.
Rent expense for the years ended May 31, 1999 and 1998 was $97,682, and $25,543,
respectively.
Consulting Agreements
On November 1, 1998, Metroplex red into certain agreements for marketing and
sales assistance, as well as certain financial advisory services. These
agreements expire on June 30, 1999. Total consulting fees incurred in connection
with these agreements amounted to $196,000, of which $186,000 is accrued in the
accompanying consolidated balance sheet for amounts unpaid.
Through June 30, 1998, VTUE had outstanding consulting agreements with certain
officers, directors and consultants which were terminated on that date. On or
about December 18, 1998, VTUE issued 4,270,000 shares of its common stock to
satisfy these agreements and certain trade liabilities totaling $504,161 or $.11
per share.
On July 1, 1998 VTUE entered an agreement with NuVen Advisors,Inc. ("NuVen") for
financial advisory services at the rate of $10,000 per month. In connection with
this agreement on April 30, 1999 VTUE issued 850,000 shares of common stock in
settlement of services rendered through April 30, 1999 valued at $100,000 or
$.12 per share.
Note 6 - Stockholders' Equity
Common Stock
In connection with Metroplex's acquisition of the assets of InteleSell on June
30, 1998, the Company issued 1,049 shares of it's common stock valued at
$135,142 (see Notes 1 and 3). The Board of Directors valued this common stock
based on the Company's peer group historical revenues and 1999 projected
revenues. The value placed on these shares of common stock was approximately
$129 per share.
On May 3, 1999, Metroplex's Board of Directors and shareholders approved the
conversion of the InteleSell notes payable totaling $1,200,000, plus accrued
interest of $81,000 into 7,154,989 shares of the Company's common stock. The
parties agreed to a value per share of the Company's common stock of $.18 per
share; however, no credit was provided for accrued interest. The notes plus the
accrued interest were converted on May 4, 1999.
[VEI\FIN:53199FS]-7a
F-12
<PAGE>
VIRTUAL ENTERPRISES, INC.
Notes to Consolidated Financial Statements (Continued)
On May 3, 1999, Metroplex's Board of Directors and shareholders approved the
issuance of 1,406,000 shares of common stock to certain officers and employees
for prior services rendered to the Company. The shares issued for services
rendered were valued by the Board of Directors at $.17 per share. The valuation
was primarily based on the negotiated conversion of the InteleSell notes into
the Company's common stock.
During fiscal 1999, Metroplex issued 332 shares of convertible preferred stock
at $1,000 per share. Each preferred share was converted into 1,000 shares of the
Company's common stock. Through May 31, 1999, Metroplex received net proceeds of
$330,705; no convertible preferred shares were issued subsequent to May 31,
1999.
From July 1997 through May 31, 1999 Metroplex authorized and issued
participating equity instruments, which enabled the holder to participate in the
profits and benefit from a sale or an initial public offering of Metroplex. Such
interests were converted into shares of common stock subsequent to the
acquisition of Metroplex's assets. On May 31, 1999 the participants will be
issued 1,100,000 shares of common stock in satisfaction of $662,387 of these
equity participation interests. Shares were deemed issued retroactively to
effect the date of issuance of the participation interest; 503,336 shares in
fiscal 1998 and 596,664 shares in fiscal 1999.
Stock Options
In connection with a management agreement, the Company issued options to
purchase 750,000 shares at $0.01 per share on or about August 1, 1995. The
options are fully vested and are exercisable at any time prior to December 31,
1999. In addition, in connection with certain consulting agreements, the Company
issued options to purchase 100,000 shares of common stock, each, to two (2)
individuals, exercisable at $1.00 per share, expiring on December 31, 1999 and
June 30, 2001, respectively. These stock options were fully vested at the date
of issuance.
Warrants
As of May 31, 1999, warrants to purchase 668,000 shares of common stock were
outstanding at an exercise price of $5.00 per share. The warrants are
exercisable at the option of the holders on or before December 31, 2000.
Note 7 - Related Party Transactions
Metroplex has made payments of $4,581 in fiscal year 1999 to a computer retailer
of which an employee of the Company is an owner.
The Company has a note payable due to an officer of the Company totaling
$248,436 at May 31, 1999 for advances to the Company through charges for Company
expenses on his personal credit card. The note bears interest at 17% per annum
and is due on demand. Management expects to repay the note in fiscal 2000.
Payments for interest charges under this note were $18,849 and $9,184 in fiscal
1999 and 1998, respectively.
The Company has a note payable due to a former officer of the Company totaling
$38,596 at May 31, 1999 for advances to the Company through charges for Company
expenses on his personal credit card. The note bears interest at 17% per annum
and is due on demand. Management expects to repay the note in fiscal 2000.
No interest payments have been made on this note to date.
[VEI\FIN:53199FS]-7a
F-13
<PAGE>
VIRTUAL ENTERPRISES, INC.
Notes to Consolidated Financial Statements (Continued)
Note 8 - Subsequent Events
On June 6, 1999, the Company issued 8% notes payable amounting to $250,000. The
note matures on June 6, 2000. The Company issued 200,000 shares of common stock
valued at $200,000. These shares of common stock will be held in escrow until
maturity or an event of default, at which time these shares will be released to
the noteholder free of liens or encumbrances. The value of these common shares
of $200,000 will be included in debt issue costs to be amortized to operations
using the effective interest method, through maturity.
[VEI\FIN:53199FS]-7a
F-14
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-END> MAY-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 337,048
<DEPRECIATION> 115,027
<TOTAL-ASSETS> 1,213,406
<CURRENT-LIABILITIES> 5,189,709
<BONDS> 0
0
0
<COMMON> 159,194
<OTHER-SE> 380,465
<TOTAL-LIABILITY-AND-EQUITY> 1,213,406
<SALES> 382,798
<TOTAL-REVENUES> 382,798
<CGS> 0
<TOTAL-COSTS> 1,840,523
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 118,986
<INCOME-PRETAX> (1,575,849)
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<INCOME-CONTINUING> (1,575,849)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,575,849)
<EPS-BASIC> (1.07)
<EPS-DILUTED> (1.07)
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