FORM 8-K/A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
Date of Report (Date of earliest event reported): May 5, 1999
VIRTUAL ENTERPRISES INC.
(Exact name of registrant as specified in its charter.)
Nevada
(State of incorporation or organization)
33-23430-D
(Commission File Number)
84-1091271
(I.R.S. Employee Identification No.)
4695 MacArthur Court, Suite 530, Newport Beach, California
(Address of principal executive offices)
92660
(Zip Code)
Registrant's telephone number, including area code: (714) 475-6755
2 Park Plaza, Suite 470, Irvine, California 92614
(Former name or former address, if changed since last report)
[VEI\8K:INCLMET]
<PAGE>
Item 1. Changes in Control of Registrant
N/A
Item 2. Acquisition or Disposition of Assets
On May 5, 1999, the Registrant entered into an Asset Purchase Agreement
and Plan Of Reorganization (the ?Agreement@) with Metroplex Web Inc., a Texas
corporation (AMetroplex@) whereby the Registrant acquired certain assets,
property, business interests and intellectual rights owned by Metroplex for
securities consisting of Ten Million (10,000,000) shares of the Registrant=s
$.01 par value common stock, causing Metroplex to have voting control and become
the principal stockholder of the Registrant.
Item 3. Bankruptcy or Receivership
N/A
Item 4. Changes in Registrant's Certifying Accountant
N/A
Item 5. Other Events
N/A
Item 6. Change in Registrant's Directors
N/A
Item 7. Financial Statements and Exhibits
(a) Set forth on pages F-1 through F-14 is the following financial
information relating to MetroplexWeb, Inc.:
- Report of Independent Accountants
- Balance sheet of MetroplexWeb, Inc. as of May 31,
1999
- Statements of Operations for the years ended May 31,
1999 and 1998
- Statements of Stockholders' Deficiency for the years
ended May 31, 1999 and 1998
- Statements of Cash Flows for the years ended May 31,
1999 and 1998
- Notes to Financial Statements
(b) Set forth on pages F-15 through F-18 is the consolidating
financial information reflecting the asset purchase of
MetroplexWeb required to be set forth in the Registrant's
current Report as follows:
- Consolidating Balance Sheet (Unaudited) - May 31,
1999
- Pro Forma Consolidating Statement of Operations
(Unaudited for the year ended May 31, 1999
- Notes to Pro Forma Consolidated Financial Statements
(Unaudited)
[VEI\8K:INCLMET]
2
<PAGE>
Item 8. Change in Registrant's Fiscal Year
N/A
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
Virtual Enterprises, Inc.
(Registrant)
Dated: July 20, 1999 By: /s/ Fred G. Luke
---------------------------------------
Fred G. Luke,
Chairman of the Board and President
[VEI\8K:INCLMET]
3
<PAGE>
METROPLEXWEB, INC.
Index to Financial Statements
Description Page
Independent Auditors' Report ..............................................F-2
Balance Sheet as of May 31, 1999...........................................F-3
Statements of Operations for the years ended May 31, 1999 and 1998 ........F-4
Statements of Stockholders' Deficiency for the years ended May 31, 1999
and 1998 .................................................................F-5
Statements of Cash Flows for the years ended May 31, 1999 and 1998.........F-6
Notes to Financial Statements..............................................F-7
[VEI\10-KSB:53199FS.MET]-3
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors METROPLEXWEB, INC.
We have audited the accompanying balance sheet of MetroplexWeb, Inc. (the
"Company") as of May 31, 1999, and the related statements of operations,
stockholders' deficiency, and cash flows for each of the years in the two-year
period ended May 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of May 31, 1999,
and the 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 financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
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 financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ McKennon, Wilson & Morgan LLP
Irvine, California
July 16, 1999
[VEI\10-KSB:53199FS.MET]-3
F-2
<PAGE>
<TABLE>
<CAPTION>
METROPLEXWEB, INC.
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' DEFICIENCY
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
Equity participation interests (Note 5) 662,387
Commitments and contingencies (Note 6)
Stockholders' deficiency:
Preferred stock, par value $10.00 per share; 500,000 shares authorized, 332
shares issued and outstanding
Common stock, par value $0.001; 10,000,000 shares 330,705
authorized, 1,436,981 shares issued and outstanding
Additional paid-in capital 1,437
Accumulated deficit 1,651,010
(2,105,880)
Total stockholders' deficiency (122,728)
Total liabilities and stockholders' deficiency $ 1,213,406
===================
</TABLE>
See accompanying notes to these financial statements.
[VEI\10-KSB:53199FS.MET]-3
F-3
<PAGE>
<TABLE>
<CAPTION>
METROPLEXWEB, INC.
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 issues 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) expense (862) -
--------------------- ---------------------
Loss before income taxes (1,575,849) (501,944)
Income taxes - -
--------------------- ---------------------
Net loss $ (1,575,849) $ (501,944)
===================== ======================
</TABLE>
See accompanying notes to these financial statements.
[VEI\10-KSB:53199FS.MET]-3
F-4
<PAGE>
<TABLE>
<CAPTION>
METROPLEXWEB, INC.
Statements of Stockholders' Deficiency
For The Years Ended May 31, 1999 and 1998
Preferred Stock Common Stock Additional
Paid-In
Capital
Shares Amount Shares Amount
-------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balances, May 31, 1997 - $ - 1,000 $ 1 $ 499
Net loss for year - - - - -
-------------- ---------------- --------------- --------------- ---------------
- - 1,000 1 499
Balances, May 31, 1998
Issuance of preferred stock 332 330,705 - - -
Shares issued for
acquisition of InteleSell - - 176 - 135,142
Conversion of note payable - - 1,200,000 1,200 1,279,800
Shares issued for services
rendered by employees - - 235,805 236 235,569
Net loss for year -
- - - -
---------------- --------------- --------------- ---------------
Balances, May 31, 1999 332 $ 330,705 1,436,981 $ 1,437 $ 1,651,010
============== ================ =============== =============== ===============
</TABLE>
See accompanying notes to these financial statements.
[VEI\10-KSB:53199FS.MET]-3
F-5(a)
<PAGE>
<TABLE>
<CAPTION>
METROPLEXWEB, INC.
Statements of Stockholders' Deficiency
For The Years Ended May 31, 1999 and 1998
Accumulated
Deficit Total
----------------- ------------------
<S> <C> <C>
Balances, May 31, 1997 $ (28,087) $ (27,587)
Net loss for year (501,944) (501,944)
----------------- ------------------
(530,031) (529,531)
Balances, May 31, 1998
Issuance of preferred stock - 330,705
Shares issued for
acquisition of InteleSell - 135,142
Conversion of note payable - 1,281,000
Shares issued for services
rendered by employees - 235,805
Net loss for year (1,575,849) (1,575,849)
----------------- ------------------
Balances, May 31, 1999 $ (2,105,880) $ (122,728)
================= ==================
</TABLE>
See accompanying notes to these financial statements.
[VEI\10-KSB:53199FS.MET]-3
F-5(b)
<PAGE>
<TABLE>
<CAPTION>
METROPLEXWEB, INC.
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 90,272 13,387
Amortization 161,903 -
Issuance of common stock for services rendered by employees 235,805 -
Increase in accrued 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 preferred stock 330,705 -
Issuance of equity participation interests 364,093 303,094
--------------------- ---------------------
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 note payable to InteleSell, plus accrued interest into
common stock $ 1,281,000 $ -
</TABLE>
See accompanying notes to these financial statements.
[VEI\10-KSB:53199FS.MET]-3
F-6
<PAGE>
METROPLEXWEB, INC.
Notes to Financial Statements
Note 1 - Organization and History
MetroplexWeb, Inc. (the "Company"), a Texas corporation, was formed on September
12, 1996. The Company is engaged primarily in the development, design, hosting,
and support of internet web pages. The Company also creates, designs and
administers internet malls, where users can search for products and services in
their geographical area known as "virtual cities." The Company's operations are
primarily located in Dallas/Fort Worth, Texas, and are expanding into other
metropolitan cities.
On June 30, 1998, the Company entered into an asset purchase agreement with
InteleSell, Inc. ("InteleSell"). In connection therewith, the Company 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.
On May 5, 1999, the Company's assets were acquired by Virtual Enterprises, Inc.
("VEI"), a publically- traded company which had no operations, for 10,000,000
shares of VEI's common stock, valued at $3,000,000. The accompanying financial
statements do not reflect the accounting for this acquisition.
Note 2 - Basis of Presentation and Principles of Accounting
Basis of Presentation
The accompanying financial statements reflect the historical operations of the
Company for all periods presented. The accompanying financial statements include
the operations of InteleSell beginning July 1, 1998.
Liquidity
The accompanying 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 working capital
requirements. The Company, through VEI, 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. Losses from operations are
expected to increase due to management's belief that expanded marketing and
sales efforts are required to significantly increase the Company's revenues.
There are no assurances that the Company will be successful in obtaining
additional funding on terms satisfactory to the Company. These factors raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Cash and Cash Equivalents
Cash equivalents include short-term, highly liquid investments with maturities
of three months or less at the time of acquisition.
[VEI\10-KSB:53199FS.MET]-3
F-7
<PAGE>
METROPLEXWEB, INC.
Notes to Financial Statements (Continued)
Property and Equipment
Property and equipment are depreciated over their estimated useful lives using
the straight-line method ranging 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 statements of operations.
The Company assesses the recoverability of property and equipment by determining
whether the depreciation of property and equipment over its remaining life can
be recovered through projected undiscounted future cash flows. The amount of
property and equipment impairment, if any, is measured based on fair value or
discounted cash flows and such impairment is charged to operations. As of May
31, 1999, management believes that there is no impairment of property and
equipment.
Property and equipment are stated at cost, net of accumulated depreciation, and
are comprised of the following at May 31, 1999:
1999
-------------------
Property and equipment $ 297,007
Furniture and fixtures 37,694
Leasehold improvements 2,347
-------------------
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 acquistions 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 its 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.
[VEI\10-KSB:53199FS.MET]-3
F-8
<PAGE>
METROPLEXWEB, INC.
Notes to Financial Statements (Continued)
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 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.
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. Costs related to insignificant obligations are accrued.
The Company generally enters into contracts to host customer websites for one
year. 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.
Income Taxes
The Company elected to be taxed under Subchapter S of the Internal Revenue Code.
Accordingly, profits and losses are reflected in the individual income tax
returns of the shareholders. No income tax expense has been recorded in the
accompanying financial statements.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
[VEI\10-KSB:53199FS.MET]-3
F-9
<PAGE>
METROPLEXWEB, INC.
Notes to Financial Statements (Continued)
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, as well as notes payable.
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 financial statements.
Disclosures about Segments of an Enterprise and Related Information
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures of an Enterprise and Related Information." The provisions of this
statement require disclosures of financial and descriptive information about an
enterprise's operating segments in annual and interim financial reports issued
to stockholders. The statement defines an operating segment as a component of an
enterprise that engages in business activities that generate revenue and incur
expense, whose operating results are reviewed by the chief operating decision
maker in the determination of resource allocation and performance, and for which
discrete financial information is available. The Company adopted the provisions
of this statement for fiscal 1999. These disclosure requirements will not impact
on the Company's financial position or results of operations. At May 31, 1999,
the Company had no identifiable assets or operations constituting a segment as
defined by this statement.
Stock-based Compensation
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 ("SFAS 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.
[VEI\10-KSB:53199FS.MET]-3
F-10
<PAGE>
METROPLEXWEB, INC.
Notes to Financial Statements (Continued)
Note 3 - Acquisitions
As discussed in Note 1, on June 30, 1998, the Company entered into an asset
purchase agreement with InteleSell to acquire all of the assets owned by
InteleSell. In connection therewith, the Company issued 176 shares of its 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.
The Company allocated the remaining purchase price of $882,142 to goodwill. The
unaudited pro forma statement of operations data for the years ended May 31,
1999 and 1998, assuming the acquisition occurred June 1, 1997, are as follows:
1999 1998
------------------- -----------------
Revenues $ 387,788 $ 270,871
=================== =================
Net loss $ (1,626,161) $ (936,958)
=================== ==================
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 1,200,000 shares of its common
stock.
Note 5 - Equity Participation Agreement
In July 1997, the Company authorized the issuance of a participating equity
instrument which enables the holder to participate in the profits and benefit
from a sale or an initial public offering of the Company. The shareholders of
the Company established USA Internet Solutions, LLC ("USAIS") on March 9, 1997
as the vehicle to effect the issuance of equity participation interests . From
July 1997 through May 31, 1999, USAIS issued 134 membership interests (the
"Interest") at $5,000 per Interest; the aggregate consideration received was
$662,387, net of fees of $7,613. Each Interest entitles the holder to receive
their initial investment from 80% of the income of the Company. Once the holders
receive their initial investment, they will receive 20% of the Company's profits
until such holders receive two times their initial investment. In the event the
Company effects an initial public offering, the holders will receive 10% of the
issued and outstanding common stock of the Company. The interests will be
converted subsequent to May 31, 1999 as a result of the acquisition of the
Company's assets by VEI.
The Company accounts for the Interest similar to a minority interest, whereby
the Company reflects the portion of its profits attributable to the Interest
holders in the statement of operations. The Company has incurred losses from
operations since its inception, and accordingly, the Company has not allocated
losses in the accompanying statement of operations in fiscal 1999 or 1998 to
these Interest holders.
[VEI\10-KSB:53199FS.MET]-3
F-11
<PAGE>
METROPLEXWEB, INC.
Notes to Financial Statements (Continued)
Note 6 - Commitments and Contingencies
Operating Leases
The Company is obligated under certain facility lease agreements to make future
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.
Litigation
A claim has been made against the Company for alleged unpaid fees and other
damages arising from purchased assets from another web site provider. The
Company made an offer of settlement on May 27, 1999, but no response or
counter-offer has been received to date. The Company estimates that the
liability could exceed $10,000 plus attorneys' fees. A provision of $10,000 has
been charged to operations in fiscal 1999.
Although no claim has been made, one of the founding shareholders of the Company
has failed and refused to reach a settlement between the shareholder and the
Company because of improprieties perpetuated by the shareholder. The Company's
management intends to file a complaint against this shareholder in an effort to
rescind the original issuance of 500 shares of common stock at inception. The
shareholder has demanded $15,000, which the Company has refused to pay. No
provision for loss has been made in the accompanying statements of operations.
The Company is subject to a limited number of claims and actions that arise in
the ordinary course of business. The litigation process is inherently uncertain,
and it is possible that the resolution of the Company's existing and future
litigation may adversely affect the Company. Management is unaware of any
matters, which may have material impact on the Company's financial position,
results of operations, or cash flows.
[VEI\10-KSB:53199FS.MET]-3
F-12
<PAGE>
METROPLEXWEB, INC.
Notes to Financial Statements (Continued)
Consulting Agreements
On November 1, 1998, the Company entered into certain agreements for marketing
and sales assistance, as well as certain financial advisory services. These
agreements expire on November 1, 1999. Total consulting fees incurred in
connection with these agreements amounted to $196,000, of which $186,000 is
accrued in the accompanying balance sheet for amounts unpaid.
In the normal course of business, the Company utilizes consultants in its
operations. In the event these consultants are classified as employees, the
Company could be responsible for certain state and federal taxes. Management is
currently assessing the appropriate classification of these consultants. No
provision for employee related taxes have been made in the accompanying
financial statements.
Note 7 - Stockholders' Equity
Common Stock
In connection with the Company's acquisition of the assets of InteleSell on June
30, 1998, the Company issued 176 shares of its 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 $767 per share.
On May 3, 1999, the Company'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 1,200,000 shares of common stock. The parties agreed
to a value per share of the Company's common stock of $1.00 per share; however,
no credit was provided for accrued interest. The notes plus the accrued interest
were converted on May 4, 1999.
On May 3, 1999, the Company's Board of Directors and shareholders approved the
issuance of 235,805 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 $1.00 per share. The valuation was
primarily based on the negotiated conversion of the InteleSell notes into the
Company's common stock.
Preferred Stock
During fiscal 1999, the Company issued 334 shares of convertible preferred stock
at $1,000 per share. Preferred shareholders have preference over common
stockholders in liquidation rights. Each preferred share is convertible into 500
common shares. Through May 31, 1999, the Company received net proceeds of
$330,705; no convertible preferred shares were issued subsequent to May 31,
1999.
Note 8 - Related Party Transactions
The Company has made payments of $4,581 in fiscal year 1999 to a computer
retailer of which an employee of the Company is an owner.
[VEI\10-KSB:53199FS.MET]-3
F-13
<PAGE>
METROPLEXWEB, INC.
Notes to Financial Statements (Continued)
The Company has a note payable due to an officer of the Company totaling
$248,537 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.
Note 9 - 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\10-KSB:53199FS.MET]-3
F-14
<PAGE>
<TABLE>
<CAPTION>
VIRTUAL ENTERPRISES, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
As of February 28, 1999
(Unaudited)
Virtual
Enterprises, Inc. MetroplexWeb, Inc. Eliminations Totals
---------------------- ---------------------- ----------------- -----------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 1 $ - $ 0 $ 1
-
Total Current Assets 1 - 0 1
---------------------- ---------------------- ----------------- -----------------
Property and equipment, net of
accumulated depreciation 0 230,474 0 230,474
Goodwill, net of accumulated
amortization 0 766,623 0 766,623
Client lists, net of accumulated
amortization 0 206,617 0 206,617
Deposits 9,692 0 0 9,692
Investment in subsidiary 3,000,000 0 (3,000,000) 0
---------------------- ---------------------- ----------------- -----------------
TOTAL ASSETS $ 3,000,001 $ 1,213,406 $ (3,000,000) $ 1,213,407
====================== ====================== ================= =================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current:
Accounts payable and bank overdraf$ 0 $ 65,433 $ 0 $ 65,433
Accrued compensation to officers 0 28,000 0 28,000
Accrued consulting fees 0 158,000 0 158,000
Other accrued liabilities 0 65,576 0 65,576
Deferred revenue 0 69,605 0 69,605
---------------------- ---------------------- ----------------- -----------------
Total Current Liabilities 0 386,614 0 386,614
--------------------- ---------------------- ----------------- -----------------
Notes Payable to officers 0 287,133 0 287,133
---------------------- ---------------------- ----------------- -----------------
Total Liabilities 0 673,747 0 673,747
---------------------- ---------------------- ----------------- -----------------
Equity participation interests 0 662,387 (662,387) 0
Stockholders' Equity:
Preferred Stock 0 330,705 (330,705) 0
Common Stock 159,906 1,437 (1,437) 159,906
Additional paid-in capital 3,804,316 1,651,010 (2,969,692) 2,485,634
Accumulated deficit (964,221) (2,105,880) 964,221 (2,105,880)
---------------------- ---------------------- ----------------- ------------------
Total Stockholders' Equity (3,000,001) (122,728) (2,337,613) 539,660
---------------------- ---------------------- ----------------- -----------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $ 1 $ 1,213,406 $ (3,000,000) $ 1,213,407
====================== ====================== ================= =================
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
[VEI\10-KSB:53199FS.MET]-3
F-15
<PAGE>
<TABLE>
<CAPTION>
VIRTUAL ENTERPRISES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended May 31, 1999
(Unaudited)
Virtual
Enterprises, MetroplexWeb, Adjustments/
Inc. Inc. Eliminations Totals
---------------------- --------------------- --------------------- --------------------------
<S> <C> <C> <C> <C>
Sales $ 0 $ 382,798 $ 4,990 $ 387,788
Operating Expenses 93,259 1,840,523 47,302 1,981,084
---------------------- --------------------- --------------------- --------------------------
Loss from operations (93,259) (1,457,725) (42,312) (1,593,296)
---------------------- --------------------- --------------------- --------------------------
Interest expense 0 118,986 8,000 126,986
Other (income) expense 0 (862) 0 (862)
---------------------- --------------------- --------------------- --------------------------
Net Loss $ (93,259) $ (1,575,849) $ (50,312) $ (1,719,420)
====================== ===================== ===================== ==========================
Loss per share $ (.02) $ N/A $ N/A $ (.11)
====================== ===================== ===================== ==========================
Weighted average common
shares outstanding 5,069,372 N/A N/A 15,919,372
====================== ===================== ===================== ==========================
</TABLE>
See Accompanying Notes to Pro Forma Consolidated Financial Statements.
[VEI\10-KSB:53199FS.MET]-3
F-16
<PAGE>
VIRTUAL ENTERPRISES, INC.
Notes to Pro Forma Financial Statements
(Unaudited)
Note 1. Basis of Presentation
On May 5, 1999, Virtual Enterprises, Inc. ("VEI") acquired the assets of
MetroplexWeb, Inc., a Texas corporation ("MWI"). The unaudited consolidated
balance sheet as of May 31, 1999 of VEI reflects the acquisition of MWI. The
unaudited pro forma consolidated statement of operations for the year ended May
31, 1999 of VEI reflects the operations of VEI, on a pro forma basis assuming
the acquisition occurred June 1, 1998.
The accompanying historical statements of MWI includes the operations of
InteleSell, Inc. ("II") acquired in June 1998. MWI acquired the issued and
outstanding common stock of II for $1,200,000 in notes payable and 176 common
shares of MWI to the former shareholders of II. The purchase price of $1,335,142
was allocated $200,000 to certain property and equipment and $253,000 to
customer lists based on their estimated fair value and $882,142 to goodwill.
These unaudited pro forma consolidated financial statements do not purport to be
indicative of the results that actually would have been obtained if the
companies and their operations had actually been combined on June 1, 1998, and
this presentation is not intended to be a projection of future results or
trends.
Note 2. Background and Overview of the Transaction
Prior to the acquisition, VEI was an effectively inactive publicly traded
Company with limited assets and accumulated operating losses. The market
capitalization of VEI was approximately $1,000,000 based upon the average of the
bid and ask price for a period of approximately 90 days prior to the
acquisition.
MWI is an Internet Web Page designer and servicer with a client base of over
6,000 companies. MWI also has a proprietary product called "City Malls" where
internet users can search out sources for products and services in their local
geographic areas. Currently, MWI has six City Malls operating with another two
opening within 30 days.
VEI purchased MWI through the issuance of 10,000,000 shares of common stock with
a value estimated to be $3,000,000. Such value was based upon the current
average of the bid and ask of approximately $0.20 and an assumption that such
average would increase approximately 50% upon consummation of the transaction.
However, since the sellers of MWI would be acquiring a controlling interest in
VEI, generally accepted accounting principles ("GAAP") require that the
transaction be accounted for as a recapitalization of MWI. Accordingly, the
historical balance sheet of MWI will be consolidated with the balance sheet of
VEI, after reflecting the recapitalization of MWI. If VEI were the acquiring
entity, the basis in the client lists and the City Malls would be presented at
their fair value of approximately $4.2 million with no goodwill.
[VEI\10-KSB:53199FS.MET]-3
F-17
<PAGE>
Note 3. Adjustments to Proforma Financial Statements
Statement of Operations
As MWI had limited operations prior to May 31, 1998, the attached pro forma
Consolidated Statement of Operations for the year ended May 31, 1999 has been
presented in order to provide more meaningful disclosure to the reader.
Management intends to amend this Form 8-K as soon as practical after the Form
10-KSB for the year ended May 31, 1999 is filed with the Securities and Exchange
Commission.
Depreciation and Amortization
Fixed assets, client lists and goodwill are being amortized on the straight line
basis over the estimated useful lives of 3 years for fixed assets, 5 years for
client lists and 7 years for goodwill.
Loss Per Share
Pro forma loss per share is completed using the weighted average number of
shares of the Company's common stock issued and outstanding, assuming that the
shares issued in the transaction were outstanding for the entire period. Common
stock equivalents were not considered in the loss per share calculation as the
effect would have been anti-dilutive.
Note 4. Acquisitions
As discussed in Note 3 of the MWI audited financial statements attached, on June
30, 1998, MWI entered into an Asset Purchase Agreement with InteleSell, Inc. to
acquire all of the assets owned by InteleSell, Inc. The unaudited pro forma
statement of operations data for the year ended May 31, 1999, assuming the
acquisition occurred June 1, 1998, is as follows:
Revenues $ 387,778
==================
Net loss $ (1,777,500)
===================
[VEI\10-KSB:53199FS.MET]-3
F-18
<PAGE>
EXHIBIT 16(a)
Kang, Yu &Jun
An Accountancy Corporation,
Member Firm of AICPA, SECPS, PCPS and CSCPA
18000 Studebaker Road, Suite 295
Cerritos, California. 90703
(562) 865-2727
May 15, 1999
Mr. Fred G. Luke
Chairman of the Board
VIRTUAL ENTERPRISES, INC.
4695 MacArthur Court, Suite 530
Newport Beach, CA 92660
Re: Resignation
Dear Mr. Luke:
This is to confirm that the client-auditor relationship between VIRTUAL
ENTERPRISES, INC. (Commission file Number 33-23430-D) and Kang, Yu & Jun has
ceased.
Very truly yours,
/s/KY&J CPA'S
Kang, Yu &Jun
cc: Office of the Chief Accountant
SECPA Letter File
Securities & Exchange Commission
Mail Stop 9-5
450 Fifth Street, NW
Washington, DC 20549
[VEI\10-KSB:53199FS.MET]-3
F-19
<PAGE>
EXHIBIT 16(b)
Kang, Yu &Jun
An Accountancy Corporation,
Member Firm of AICPA, SECPS, PCPS and CSCPA
18000 Studebaker Road, Suite 295
Cerritos, California. 90703
(562) 865-2727
June 28, 1999
We have read the disclosure made in this Form 8-K/A regarding our resignation as
Registrants Certifying Accountant as disclosed in Item 4 and are in agreement
with the disclosures.
/s/ Kang, Yu & Jun
[VEI\10-KSB:53199FS.MET]-3
F-20
