<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant To Section 13 Or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 18, 1998
VIRTUALFUND.COM, INC.
(Exact name of registrant as specified in its charter)
Minnesota 0-18114 41-1612861
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
7090 Shady Oak Road
Eden Prairie, Minnesota 55344
(Address of registrant's principal executive offices)
(612) 941-8687
(Registrant's telephone number)
Not Applicable
(Former name or former address, if changed since last report.)
1
<PAGE>
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired
The audited financial statements of K&R Technical Services, Inc.
("K&R"), prepared in accordance with Regulation S-X, consisting of the
balance sheet as of December 31, 1997 and the related statements of
operations, stockholders' equity and cash flows for the year then ended
together with the corresponding Independent Auditor's Report filed with
this report are listed in the Index to Financial Statements on page F-1
of this report.
The unaudited interim financial statements of K&R, prepared in
accordance with Regulation S-X, consisting of the balance sheet as of
September 30, 1998 and the related statements of operations and cash
flows for the nine months ended September 30, 1998 and 1997 filed with
this report are listed in the Index to Financial Statements on page F-1
of this report.
(b) Unaudited Pro Forma Financial Information
The unaudited pro forma financial statements for the consolidated
companies filed with this report are listed in the Index to Financial
Statements on page F-1 of this report.
(c) Exhibits
2.1 Agreement and Plan of Merger, dated as of December 18, 1998,
by and among VirtualFund.com, Inc., Virtual Acquisition Corp.
I, K&R Technical Services, Inc. and the shareholders of K&R
Technical Services, Inc. Omitted from such Exhibit are the
exhibits thereto referenced in such agreement. The registrant
will furnish supplementally a copy of any such exhibits to the
Commission upon request. *
13.1 Annual Report on Form 10-K for the fiscal year ended June 30,
1998, as filed with the Securities and Exchange Commission on
September 28, 1998. **
- -------------------
* Exhibit previously filed on December 31, 1998 with Registrant's Current
Report on Form 8-K dated December 18, 1998 incorporated herein by reference
under Exhibit Number indicated.
** Filed with the Securities and Exchange Commission on September 28, 1998
(file no. 0-18114) and incorporated herein by reference.
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: March 3, 1999
VIRTUALFUND.COM, INC.
(Registrant)
By /s/ James H. Horstmann
-------------------------------
JAMES H. HORSTMANN
Chief Financial Officer
3
<PAGE>
VIRTUALFUND.COM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Unaudited Pro Forma Consolidated Financial Statements
- -----------------------------------------------------
Unaudited pro forma Consolidated Statement of Operations for
the year ended June 30, 1998 F-2
Unaudited pro forma Consolidated Statement of Operations for
the six months ended January 3, 1999 F-3
Notes to unaudited pro forma Consolidated Statements of Operations F-4
Historical Financial Statements of K&R Technical Services, Inc.
- ---------------------------------------------------------------
Independent Auditor's Report F-5
Balance Sheets as of December 31, 1997 and September 30, 1998 (unaudited) F-6
Statements of Operations for the year ended December 31, 1997 and
the nine months ended September 30, 1997 and 1998 (unaudited) F-7
Statements of Changes in Stockholders' Equity for the year ended
December 31, 1997 and the nine months ended September 30, 1998 (unaudited) F-8
Statements of Cash Flows for the year ended December 31, 1997 and
the nine months ended September 30, 1997 and 1998 (unaudited) F-9
Notes to Financial Statements F-10 to F-14
</TABLE>
F-1
<PAGE>
VIRTUALFUND.COM, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended June 30, 1998
<TABLE>
<CAPTION>
K&R
VFND Twelve Months
Year Ended Ended Pro Forma
6/30/98 6/30/98 Adjustments Pro Forma
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
SALES
Product $ 80,731,534 $ 341,615 $ $ 81,073,149
Service 6,003,462 6,003,462
-------------- -------------- -------------- --------------
NET SALES 80,731,534 6,345,077 87,076,611
COST OF SALES
Product 48,050,731 243,347 48,294,078
Service 3,786,175 3,786,175
-------------- -------------- -------------- --------------
48,050,731 4,029,522 52,080,253
-------------- -------------- -------------- --------------
GROSS PROFIT 32,680,803 2,315,555 34,996,358
OPERATING EXPENSES
Sales and marketing 14,335,306 791,490 15,126,796
Research and development 6,503,287 447,571 6,950,858
General and administrative 9,505,652 1,585,861 1,794,132 c 12,885,645
-------------- -------------- -------------- --------------
30,344,245 2,824,922 1,794,132 34,963,299
-------------- -------------- -------------- --------------
OPERATING PROFIT (LOSS) 2,336,558 (509,367) (1,794,132) 33,059
OTHER INCOME (EXPENSE)
Interest expense (715,048) (50,691) (393,750) d (1,159,489)
Interest income 118,494 22,345 140,839
Other (13,245) 56,628 43,383
-------------- -------------- -------------- --------------
(609,799) 28,282 (393,750) (975,267)
-------------- -------------- -------------- --------------
EARNINGS (LOSS) BEFORE
INCOME TAXES 1,726,759 (481,085) (2,187,882) (942,208)
INCOME TAX (PROVISION) BENEFIT 147,000 (147,000) e
-------------- -------------- -------------- --------------
NET EARNINGS (LOSS) $ 1,726,759 $ (334,085) $ (2,334,882) $ (942,208)
============== ============== ============== ==============
NET EARNINGS (LOSS) PER COMMON
SHARE-BASIC $ .12 $ (.06)
============== ==============
NET EARNINGS (LOSS) PER COMMON
SHARE-ASSUMING DILUTION $ .11 $ (.06)
============== ==============
Weighted average common shares
outstanding 14,716,003 14,716,003
Weighted average common and dilutive
potential common shares outstanding 15,602,071 14,716,003
</TABLE>
F-2
<PAGE>
VIRTUALFUND.COM, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended January 3, 1999
<TABLE>
<CAPTION>
VFND K&R
Six Months Six Months
Ended Ended Pro Forma
1/3/99 12/31/98 Adjustments Pro Forma
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
SALES
Product $ 32,980,539 $ 253,069 $ (63,352) a $ 33,170,256
Service 423,554 3,246,309 (423,554) a 3,246,309
-------------- -------------- -------------- --------------
NET SALES 33,404,093 3,499,378 (486,906) 36,416,565
COST OF SALES
Product 19,367,948 214,244 (32,482) a 19,549,710
Service 326,518 2,266,779 (326,518) a 2,266,779
-------------- -------------- -------------- --------------
19,694,466 2,481,023 (359,000) 21,816,489
-------------- -------------- -------------- --------------
GROSS PROFIT 13,709,627 1,018,355 (127,906) 14,600,076
OPERATING EXPENSES
Sales and marketing 7,751,456 587,200 (103,000) a 8,235,656
Research and development 6,674,686 2,524,000 (2,524,000) a 4,174,686
(2,500,000) b
General and administrative 5,169,086 961,051 (310,406) a 6,567,286
747,555 c
Restructuring and other special charges (600,000) (600,000)
-------------- -------------- -------------- --------------
18,995,228 4,072,251 (4,689,851) 18,377,628
-------------- -------------- -------------- --------------
OPERATING LOSS (5,285,601) (3,053,896) 4,561,945 (3,777,552)
OTHER INCOME (EXPENSE)
Interest expense (395,040) (37,655) 16,476 a (613,094)
(196,875) d
Interest income 59,007 11,386 (2,281) a 68,112
Other (116,601) (6,092) 547 a (122,146)
-------------- -------------- -------------- --------------
(452,634) (32,361) (182,133) (667,128)
-------------- -------------- -------------- --------------
LOSS BEFORE INCOME TAXES (5,738,235) (3,086,257) 4,379,812 (4,444,680)
INCOME TAX BENEFIT 11,345 (11,345) e
-------------- -------------- -------------- --------------
NET LOSS $ (5,738,235) $ (3,074,912) $ 4,368,467 $ (4,444,680)
============== ============== ============== ==============
NET LOSS PER COMMON SHARE -
BASIC $ (.36) $ (.28)
============== ==============
NET LOSS PER COMMON SHARE -
ASSUMING DILUTION $ (.36) $ (.28)
============== ==============
Weighted average common shares
outstanding 15,730,738 15,730,738
Weighted average common and dilutive
potential common shares outstanding 15,730,738 15,730,738
</TABLE>
F-3
<PAGE>
VIRTUALFUND.COM, INC. AND SUBSIDIARIES
Notes to Unaudited Pro Forma Consolidated Statements of Operations
For the Year Ended June 30, 1998 and the Six Months Ended January 3, 1999
1. UNAUDITED PRO FORMA FINANCIAL STATEMENTS
On December 18, 1998, the Company issued 1.5 million shares of Series A
Convertible Preferred Stock and notes payable in the aggregate of
$3,678,227 in exchange for all of the common stock of K&R Technical
Services, Inc. (K&R). The acquisition was achieved pursuant to an
Agreement and Plan of Merger, dated December 18, 1998, by and among
VirtualFund.com, Inc. (VFND), Virtual Acquisition Corp I, K&R Technical
Services, Inc. and The Shareholders of K&R Technical Services, Inc.
(Agreement). Under the terms of the Agreement, the purchase price was
$11,278,217, consisting of $3,678,227 in notes payable, $7,499,990 in
Series A Preferred Stock and approximately $100,000 in transaction
costs. The preferred stock was valued at $5.00 per share based on a
guaranteed value of $5.00 per share two years from the date of the
transaction pursuant to the Agreement. The acquisition was accounted
for as a purchase.
The unaudited pro forma consolidated statements of operations give
effect on a purchase basis to the acquisition of K&R. The unaudited pro
forma consolidated statement of operations for the year ended June 30,
1998 has been prepared by consolidating the statement of operations of
VFND for the year ended June 30, 1998 with the statement of operations
for K&R for the twelve months ended June 30, 1998. The unaudited pro
forma consolidated statement of operations for the six months ended
January 3, 1999 has been prepared by consolidating the statement of
operations of VFND for the six months ended January 3, 1999 with the
statement of operations for K&R for the six months ended December 31,
1998. The results of K&R's operations for the month ended January 3,
1999 are included in the statement of operations of VFND for the six
months ended January 3, 1999.
The unaudited pro forma consolidated statements of operations for the
year ended June 30, 1998 and the six months ended January 3, 1999
assume that the acquisition of K&R occurred on July 1, 1997. The
unaudited pro forma consolidated statements of income do not purport to
represent the results of operations of VFND had the transactions and
events assumed therein occurred on the date specified, nor are they
necessarily indicative of the results of operations that may be
achieved in the future. The unaudited pro forma adjustments are based
on management's preliminary assumptions regarding purchase accounting
adjustments. The actual allocation of the purchase price will be
adjusted to the extent that actual amounts differ from management's
estimates in accordance with Statements of Financial Accounting
Standards No. 38, "Accounting for Preacquisition Contingencies of
Purchased Enterprises".
The unaudited pro forma consolidated statements of operations are based
upon certain assumptions and adjustments described in the notes to the
unaudited pro forma consolidated statements of operations. The
unaudited pro forma consolidated statements of operations should be
read in conjunction with the historical financial statements, and
related notes, of VFND contained in VFND's quarterly report on Form
10-Q for the quarter ended January 3, 1999 and in VFND's annual report
on Form 10-K for the year ended June 30, 1998.
2. UNAUDITED PRO FORMA ADJUSTMENTS
a. The results of K&R's operations for the month of December 1998 are
included in the results of both VFND and K&R for the six months
ended January 3, 1999 and are therefore eliminated in the pro
forma consolidation.
b. The charge for acquired in process research and development has
been eliminated as it is not a recurring item.
c. Goodwill amortization of $149,511 is expected for 60 months and
is therefore added to general and administrative expenses for the
appropriate periods.
d. Interest expense is adjusted due to the borrowings used in the
acquisition of K&R.
e. The Company is not in a position to recognize an income tax
benefit from operating losses on its consolidated income tax
return.
F-4
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
K&R Technical Services, Inc.
d/b/a TEAM Technologies
Cedar Falls, Iowa
We have audited the balance sheet of K&R Technical Services, Inc., d/b/a TEAM
Technologies as of December 31, 1997 and the related statements of operations,
changes in stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements referred to above present fairly, in
all material respects, the financial position of K&R Technical Services, Inc.,
d/b/a TEAM Technologies as of December 31, 1997 and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
McGladrey & Pullen, LLP
Waterloo, Iowa
January 15, 1999
F-5
<PAGE>
K&R TECHNICAL SERVICES, INC.
d/b/a TEAM TECHNOLOGIES
Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
(Unaudited)
------------ -------------
<S> <C> <C>
ASSETS (Note 3)
CURRENT ASSETS:
Cash and cash equivalents $ 71,682 $ 83,385
Accounts receivable, less allowance for doubtful
accounts of $8,500 in 1997 and $2,522 in 1998 778,289 855,495
Unbilled services 37,527 128,854
Due from leasing company (Note 3) 228,678
Related party receivables (Note 6) 160,969 425,877
Inventory 8,112
Deferred income taxes (Note 5) 90,000 149,000
Other current assets 94,775 154,831
---------- ----------
TOTAL CURRENT ASSETS 1,470,032 1,797,442
EQUIPMENT AND IMPROVEMENTS, NET (Note 2) 786,483 1,208,840
RELATED PARTY RECEIVABLE (Note 6) 138,425
DEFERRED INCOME TAXES 38,000
OTHER ASSETS 1,825 52,857
---------- ----------
$2,396,765 $3,097,139
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 3) $ 250,000 $ 594,995
Current maturities of long-term debt (Note 3) 215,917 457,360
Accounts payable 396,024 409,813
Accrued payroll and payroll taxes 339,631 319,534
Accrued 401(k) contribution 103,676
Other current liabilities 77,372 223,386
---------- ----------
TOTAL CURRENT LIABILITIES 1,382,620 2,005,088
LONG-TERM DEBT, less current maturities (Note 3) 401,687 699,183
DEFERRED INCOME TAXES (Note 5) 8,000
COMMITMENTS AND CONTINGENCIES (Notes 4 and 6)
STOCKHOLDERS' EQUITY: (Notes 4 and 7)
Common stock, no par value; authorized 500,000 shares; shares
issued and outstanding 150,000 in 1997 and 153,450 in 1998 158,698 322,868
Retained earnings 445,760 70,170
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 604,458 392,868
---------- ----------
$2,396,765 $3,097,139
========== ==========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
K&R TECHNICAL SERVICES, INC.
d/b/a TEAM TECHNOLOGIES
Statements of Operations
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended September 30,
December 31, ----------------------------
1997 1997 1998
(Unaudited) (Unaudited)
------------ ----------- ------------
<S> <C> <C> <C>
SALES
Service $ 5,320,888 $ 3,801,893 $ 4,769,452
Product 302,060 144,466 306,601
----------- ----------- -----------
NET SALES 5,622,948 3,946,359 5,076,053
COST OF SALES
Service 3,413,031 2,309,976 3,022,043
Product 204,168 115,358 239,517
----------- ----------- -----------
3,617,199 2,425,334 3,261,560
----------- ----------- -----------
GROSS PROFIT 2,005,749 1,521,025 1,814,493
OPERATING EXPENSES
Sales and marketing 813,000 561,456 804,708
Research and development 609,790 377,472 401,187
General and administrative 612,070 489,364 1,058,192
----------- ----------- -----------
2,034,860 1,428,292 2,264,087
----------- ----------- -----------
OPERATING (LOSS) PROFIT (29,111) 92,733 (449,594)
OTHER INCOME (EXPENSE)
Interest expense (46,998) (42,033) (33,161)
Interest income 15,205 2,436 13,061
----------- ----------- -----------
(31,793) (39,597) (20,100)
----------- ----------- -----------
(LOSS) EARNINGS BEFORE INCOME TAXES (60,904) 53,136 (469,694)
INCOME TAX BENEFIT (EXPENSE) (Note 5) 31,000 (19,927) 94,104
----------- ----------- -----------
NET (LOSS) EARNINGS $ (29,904) $ 33,209 $ (375,590)
=========== =========== ===========
NET (LOSS) EARNINGS PER COMMON SHARE -
BASIC AND ASSUMING DILUTION $ (.20) $ .22 $ (2.45)
=========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES -
BASIC AND ASSUMING DILUTION 150,000 150,000 153,450
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-7
<PAGE>
K&R TECHNICAL SERVICES, INC.
d/b/a TEAM TECHNOLOGIES
Statements of Changes in Stockholders' Equity
For the Year Ended December 31, 1997 and
Nine Months Ended September 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Number
of Shares Common Retained
Issued Stock Earnings Total
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 1,000 $ 158,698 $ 475,664 $ 634,362
150 for 1 stock split 149,000
Net loss (29,904) (29,904)
--------- --------- --------- ---------
Balance, December 31, 1997 150,000 158,698 445,760 604,458
Issuance of common
stock (unaudited) 3,450 164,000 164,000
Net loss (unaudited) (375,590) (375,590)
--------- --------- --------- ---------
Balance, September 30, 1998
(unaudited) 153,450 $ 322,698 $ 70,170 $ 392,868
========= ========= ========= =========
</TABLE>
See notes to financial statements.
F-8
<PAGE>
K&R TECHNICAL SERVICES, INC.
d/b/a TEAM TECHNOLOGIES
Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended September 30,
December 31, ---------------------------
1997 1997 1998
------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (29,904) $ 33,209 $(375,590)
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization 219,515 182,074 414,540
Loss (gain) on sale of equipment 65,850 54,172 (1,000)
Compensation expense related to stock issued 164,000
Deferred income taxes (85,000) (70,000) (105,000)
Change in current assets and current liabilities:
Accounts receivable (410,537) (226,681) (77,206)
Inventory 2,497 3,845 8,112
Unbilled services (37,527) (91,327)
Other assets 5,879 (2,790) (98,597)
Accounts payable 240,179 87,284 13,789
Accrued expenses 226,660 166,717 22,241
--------- --------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 197,612 227,830 (126,038)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from related parties 22,277 21,679
Advances to related parties (151,761) (132,492) (138,974)
Additions to equipment and improvements (89,787) (222,179) (480,113)
Proceeds from sale of equipment 16,520 1,000
Collections on due from leasing company 200,000 200,000 228,678
Additions to due from leasing company (228,678)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (231,429) (132,992) (389,409)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit lines 955,000 655,000 935,995
Payments on revolving credit lines (705,000) (595,000) (591,000)
Proceeds from long-term debt 400,000
Payments on long-term debt (207,414) (167,792) (217,845)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 42,586 (107,792) 527,150
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 8,769 (12,954) 11,703
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 62,913 62,913 71,682
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 71,682 $ 49,959 $ 83,385
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 47,394 $ 70,030 $ 22,100
Income taxes 80,351 42,033 32,840
Supplemental schedule of noncash investing and
financing activities:
Equipment acquired in exchange for capital leases $ 346,568 $ 356,784
</TABLE>
See notes to financial statements.
F-9
<PAGE>
K&R TECHNICAL SERVICES, INC.
d/b/a TEAM TECHNOLOGIES
Notes to Financial Statements
(Information as of and for the nine months
ended September 30, 1997 and 1998 is unaudited)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business
K&R Technical Services, Inc., d/b/a TEAM Technologies (the Company) is
a regional systems integrator providing a broad range of professional
and technical services consisting of networking and internetworking
products, including Internet related products, systems and network
support, and management and information services.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Credit Risk
The Company sells its products and services on a prepaid basis and by
extending credit in the normal course of business. Its customer base
ranges from small local entities to Fortune 500 companies located
primarily in the Midwest and in the agriculture industry. The Company
had two customers who accounted for approximately 42% and 65% of trade
receivables and sales, respectively, as of and for the year ended
December 31, 1997. The Company performs ongoing credit evaluations of
its customers' financial condition and generally requires no
collateral.
Revenue recognition and unbilled services
Product sales are recorded on shipment. Service revenues are recorded
as the work progresses at estimated billable amounts. Reserves are
established for anticipated returns of product, allowances and bad
debts.
Cash equivalents
All highly liquid cash investments with a maturity of three months or
less at the date of purchase are considered to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market, with cost
determined using the first-in, first-out (FIFO) basis. Inventory
consists primarily of finished products acquired for resale.
Equipment and improvements
Equipment and improvements are recorded at cost. Depreciation and
amortization are computed using the straight-line method over the
estimated useful lives of the assets of three to seven years. The
leasehold interests in equipment are being amortized by the
straight-line method over the life of the leases. It is the Company's
policy to include amortization on assets acquired under capital leases
in with depreciation on owned assets.
Fair value of financial instruments
Statement of Financial Accounting Standards (SFAS) No. 107,
"Disclosures About Fair Value of Financial Instruments," requires
disclosure of the fair value of certain financial instruments. Cash and
cash equivalents, accounts receivable, short-term debt, accounts
payable, and accrued liabilities are reflected in the financial
statements at their estimated fair value. The carrying amount of the
Company's long-term debt approximated its fair value at December 31,
1997 due to the debt agreements containing market interest rates.
Income taxes
The Company utilizes the asset and liability method of accounting for
income taxes as set forth in SFAS No. 109, "Accounting for Income
Taxes." Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to the temporary differences between the financial statement and tax
bases of existing assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which these temporary differences are
expected to be recovered or settled.
F-10
<PAGE>
Research and development
The Company is involved in the development of new products and
improvement of existing products. Research and development costs are
charged to expense as incurred.
Common stock issued to employees
Common stock issued to employees is recorded as compensation expense at
the estimated market value at the date of issuance. The estimated
market value is determined on a periodic basis by the Company's Board
of Directors.
Earnings per share
In 1997, the Financial Accounting Standards Board issued Statement No.
128 replacing the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Basic earnings per
share is computed by dividing net income available to common
stockholders by the weighted average number of shares outstanding. In
computing diluted earnings per share, the dilutive effect of stock
options during the periods presented as well as the effect of
contingently issuable shares also increase the weighted average number
of shares.
The Company initially applied Statement No. 128 for the year ended
December 31, 1997 and has restated all per share information for prior
periods to conform to Statement No. 128.
The 150 for 1 stock split during the year ended December 31, 1997 has
been reflected in all periods presented.
New Accounting Standards
The Financial Accounting Standards Board has recently issued SFAS No.
130, Reporting Comprehensive Income and SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. The Company intends
to adopt these standards in 1999 by making the required disclosures.
Therefore, the adoption of these standards is not expected to have an
effect on the Company's financial position or results of operations.
The Financial Accounting Standards Board has also recently issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities
which will be effective for the Company in 1999. The Company is
reviewing the requirements of this standard and has not yet determined
the impact on the financial statements of the Company.
Interim financial information (unaudited)
The financial statements and related notes as of September 30, 1998 and
for the nine month periods ended September 30, 1997 and 1998 are
unaudited, but in the opinion of management include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations. The
operating results for the interim periods are not necessarily
indicative of the operating results to be expected for a full year or
for other interim periods. The presentation does not include all
disclosures required by generally accepted accounting principles as
they are not required for interim information.
2. EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consist of the following:
Life Used
for Depreciation
----------------
Furniture and fixtures 5-7 years $ 235,516
Vehicles 5 years 13,798
Leasehold interest in equipment 3-5 years 713,982
Leasehold improvements 10-15 years 129,180
----------
1,092,476
Accumulated depreciation and
amortization (305,993)
----------
$ 786,483
==========
At December 31, 1997, the Company had accumulated amortization of
$163,057 on assets acquired under capital leases.
3. PLEDGED ASSETS AND RELATED DEBT
The Company had a $250,000 line of credit agreement with a bank that
expired in September 1998. Borrowings on the agreement bear interest at
0.25% above prime (8.75% at December 31, 1997) and are collateralized
by substantially all assets of the Company and personally guaranteed by
the stockholders. At December 31, 1997, there was $250,000 outstanding
on the agreement. This agreement was replaced in September 1998 with
another
F-11
<PAGE>
credit agreement with a different bank that allowed advances up to
$1,000,000 expiring May 1999. The terms of this new agreement are
substantially the same as described above.
Long-term debt consists of the following:
<TABLE>
<S> <C>
5% CEBA forgivable loan - no principal and interest payments for the first two
years; payable in annual installments of $16,524, including interest, thereafter
to June 2001; collateralized by substantially all assets of the Company and
personally guaranteed by the stockholders; this loan will be forgiven if the
Company achieves and maintains a certain employment level through June 2001 $ 45,000
Obligations under capital leases for equipment; payable in monthly installments
totalling $21,661; expiring through 2001 572,604
--------
617,604
Less current maturities 215,917
--------
$401,687
========
</TABLE>
Excluding the capital lease obligations, maturities of long-term debt
are as follows:
Year Ending
-----------
1998 $ -
1999 15,174
2000 15,630
2001 14,196
--------
$ 45,000
========
Subsequent to December 31, 1997 the Company entered into additional
capital leases for equipment that they had purchased at that date. The
amount received subsequent to year end was $228,678.
4. COMMITMENTS
Leases
The Company leases certain equipment under leases which meet the
criteria for capital lease classification. These agreements have been
capitalized at the lesser of the fair market value of the equipment or
the present value of the future minimum lease payments. The Company
also leases other equipment and its office facility under operating
leases which expire at various dates through October 2011.
The Company's office facility lease is under a 15-year commercial lease
with TEAM Property Management (TPM), an Iowa limited partnership
controlled by the Company's shareholders. Rent expense under all
equipment and facilities operating leases (including property taxes,
insurance, and maintenance costs) was as follows in 1997:
TPM $202,849
Other parties 45,305
--------
Total $248,154
========
Future minimum lease payments under capital and operating leases in
effect at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Operating Leases
Capital -----------------------
Year ending December 31: Leases TPM Other
-------- ---------- -------
<S> <C> <C> <C>
1998 $256,122 $ 192,000 $24,232
1999 237,612 192,000 24,232
2000 137,637 192,000 24,232
2001 15,800 192,000 16,080
2002 192,000
Thereafter (2003 through 2011) 1,696,000
-------- ---------- -------
647,171 $2,656,000 $88,776
========== =======
Less interest (74,567)
--------
Present value of net minimum
lease payments $572,604
========
</TABLE>
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<PAGE>
Employee benefit plan
The Company has a qualified defined contribution 401(k) plan covering
substantially all employees. The plan offers an employee savings
feature and discretionary Company matching contributions. The Company
contributed $118,710 to this plan in 1997.
Virtual Stock Plan
Effective January 1, 1996, the Company implemented a nonqualified
performance compensation plan whereby phantom stock units are awarded
to eligible employees. The plan will operate over an eight year period
ending December 31, 2003 with vesting based on years of service.
Compensation expense under this plan was $19,303 in 1997.
Stock Option plan
The Company has a stock option plan under which options to purchase
shares of common stock may be granted to key employees. The plan
provides that the option price shall be 100% of the book value of the
stock as of the last day of the month preceding the month in which the
options are granted. There were no options issued or outstanding under
this plan as of December 31, 1997.
Buy Sell Agreement
The stockholders of the Company have entered into a stock purchase
agreement among themselves that requires them to first offer their
shares to the other stockholders or to the Company in the event they
wish to sell. The Company and the stockholders have the right of first
refusal to buy all of the shares offered. The Company is required to
buy the stock held by each stockholder upon their death or disability.
5. INCOME TAXES
The benefit for income taxes consists of the following:
Current - primarily federal $(54,000)
Deferred 85,000
--------
$ 31,000
========
A reconciliation of the expected federal income tax benefit at the
statutory rate of 35% with the benefit for income taxes is as follows:
Tax benefit computed at statutory rates $ 21,000
Other 10,000
--------
$ 31,000
========
Under SFAS No. 109, deferred tax assets and liabilities are classified
as current and noncurrent on the basis of the classification of the
related asset or liability for financial reporting.
Temporary differences comprising the net deferred taxes shown on the
balance sheet are as follows:
<TABLE>
<CAPTION>
Assets Liabilities Total
-------- ----------- --------
<S> <C> <C> <C>
Research and development carrying cost $ 51,000 $ 51,000
Accrued vacation 34,000 34,000
Other 10,000 $ (5,000) 5,000
-------- --------- --------
Current 95,000 (5,000) 90,000
Equipment and improvements basis (15,000) (15,000)
Other 7,000 7,000
-------- -------- --------
Noncurrent 7,000 (15,000) (8,000)
-------- -------- --------
$102,000 $(20,000) $ 82,000
======== ======== ========
</TABLE>
F-13
<PAGE>
6. RELATED PARTY TRANSACTIONS
The Company had advances to its stockholders in the amount of $153,356
plus accrued interest of $3,500 as of December 31, 1997. Interest on
advances is adjustable every three years and was 5.65% at December 31,
1997.
The Company has guaranteed loans related to the office building, which
is discussed in Note 4, and has guaranteed another note payable of this
affiliate. These loans have a total balance of $1,907,500 at December
31, 1997. The Company also had a note receivable from this entity for
$138,425 plus accrued interest of $4,113 as of December 31, 1997. The
note bears interest at 5.6% per annum and is due on June 30, 1999.
7. SUBSEQUENT EVENT
On December 18, 1998, the Company and its stockholders entered into an
agreement and plan of merger with a subsidiary of VirtualFund.com, Inc.
of Eden Prairie, Minnesota. Under the terms of the agreement, the
stockholders of the Company exchanged all of their shares in the
Company for stock and other consideration in VirtualFund.com, Inc.
F-14
