**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

**(Mark One)**

** **

ý                                  **QUARTERLYREPORT UNDER SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**Forthe quarterly period ended:  December31, 2001**

 

**or**

 

o                                    **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from            to            **.

 

**CommissionFile No.: 0-18114**

 

**VIRTUALFUND.COM, INC.**

(Exact name of registrantas specified in charter)

 

| **Minnesota**                                                                       |   | **41-1612861**                     |
|-------------------------------------------------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of incorporation or organization)                     |   | (IRS Employer  Identification No.) |
|                                                                                |   |                               |
| **13911 Ridgedale Drive, Suite 477,  Minnetonka, Minnesota**                        |   | **55305**                          |
| (Address  of principal executive offices)                                           |   | (Zip  code)                        |
|                                                                                |   |                               |
| **(952)  348-0480**                                                                 |
| Registrant’s  telephone number, including area code)                           |
|                                                                                |   |                               |
|                                                                                |   |                               |
| (Former name, former  address and former fiscal year, if changed since last report) |
|                                                                                |   |                               |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

                Yes o    No ý

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

                Yeso    No ý

 

APPLICABLE ONLY TOCORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of issuer’s classesof common stock, as of the latest practicable date.

 

| **Class**                     |   | **Outstanding  at 12/31/02** |
|-------------------------------|--------|------------------------------|
|                          |   |                         |
| Common Stock, $.01 par  value |   | 15,203,617                   |

 

 

 

**TABLE OF CONTENTS**

 
| PART I. FINANCIAL  INFORMATION    |     |                                                                                        |
|-----------------------------------|----------|---------------------------------------------------------------------------------------------|
|                              | ITEM 1.  | FINANCIAL STATEMENTS                                                                        |   |   |
|                              |     | CONSOLIDATED BALANCE SHEETS                                                                 |   |   |
|                              |     | CONSOLIDATED  STATEMENTS OF OPERATIONS                                                      |   |   |
|                              |     | CONSOLIDATED  STATEMENTS OF CASH FLOWS                                                      |   |   |
|                              |     | NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS                                                 |   |   |
|                              | ITEM  2. | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |   |   |
|                              | ITEM  3. | QUANTITATIVE  AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                                  |   |   |
| PART  II.  OTHER INFORMATION |     |                                                                                        |
|                              | ITEM  1. | LEGAL  PROCEEDINGS                                                                          |   |   |
|                              | ITEM  2. | CHANGES  IN SECURITIES                                                                      |   |   |
|                              | ITEM 3.  | DEFAULTS UPON SENIOR  SECURITIES                                                            |   |   |
|                              | ITEM  4. | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                        |   |   |
|                              | ITEM  5. | OTHER  INFORMATION                                                                          |   |   |
|                              | ITEM  6. | EXHIBITS  AND REPORTS ON FORM 8-K                                                           |   |   |
| SIGNATURES                        |     |                                                                                        |

 

 

2

----

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

VIRTUALFUND.COM, INC. ANDSUBSIDIARIESCONSOLIDATED BALANCE SHEETS

 
|                                                                                                                                 |   | **December  31,** |      | **June 30,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-----------|--------------|--------|
|                                                                                                                                 |   | **2001**          |      | **2001**     |   |
|                                                                                                                                 |   | **(Unaudited)**   |      |         |   |
| ASSETS                                                                                                                               |   |              |      |         |   |
| CURRENT ASSETS                                                                                                                       |   |              |      |         |   |
| Cash and cash  equivalents                                                                                                           |   | $                 | 3,699,494 |         | $      | 8,439,552 |   |
| Restricted cash                                                                                                                      |   | 2,000,000         |      | —       |   |
| Marketable  securities                                                                                                               |   | 1,082,520         |      | —       |   |
| Receivables,  less allowance for doubtful accounts of $-0- and $1,600                                                                |   | 125,730           |      | 1,355,933    |   |
| Receivables—related  parties, less allowance of $-0- and $1,925,400                                                             |   | 135,671           |      | 135,671      |   |
| Notes receivable                                                                                                                     |   | 393,173           |      | —       |   |
| Prepaid expenses                                                                                                                     |   | 1,627,890         |      | 1,615,984    |   |
| TOTAL CURRENT  ASSETS                                                                                                                |   | 9,064,478         |      | 11,547,140   |   |
|                                                                                                                                 |   |              |      |         |   |
| PROPERTY AND  EQUIPMENT, NET                                                                                                         |   | 17,655            |      | 58,022       |   |
|                                                                                                                                 |   |              |      |         |   |
| NOTES RECEIVABLE                                                                                                                     |   | 89,412            |      | —       |   |
|                                                                                                                                 |   |              |      |         |   |
| NOTES  RECEIVABLE—RELATED PARTIES                                                                                               |   | 146,948           |      | —       |   |
|                                                                                                                                 |   |              |      |         |   |
| MARKETABLE  SECURITIES                                                                                                               |   | 87,811            |      | —       |   |
|                                                                                                                                 |   |              |      |         |   |
|                                                                                                                                 |   | $                 | 9,406,304 |         | $      | 11,605,162 |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                            |   |              |      |         |   |
|                                                                                                                                 |   |              |      |         |   |
| CURRENT  LIABILITIES                                                                                                                 |   |              |      |         |   |
| Notes payable and  accrued interest—related parties, 9.25%, unsecured                                                           |   | $                 | 840,110   |         | $      | 820,343 |   |
| Accounts payable                                                                                                                     |   | 684,671           |      | 717,004      |   |
| Accrued  nonrecurring and restructuring charges                                                                                      |   | 1,370,745         |      | 1,883,280    |   |
| Accrued expenses                                                                                                                     |   | 133,500           |      | 138,745      |   |
| Other current  liabilities                                                                                                           |   | 1,544,436         |      | 1,856,780    |   |
| Net liabilities  of discontinued operations                                                                                          |   | 1,327,036         |      | 2,061,221    |   |
| TOTAL CURRENT  LIABILITIES                                                                                                           |   | 5,900,498         |      | 7,477,373    |   |
|                                                                                                                                 |   |              |      |         |   |
| COMMITMENTS AND  CONTINGENCIES                                                                                                       |   |              |      |         |   |
|                                                                                                                                 |   |              |      |         |   |
| STOCKHOLDERS’  EQUITY                                                                                                           |   |              |      |         |   |
| Series A  convertible preferred stock, $.01 par value (5,000,000 shares authorized; no  shares issued and outstanding)               |   | —            |      | —       |   |
| Common stock,  $.01 par value (50,000,000 shares authorized; 15,381,404 and 15,631,404  shares issued and outstanding, respectively) |   | 153,814           |      | 156,314      |   |
| Additional  paid-in capital                                                                                                          |   | 36,140,694        |      | 36,150,694   |   |
| Accumulated  other comprehensive loss                                                                                                |   | (141,853          | )         | —       |   |
| Accumulated  deficit                                                                                                                 |   | (32,646,849       | )         | (32,179,219  | )      |
|                                                                                                                                 |   | 3,505,806         |      | 4,127,789    |   |
|                                                                                                                                 |   |              |      |         |   |
|                                                                                                                                 |   | $                 | 9,406,304 |         | $      | 11,605,162 |   |

 

See notes to consolidated financial statements

 

 

3

----

 

VIRTUALFUND.COM,INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OFOPERATIONS

(Unaudited)

 
|                                                                             |   | **Three  Months Ended** |   | **Six Months  Ended**   |   |
|----------------------------------------------------------------------------------|--------|-------------------------|--------|-------------------------|--------|
|                                                                             |   | **December  31,  2001** |   | **December  30,  2000** |   | **December  31,  2001** |   | **December  30,  2000** |   |
|                                                                             |   |                    |   |                    |   |   |   |   |   |
| NET SALES                                                                        |   | $                       | — |                    | $      | — |   | $ | — |   | $ | — |   |
|                                                                             |   |                    |   |                    |   |   |   |   |   |
| COST OF SALES                                                                    |   | —                  |   | —                  |   | — |   | — |   |
|                                                                             |   |                    |   |                    |   |   |   |   |   |
| GROSS PROFIT                                                                     |   | —                  |   | —                  |   | — |   | — |   |
|                                                                             |   |                    |   |                    |   |   |   |   |   |
| OPERATING  EXPENSES                                                              |   |                    |   |                    |   |   |   |   |   |
| General and  administrative                                                      |   | 690,245                 |   | 2,149,540               |   | 1,316,561 |   | 4,022,142 |   |
| Restructuring  charges (recoveries)                                              |   | (92,799                 | )      | 11,468,041              |   | (101,119 | ) | 11,468,041 |   |
|                                                                             |   | 597,446                 |   | 13,617,581              |   | 1,215,442 |   | 15,490,183 |   |
|                                                                             |   |                    |   |                    |   |   |   |   |   |
| OPERATING LOSS                                                                   |   | (597,446                | )      | (13,617,581             | )      | (1,215,442 | ) | (15,490,183 | ) |
|                                                                             |   |                    |   |                    |   |   |   |   |   |
| OTHER INCOME  (EXPENSE)                                                          |   |                    |   |                    |   |   |   |   |   |
| Interest expense                                                                 |   | —                  |   | (2,179                  | )      | (986 | ) | (3,354 | ) |
| Interest income                                                                  |   | 70,234                  |   | 373,318                 |   | 151,708 |   | 954,247 |   |
| Other                                                                            |   | —                  |   | 32,071                  |   | (62,660 | ) | 36,550 |   |
|                                                                             |   | 70,234                  |   | 403,210                 |   | 88,062 |   | 987,443 |   |
| LOSS FROM CONTINUING  OPERATIONS BEFORE INCOME TAXES                             |   | (527,212                | )      | (13,214,371             | )      | (1,127,380 | ) | (14,502,740 | ) |
|                                                                             |   |                    |   |                    |   |   |   |   |   |
| INCOME TAX  PROVISION                                                            |   | —                  |   | —                  |   | — |   | — |   |
|                                                                             |   |                    |   |                    |   |   |   |   |   |
| LOSS FROM  CONTINUING OPERATIONS                                                 |   | (527,212                | )      | (13,214,371             | )      | (1,127,380 | ) | (14,502,740 | ) |
|                                                                             |   |                    |   |                    |   |   |   |   |   |
| INCOME (LOSS)  FROM DISCONTINUED OPERATIONS, net of income tax provision of $-0- |   | 567,000                 |   | (2,848,333              | )      | 659,750 |   | (5,548,358 | ) |
|                                                                             |   |                    |   |                    |   |   |   |   |   |
| NET INCOME  (LOSS)                                                               |   | $                       | 39,788 |                    | $      | (16,062,704 | ) | $ | (467,630 | ) | $ | (20,051,098 | ) |
|                                                                             |   |                    |   |                    |   |   |   |   |   |
| NET INCOME  (LOSS) PER COMMON SHARE—BASIC AND DILUTED                       |   |                    |   |                    |   |   |   |   |   |
| Continuing  operations                                                           |   | $                       | (0.03  | )                       | $      | (0.84 | ) | $ | (0.07 | ) | $ | (0.88 | ) |
| Discontinued  operations                                                         |   | 0.03                    |   | (0.18                   | )      | 0.04 |   | (0.34 | ) |
|                                                                             |   | $                       | 0.00   |                    | $      | (1.02 | ) | $ | (0.03 | ) | $ | (1.22 | ) |
|                                                                             |   |                    |   |                    |   |   |   |   |   |
| WEIGHTED AVERAGE  COMMON SHARES OUTSTANDING BASIC AND DILUTED                    |   | 15,552,600              |   | 15,713,729              |   | 15,592,002 |   | 16,445,132 |   |

 

See notes to consolidated financial statements

 

4

----

 

VIRTUALFUND.COM, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASHFLOWS

Unaudited

 
|                                                                        |   | **Six Months  Ended**   |      |
|-----------------------------------------------------------------------------|--------|-------------------------|-----------|
|                                                                        |   | **December  31,  2001** |      | **December  30,  2000** |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES                                       |   |                    |      |   |   |
| Net loss                                                                    |   | $                       | (467,630  | ) | $ | (20,051,098 | ) |
| Adjustment to  reconcile net loss to net cash used by operating activities: |   |                    |      |   |   |
| Discontinued  operations                                                    |   | (734,186                | )         | (2,333,630 | ) |
| Restructuring  and unusual charges—asset write off                     |   | —                  |      | 3,823,402 |   |
| Depreciation and  amortization                                              |   | 13,467                  |      | 337,318 |   |
| Loss on sale or  disposal of property and equipment                         |   | 22,400                  |      | (9,040 | ) |
| Change in assets  and liabilities:                                          |   |                    |      |   |   |
| Accounts and  notes receivable                                              |   | 837,030                 |      | (73,752 | ) |
| Receivables—related  parties                                           |   | 135,671                 |      | — |   |
| Prepaid expenses                                                            |   | (11,906                 | )         | (1,794,799 | ) |
| Accounts payable                                                            |   | (32,331                 | )         | (246,882 | ) |
| Accrued  nonrecurring and restructuring charges                             |   | (512,537                | )         | 3,541,996 |   |
| Accrued expenses                                                            |   | (5,245                  | )         | (306,166 | ) |
| Income taxes  payable                                                       |   | —                  |      | (866,530 | ) |
| Other current  liabilities                                                  |   | (312,344                | )         | (6,369 | ) |
| Net cash used by  operating activities                                      |   | (1,067,611              | )         | (17,985,550 | ) |
|                                                                        |   |                    |      |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                       |   |                    |      |   |   |
| Purchase of  marketable securities                                          |   | (1,312,184              | )         | — |   |
| Loans to related  parties                                                   |   | (1,702,263              | )         | (522,548 | ) |
| Collections from  related parties                                           |   | 1,350,000               |      | — |   |
| Purchases of  property and equipment                                        |   | —                  |      | (611,919 | ) |
| Proceeds from  sale of property and equipment                               |   | 4,500                   |      | 23,354 |   |
| Additions to  other assets                                                  |   | —                  |      | (7,964 | ) |
| Net cash used by  investing activities                                      |   | (1,659,947              | )         | (1,119,077 | ) |
|                                                                        |   |                    |      |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                       |   |                    |      |   |   |
| Repurchase of  common shares                                                |   | —                  |      | (5,970,613 | ) |
| Cancellation of  common shares                                              |   | (12,500                 | )         | — |   |
| Net cash used by  financing activities                                      |   | (12,500                 | )         | (5,970,613 | ) |
|                                                                        |   |                    |      |   |   |
| DECREASE IN CASH  AND CASH EQUIVALENTS                                      |   | (2,740,058              | )         | (25,075,240 | ) |
|                                                                        |   |                    |      |   |   |
| CASH AND CASH  EQUIVALENTS                                                  |   |                    |      |   |   |
| Beginning of  period                                                        |   | 8,439,552               |      | 39,533,688 |   |
|                                                                        |   |                    |      |   |   |
| End of period  (2001 includes $2,000,000 of restricted cash)                |   | $                       | 5,699,494 |   | $ | 14,458,448 |   |

 

See notes to consolidated financial statements

 

5

----

 

VIRTUALFUND.COM, INC. ANDSUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.       Basis of Presentation -

 

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of Americafor interim financial information and with the instructions to Form 10-Q andRule 10-01 of Regulation S-X. They do not include all information and footnotesrequired by accounting principles generally accepted  in the United States of America for complete financialstatements. However, except as disclosed herein, there has been no materialchange in the information disclosed in the notes to consolidated financialstatements included in the Annual Report on Form 10-K of VirtualFund.com, Inc.and subsidiaries (the “Company”) for the year ended June 30, 2001. In theopinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a fair presentation have been included.Operating results for the three and six months ended December 31, 2001 are notnecessarily indicative of the results that may be expected for the year endingJune 30, 2002.

 

2.       Restructuring Charges -

 

In December 2000, as aresult of the discontinued operations and other actions, the Company adopted arestructuring plan and incurred certain restructuring charges in 2001, whichare included in operations as follows:

 

 
|                                 |   | **Allowance  and  Accrual at** |      | **Three  Months Ended December 31, 2001** |   | **Allowance  and  Accrual at** |   |
|--------------------------------------|--------|--------------------------------|-----------|-------------------------------------------|--------|--------------------------------|--------|
|                                 |   | **September  30,  2001**       |      | **Recoveries**                            |   | **Asset  Write-offs**          |   | **Amounts  Paid** |   | **December  31,   2001** |   |
| NONRECURRING                         |   |                           |      |                                      |   |                           |   |   |   |   |   |
| Allowance for  doubtful accounts (a) |   | $                              | 1,925,369 |                                      | $      | —                         |   | $ | — |   | $ | — |   | $ | 1,925,369 |   |
|                                 |   |                           |      |                                      |   |                           |   |   |   |   |   |
| RESTRUCTURING                        |   |                           |      |                                      |   |                           |   |   |   |   |   |
| Product  discontinuance (b)          |   | 743,996                        |      | —                                    |   | (36,624                        | )      | — |   | 707,372 |   |
| Facilities costs  (c)                |   | 919,468                        |      | (92,799                                   | )      | (30,296                        | )      | (133,000 | ) | 663,373 |   |
|                                 |   | 1,663,464                      |      | (92,799                                   | )      | (66,920                        | )      | (133,000 | ) | 1,370,745 |   |
|                                 |   |                           |      |                                      |   |                           |   |   |   |   |   |
|                                 |   | $                              | 3,588,833 |                                      | $      | (92,799                        | )      | $ | (66,920 | ) | $ | (133,000 | ) | $ | 3,296,114 |   |
|                                 |   |                           |      |                                      |   |                           |   |   |   |   |   |

 

 

6

----

 
|                                 |   |                          |      |                                    |   |                           |   |              |     |                    |   |
|--------------------------------------|--------|-------------------------------|-----------|-----------------------------------------|--------|--------------------------------|--------|-------------------|----------|-------------------------|--------|
|                                 |   |                          |      |                                    |   |                           |   |              |     |                    |   |
|                                 |   | **Allowance  and**            |      | **Six Months  Ended December 31, 2001** |   | **Allowance  and  Accrual at** |   |
|                                 |   | **Accrual at  June 30, 2001** |      | **Recoveries**                          |   | **Asset  Write-offs**          |   | **Amounts  Paid** |     | **December  31,  2001** |   |
| NONRECURRING                         |   |                          |      |                                    |   |                           |   |              |     |                    |   |
| Allowance for  doubtful accounts (a) |   | $                             | 1,925,369 |                                    | $      | —                         |   | $                 | —   |                    | $      | — |   | $ | 1,925,369 |   |
|                                 |   |                          |      |                                    |   |                           |   |              |     |                    |   |
| RESTRUCTURING                        |   |                          |      |                                    |   |                           |   |              |     |                    |   |
| Product  discontinuance (b)          |   | 855,076                       |      | —                                  |   | (147,704                       | )      | —            |     | 707,372                 |   |
| Employee  separation costs           |   | 46,956                        |      | —                                  |   | —                         |   | (46,956           | )        | —                  |   |
| Facilities costs  (c)                |   | 981,248                       |      | (101,119                                | )      | (83,756                        | )      | (133,000          | )        | 663,373                 |   |
|                                 |   | 1,883,280                     |      | (101,119                                | )      | (231,460                       | )      | (179,956          | )        | 1,370,745               |   |
|                                 |   |                          |      |                                    |   |                           |   |              |     |                    |   |
|                                 |   | $                             | 3,808,649 |                                    | $      | (101,119                       | )      | $                 | (231,460 | )                       | $      | (179,956 | ) | $ | 3,296,114 |   |
|                                 |   |                          |      |                                    |   |                           |   |              |     |                    |   |

----

(a)          Allowance for uncollectiblereceivables from Melvin Masters (Masters), the Company’s former Chief ExecutiveOfficer (former CEO).

 

(b)         Costs associatedwith the discontinuance of the Internet business-to-business software platform,B2BXchange, and separate supply chain investment.  Approximately $1,585,000 related to the Rymatics termination ofoperations (including $1,031,250 of goodwill write-off) and $1,200,000 to theManugistics legal proceedings.

 

(c)       Payments to exit closed and idlefacilities leases.

 

3.       Discontinued Operations

 

In the fourth quarter of2001 we discontinued the Internet Services Business Unit (ISBU), which includedthe B2BX platform development and Supply Chain Management software integration,RSPNetwork, Inc., and Rymatics, Inc. The related expenses are reflected in the restructuring charges includedin the operating statement in that fiscal year.  As part of the restructuring, the assets of RSPN were sold to amember of the Company’s Board of Directors and a stockholder during the quarterended September 30, 2001.  All ISBUoperations are disclosed herein as discontinued operations.  Net sales of the ISBU for the three monthsended December 31, 2001 and December 30, 2000 were $-0- and $1,590,354,respectively, and $130,408 and $3,080,354 for the six month periods endedDecember 31, 2001 and December 30, 2000, respectively.

 

7

----

 

4.       Comprehensive Loss

 

Comprehensive loss forthe Company includes net income (loss) and unrealized loss on marketable securitiesand was as follows:

 
|                                      |   | **Three  Months Ended December 31,** |     | **Six Months  Ended December 31,** |   |
|-------------------------------------------|--------|--------------------------------------|----------|------------------------------------|--------|
|                                      |   | **2001**                             |     | **2000**                           |   | **2001** |   | **2000** |   |
| Net income  (loss)                        |   | $                                    | 39,788   |                               | $      | (16,062,704 | ) | $ | (467,630 | ) | $ | (20,051,098 | ) |
| Other  comprehensive loss:                |   |                                 |     |                               |   |   |   |   |   |
| Unrealized loss  on marketable securities |   | (141,853                             | )        | —                             |   | (141,853 | ) | — |   |
|                                      |   |                                 |     |                               |   |   |   |   |   |
| Total comprehensive loss                  |   | $                                    | (102,065 | )                                  | $      | (16,062,704 | ) | $ | (609,483 | ) | $ | (20,051,098 | ) |
|                                      |   |                                 |     |                               |   |   |   |   |   |

 

5.       Earnings Per Share Calculation

 

The following table summarizes securities that could potentially dilutebasic earnings per share in the future but were not included in the computationof diluted earnings per share because to do so would have been antidilutive.

 
|          |   | **December 31,  2001** |   | **December  30,  2000** |   |
|---------------|--------|------------------------|--------|-------------------------|--------|
| Stock Options |   | 1,889,183              |   | 4,968,301               |   |
| Warrants(a)   |   | 4,054,953              |   | 4,404,953               |   |
|          |   |                   |   |                    |   |
|          |   | 5,944,136              |   | 9,373,254               |   |

 

----

(a)          Includes warrants for 2,192,239 common shares thatwere cancelled on March 11, 2002 under terms of a Global Settlement Agreementbetween the Company and Masters.

 

6.       Certain Related Party Transactions

 

DirectorsConsulting Compensation Agreements

 

In July 2001, the Special Compensation Committee of the Board ofDirectors authorized an agreement with the Company’s Chairman of the Board(Chairman).  The agreement provides forthe Chairman to be paid a monthly consulting services fee of $21,667 for 3years plus 100,000 options exercisable at $0.15 per share, to be granted oneach anniversary date.  If terminated bythe Company without cause, compensation is generally continued until the end ofthe agreement.  The Company alsoauthorized payment of his relocation expenses, which totaled $202,527 in fiscal2002.  In addition, the Chairmanreceives a monthly directors fee of $3,000. Additionally, the Chairman was reimbursed expenses of $26,717 duringfiscal 2002.

 

In July 2001, the Special Compensation Committee of the Board ofDirectors authorized an agreement with the Company’s Vice-Chairman of the Board(Vice-Chair).  The agreement providesfor the Vice-Chair to be paid a monthly consulting services fee of $12,500 for3 years plus 100,000 options exercisable at $0.15 per share, to be granted oneach anniversary date.  If terminated bythe Company, without cause, payment of the compensation is generally continueduntil the end of the agreement.  InAugust 2001, the Company also authorized a one–time special consultingfee in the amount of $30,000 for services provided to the Company outside ofthe agreement for 

 

8

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his monthly consulting services. In addition, the Vice-Chair receives a monthly directors fee of$3,000.  Additionally the Vice-Chair wasreimbursed expenses of $57,017 during fiscal 2002.

 

In connection with the June and July 2001 agreements with the Chairmanand Vice-Chair, the Company consulted with an independent specialist.

 

Directors LoanProgram

 

In July 2001, the Board of Directors approved a loan program, wherebythe Company is authorized to loan to Directors up to $500,000, in total, to buystock in the Company.  The Chairman andVice-Chair each borrowed $73,314 in August 2001 to purchase 488,759 and 488,758shares of the Company’s common stock, respectively. As of December 31, 2001,the Chairman and Vice-Chair each owes the Company approximately $75,000 underterms of their loan agreements, the amount originally borrowed plus interestaccrued at the annual rate of 8%.  Theloans are due on August 1, 2006.  TheSarbanes-Oxley Act of 2002 restricts future loans to directors.

 

Consulting Agreement—Interim CEO

 

In August 2001, the Company entered into a consulting agreement withFinancial Drivers, Ltd., controlled by Joseph D. Pupel.  Under terms of the agreement, Mr. Pupel isto provide financial services to the Company. In October 2001, Mr. Pupel was designated Interim Chief ExecutiveOfficer and Financial Drivers, Ltd. is paid $100 per hour for his services.During the three months ended December 31, 2001,  the Company paid Financial Drivers, Ltd. $36,285 for Mr. Pupel’sservices and $24,076 for financial services provided by other employees ofFinancial Drivers, Ltd.  For the sixmonths ended December 31, 2002,  theCompany paid Financial Drivers, Ltd. $46,789 for Mr. Pupel’s services and $36,832for financial services provided by other employees of Financial Drivers, Ltd.

 

Repricing

 

In July 2001, the Board approved the repricing of 500,000 nonstatutorystock options from $.16 per share to $.15 per share, approved the repricing of100,000 nonstatutory stock options from $2.00 to $.15 per share, and repriced100,000 nonstatutory stock options from $1.65 per share to $.15 per share.

 

7.       Investments

 

Investment—CommonStock

 

At various times during October and November 2001, the Company made anaggregate investment of $1,007,000 for 601,400 shares of Cone MillsCorporation, a publicly traded company that is a producer of denimand decorative fabrics. Commissions of approximately $36,000 were paid on these transactions toEquity Securities Investments, Inc. (Equity) whose president is also theVice-Chair of the Company.  The Companyjoined an existing investor group and in connection therewith executed anagreement with Equity on the same terms as other members of the group.  Under the terms of such agreement, theCompany agreed to pay 20% advisory fee on the gain from the sale of securitiesand reflected at year-end to be paid to Equity.  The agreement also requires 20% of the appreciation on certainsecurities and reflected at year-end to be paid to Equity.  In May and June 2002, 235,100 of theseshares were sold for a net gain of $446,874. Commissions of approximately $121,086 related to these transactions werealso paid to Equity.

 

Investment—TemporarySubordinated Loan Agreement

 

On October 30, 2001, the Company entered into a Temporary SubordinatedLoan Agreement with Equity.  Under termsof the loan, the Company agreed to lend the company $1,350,000 at 10%interest.  The loan was repaid withinterest on December 28, 2001.

 

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Investment—ConvertibleNotes

 

On November 8, 2001, the Company entered into an arrangement with CashSystems, Inc. (Borrower), a national provider of cash access services to thegaming and retail industries, to loan them up to $500,000 in the form ofconvertible notes.  On November 8, 2001,the Company loaned the Borrower $200,000 and an additional $200,000 was loanedon March 1, 2002.  The notes mature onNovember 8, 2003, pay interest at 12.5%, pay principal and interest on amonthly basis, and require the Borrower to grant the Company a security interestin a cash account which is required to maintain a minimum of $300,000 duringthe term of the loan.  Additionally, theagreement contains personal guarantees of the President and CEO of the Borrowerand a pledge of certain shares of his stock. The notes are convertible into common stock of the Borrower at anexercise price of $2 per share.  Theagreement also provides that the Company will receive warrants to purchase upto 125,000 shares of common stock of the Borrower, dependent upon the level ofborrowings.  The exercise price of thewarrants is $2 per share.  Commissionsof $65,000 and warrants to purchase 50,000 shares of common stock were paid andissued, respectively, by the Borrower to Equity.

 

 

Investment—CommonStock/Convertible Note

 

On October 24, 2001, the Company invested $305,000 for an 80% ownershipposition in Business Translation Services, Inc. (BTSV), a NevadaCorporation.  On November 12, 2001 theCompany loaned $300,000 to BTSV under the terms of a 10% convertible promissorynote, payable in three installments over 12 months.  The note is convertible into shares of BTSV at $.50 pershare.  On November 12, 2001, BTSVmerged with Muller Media, Inc. under a plan of reorganization within themeaning of Section l68 of the Internal Revenue Code, and BTSV’s name waschanged to Muller Media, Inc. (Muller). Muller guaranteed the convertible promissory note, issued a warrant tothe Company to purchase 1,200,000 shares of Muller common stock at an exerciseprice of $.125 per share and agreed to issue to the Company 2,000,000 shares ofits common stock in the event of default. Before taking into account the effects of exercising the warrant, theCompany’s ownership in Muller is approximately 16%.  Under the terms of the Kittrell Settlement (Note 9), 400,000shares of Muller were transferred to Kittrell in May 2002, reducing theCompany’s ownership to approximately 13%.

 

BTSV/Muller paid a commission of $107,550 and issued warrants for1,000,000 shares of Muller common stock to Equity for this transaction.

 

In July 2002,Muller Media, claiming unspecified damages, defaulted on payment of their$300,000 note payable to the Company. The Company established a reserve equal to the full amount of this note,and is actively pursuing collection.

 

8.       Supplemental Disclosures of Cash FlowInformation

 
|                                          |   | **Six Months  Ended**   |   |
|-----------------------------------------------|--------|-------------------------|--------|
|                                          |   | **December  31,  2001** |   | **December  30,  2000** |   |
|                                          |   |                    |   |   |   |
| Interest paid                                 |   | $                       | 986    |   | $ | (3,354 | ) |
|                                          |   |                    |   |   |   |
| Non-cash  investing and financing activities: |   |                    |   |   |   |
| Net unrealized  loss on marketable securities |   | (141,853                | )      | — |   |
|                                          |   |                    |   |   |   |
|                                               |        |                         |        |  |  |  |  |

 

 

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9.       Legal Proceedings

 

Global Settlement Agreement—Masters

On March 11, 2002, the Company entered into a Global SettlementAgreement with Melvin Masters ("Masters"), TimeMasters, Inc.,Grandchildren's Realty Alternative Program I, L.P. ("GRAMPI"), andDavid Norlander — individually and as Trustee of and on behalf of Masters TrustI, Realty Settlement, LLC, and Jessica Tran-Masters.  The parties gave each other mutual and complete releases for anyclaims and judgments, thereby ending the legal proceedings summarized below(“Feltl,” “Masters,” “Montana,” and “GRAMPI”). The Company agreed to convey to Masters or his designee all of the Company’sassets pertaining specifically and solely to B2BXchange, and pay to Masters orhis designee the amount of $600,000, which included payment of Masters’attorneys’ fees.  Masters, in turn,agreed to transfer to the Company all shares of Company stock and all warrantsowned or controlled by Masters, GRAMPI, Masters Trust I, TimeMasters, anyparent, sibling, spouse (whether current or future), child, or grandchild.

 

Kittrell

In August 2000,the Company commenced litigation against Jaffray Communications, Inc., doingbusiness as Vitesse Networks, Inc. (Vitesse) and its former President and COOMark Kittrell in Hennepin County District Court.  The lawsuit alleges that Mr. Kittrell violated his agreement notto compete against the Company and that he, contrary to his contractualpromises, recruited RSPNetwork employees to Vitesse and its subsidiaries.  The suit also alleges that Vitesseinterfered with the contractual rights of RSPNetwork that prevented Mr.Kittrell from competing against it and the Company and recruiting employees ofRSPNetwork and the Company.  Finally, the suit alleges certainsecurities law violations and misrepresentations by Mr. Kittrell inconnection with the conversion and sale of Company stock.  In connection with this lawsuit,Mr. Kittrell made a demand for arbitration, alleging breach of contractand breach of implied covenants of good faith and fair dealing.  Kittrell and the Company filed cross motionsin the trial court regarding an arbitration clause in one of the contracts at issuein the case.  Prior to the Court hearingthese motions, Kittrell and the Company agreed to arbitrate the disputesbetween them.  The suit against Vitessewas settled with Vitesse agreeing to pay $10,000, and both parties agreeing todrop all further claims.  The lawsuitagainst Kittrell went to arbitration in January 2002, with Kittrellprevailing.  The arbitrator awardedKittrell, net of certain offsets, $2,708,073. Under terms of the finalsettlement, the Company paid Kittrell $2,137,547, transferred to him 400,000shares of Muller Media, Inc. stock being held by the Company for investmentpurposes (with a book value of $60,188), and also transferred to him the rightsto future earnout payments (having no recorded value) due the Company underterms of the agreement selling the assets of RSPNetwork to RSP Acquisitions.

 

**Wiskus**

In January 2001, Michael S. Wiskus brought an action against the Companyin Minnesota state court, Hennepin County, for breach of contract andpromissory estoppel.  This action wassettled before reaching court, with the Company agreeing to pay Wiskus $95,000in exchange for his release of all present and future claims against theCompany.

 

Metiom

This matter commenced in February 2001, in the United States DistrictCourt for the District of Minnesota. The Company sued Metiom, Inc. (Metiom) seeking a declaratory judgmentthat Metiom breached a September 29, 2000, Software Licensing Agreement byfailing to timely deliver “ConnectTrade” software to it.  A few days later, Metiom filed a suitagainst the Company in the United States District Court for the District of NewYork, alleging that the Company breached the September 29, 2000, SoftwareLicensing Agreement and is seeking $1,250,000, plus interest at 1% permonth.  In July of 2002, a negotiatedsettlement was reached.  Under terms ofthe settlement, the Company paid Metiom $365,000 and entered into a mutualrelease of all current and future actions, causes of action, individual orclass action claims or demands of any kind.

 

Feltl

In November 2000, Masters and GRAMPI attempted to convey real estate toJohn E. Feltl, which subsequently became subject to the Montana litigation (seebelow).  The Company joined Feltl asdefendant in the Montana litigation, claiming that the conveyances werefraudulent.  The Company’s claims againstFeltl were relinquished under terms of the March 11, 2002, Global SettlementAgreement—Masters.

 

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Masters

On December 1, 2000, the former CEO (Masters), purporting to act bothindividually and derivatively on behalf of the Company, filed an action inMinnesota state court against the Company and three of its directors, Edward S.Adams, Timothy R. Duoos and Roger Wikner. Masters’ complaint alleged breach offiduciary duty, corporate waste and violations of the Minnesota BusinessCorporation Act and requested that the Court act to temporarily restrain thedefendants from (i) selling shares of the Company or its subsidiaries, (ii)terminating or changing the job description of any employee of the Company,(iii) selling assets of the Company or its subsidiaries except in the ordinarycourse of business, (iv) materially changing any business relationship of theCompany, (v) interfering with the scheduling of a shareholders’ meeting byMasters to elect new directors or remove all directors with the exception ofMasters and Steve Fisher, (vi) diminishing the global operating performance ofthe Company’s web site, and (vii) preventing employees or directors fromcommunicating with Masters. Moreover, Masters wanted to be allowed to removehis personal property from the Company’s premises.  On December 5, 2000, the Court denied Masters’ motion for atemporary restraining order in its entirety. The Company thereafter assertedcounterclaims against Masters seeking to recover damages arising from breach offiduciary duty, wrongful use of corporate assets and failure to repay personalloans Masters had received from the Company. At a second injunction hearingheld on January 5, 2001, the Court denied Masters’ renewed motion for atemporary injunction. After the Company and the director defendants filedmotions to dismiss Masters’ complaint, Masters stipulated to the dismissal ofhis claims. His derivative claims were dismissed with prejudice by the Court onFebruary 12, 2001, and any personal claims dismissed without prejudice.  The Court entered a judgment against Mastersregarding the repayment of personal loans. The Company agreed to release Masters from this judgment under terms ofthe Global Settlement Agreement—Masters.

 

Montana

On December 18, 2000, the Company filed an action in Montana state courtagainst Masters, and two other entities affiliated with Masters. The Companyasserted that Masters and/or GRAMPI purported to grant a security interest tothe Company in Montana properties actually owned by another Master’s affiliate,Masters Trust I. The Deed of Trust necessary to create the security interestwas never recorded. The complaint sought a declaration that the Company has asecurity interest in three parcels of real property owned by the Masters’affiliate. In addition to filing the complaint, the Company filed the necessarydocuments to restrict Masters’ or GRAMPI’s ability to convey any of theaffected parcels of real property while the lawsuit was pending.  This action was dropped under terms of theGlobal Settlement Agreement—Masters.

 

GRAMPI

On January 10, 2001, the Company commenced an action in Hennepin CountyDistrict Court against Masters and GRAMPI. The action sought, among other things, to void the lease of space in abusiness complex owned by GRAMPI on the grounds that the lease was unfair,unreasonable, and unduly benefited Masters, in violation of Masters’ fiduciaryduties to the Company.  The action alsosought the return of profits realized by Masters as a result of hisself-dealing regarding the purchase of the business complex, the lease, andother real estate transactions with the Company.  In March 2001, GRAMPI asserted a counterclaim against the Companyfor breach of the lease contract.  TheGRAMPI claims against the Company exceeded $9 million.  Masters also asserted a personalcounterclaim at that time for breach of an alleged employment contract with theCompany.  Both the Company’s and Mastersactions were withdrawn under terms of the Global Settlement Agreement—Masters.

 

Manugistics

Contrary to explicit instructions received from the majority of theBoard of Directors, Masters signed, on behalf of the Company, a softwarelicensing agreement with a company called Manugistics and initiated the wiretransfer of an initial payment of $2.5 million.  The Company refused to honor the contract alleging thatManugistics was aware of Masters acting outside of his powers and authoritieswhen signing the contract and wiring the money.  Manugistics commenced an action against the Company in federalcourt in Maryland on December 5, 2000, alleging breach of contract.  The Company filed in earlyFebruary 2001 its Answer and Counterclaims for Rescission and DeclaratoryJudgment (Claim) that the alleged contract was not valid.  TheCompany requested the Court impose a constructive trust over the $2.5 millionManugistics received.  The Claim 

 

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alleged that Manugistics was guilty of conversion and was unjustlyenriched.  It also sought a declaratoryjudgment that the contract was null and void, or that the Court rescind thecontract.  The parties settled thelitigation on July 6, 2001. Manugistics paid the Company $1.3 million in July 2001, and the parties agreedto mutually and completely release each other from any further claims.

 

Ryan

In September 2000,former Executive Vice President Thomas Ryan brought a lawsuit in HennepinCounty District Court against the Company and its former subsidiary, Colorspan Corporation,alleging that he is entitled to severance payments and performance optionsbased upon an employment agreement with Colorspan.  Mr. Ryan sought damages of $175,000 in addition to performanceoptions and attorney fees.  The matterwas tried before a jury and on October 2, 2001, the jury entered a verdictin favor of the Company.  Mr. Ryan isseeking to appeal the verdict.

 

Thurn et al.

In February 2001, the Company commenced an action in Hennepin CountyDistrict Court against Timothy N. Thurn, Nancy Masters Sawyer, and Danny J.Vatland. The Company sought money damages against the defendants for breachesof their employment agreements and/or their fiduciary duties. Moreover, theCompany sought to have the Court declare that the defendants breached theirrespective employment agreements and were therefore not entitled to any furthercompensation or benefits under those agreements and that these agreements arerescinded. The Company claimed that Thurn violated his contractual and/orfiduciary duties as Chief Financial Officer and/or Treasurer of the Company,one of the violations being the transfer of $2.5 million to Manugistics, eventhough he was aware or should have been aware that the Company’s Board ofDirectors had restricted Masters’ authority to enter into the transaction withManugistics.  The Company claimedMasters Sawyer breached her duties as former Secretary/Assistant Treasurer andmost recently as Vice-President of Operations, amongst others, by receivingexcessive unapproved compensation, failing to disclose contracts andtransactions that were contrary to the Company’s interest, and failing toperform the tasks and duties of her position due to excessive, unexplainedabsenteeism. The Company claimed that Vatland as Vice President of AdvancedTechnology Development and/or Chief Technology Officer breached his dutiesbecause he failed to disclose and furthered contracts and transactions bycorporate officers and/or directors that were contrary to the Company’sinterest, and because he furthered the use of Company funds and/or assets,which were not in furtherance of the Company’s interest and were not authorizedor were in contravention of directives issued or restrictions placed by theCompany’s Board of Directors.  Alldefendants denied the Company’s claims and raised various counterclaims,including counterclaims for severance payments, breach of contract andviolation of the Workers Adjustment Retraining Notification Act.  Vatland and Thurn claimed to be entitled to12 months of severance pay and Masters Sawyer claimed to be entitled to 36months of severance pay. Vatland further contended that he was entitled to$75,000 per year, covering a period of time after he voluntarily had his basecompensation reduced from $250,000 to $175,000.  The Company settled all claims in June 2001.  In consideration for payments from theCompany in the amounts of $157,500, $45,000, and $55,000 to Vatland, Thurn, andMasters Sawyer, respectively, the parties mutually released each other from anyfurther claims and agreed to execute a stipulation for dismissal withprejudice.

 

10.     Subsequent Events

 

Investment—PrivatePlacement

In May 2002 the Companypaid $200,000 for 208,333 private placement common units of a non-publicIllinois company that provides billing, collections and reimbursement servicesfor healthcare industry clients.  If allprivate placement units were sold, the Company would hold a 3.4% ownershipposition.

 

Acquisition of Business

On January 10, 2003, theCompany acquired all of the stock of Marquest Financial, Inc.("Marquest"), a mortgage brokerage business based in Minnesota, inexchange for 3,000,000 shares of common stock of the Company and cash of$80,000. As a result of the transaction, Marquest became a wholly owned subsidiaryof the Company. Edward M. Graca, a director of the Company, was the soleshareholder of Marquest. In connection with the acquisition, Mr. Graca enteredinto a three-year employment agreement with Marquest.

 

Issuance of RestrictedStock

In January 2003 theCompany engaged a consultant to provide assistance in establishing financialservices operations to be based in California. As compensation for suchservices, the Company agreed to issue the consultant a total of 2,000,000shares of restricted common stock of the Company which will vest over a periodof 36 months. The consulting arrangement can be terminated at any time byeither party, and upon such termination any shares that have not vested with beforfeited by the consultant and cancelled.

 

Shareholder Matters

In January 2003 ashareholder filed a Schedule 13D reporting beneficial ownership of 1,545,000shares of common stock of the Company, held for investment purposes.Concurrently, this shareholder indicated that he would seek changes in thecomposition of the Board of Directors, termination of consulting agreementswith directors and a review of related party transactions, and would seek tohave the Company pursue the acquisition of the digital printer businessformerly owned by the Company.

 

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ITEM 2.          MANAGEMENT’SDISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

** **

***Overview***

 

Currently, the Company is not operating as a sales-generatingbusiness.  The Board is activelypursuing options regarding the future use of its residual assets by examiningvarious potential business acquisitions and other opportunities.

 

##### *Results of Operations*

 

*Generaland Administrative Expenses*.  General andadministrative expenses for the quarter and six-month periods ended December31, 2001 were $690,245 and 1,316,561, respectively, compared to $2,149,540 and4,022,142 for the same periods last year. The decrease in general and administrative costs is a result of therestructuring plan implemented in December 2000 that included headcountreductions, the discontinuance of the Internet Services Business Unit (ISBU)which included the termination of all activities related to B2Bxchange and thesale of RSPNetwork, Inc. (RSPN), and the elimination of facility-related expenses.The year-to-date credit of $101,119 credit to nonrecurring and restructuringexpense results from the subleasing of warehouse space for which the estimatedremaining rent of $78,019 had been reserved in the restructuring charge takenin 2001.

 

*OtherIncome and Expense*.Interest income for the quarter and six-month period ended December 31, 2001was $70,234  and $151,708, respectively,compared to $373,318 and $954,247 for the same periods last year.  The decrease in interest income wasprimarily attributable to a reduction in the amount of invested cash that wasreceived from the sale of the Digital Graphics Business Unit (DGBU), whichoccurred on June 13, 2000.

 

*Income(Loss) from Discontinued Operations. * Income from discontinued operations for the quarter and six-monthperiods ended December 31, 2001 was $567,000 and $659,750, respectively,compared to losses of $2,848,333 and $5,548,358 for the same periods last year.The income from discontinued operations for the quarter and six-month periods endingDecember 31, 2001 results from reductions in accruals for sales tax liabilityand other expenses established on sale of the DGBU in June of 2000, based onchanges in estimate.  For the quarterand six-month periods ended December 30, 2000, the loss from discontinuedoperations results from the reclassification of business segments sold ordiscontinued as part of the restructuring program, including the sale of RSPNand the shutting down of B2BXchange.

 

##### *Liquidityand Capital Resources*

 

At December 31, 2001, the Company had cash, restricted cash and cashequivalents of $5,699,494, a decrease of $2,740,058 from June 30, 2001.

 

In September 2001, the Company placed $2,000,000 in a restrictedinterest bearing bank account pending resolution of a lawsuit which wassubsequently paid in February 2002 as part of the final settlement. (SeeNote—Legal Proceedings—Kittrell)

 

Operations used cash of $1,067,611 during the six months ended December31, 2001, primarily for general and administrative purposes and payment ofrestructuring charges, and net of an adjustment to the net liabilities ofdiscontinued operations of $734,186 for a change in estimated futureexpenses.  For the comparable periodlast year, net cash used by operations for the six month period ended December30, 2000 was $17,985,550, net of an initial accrual for restructuring of$11,468,041, reduced by asset write-offs totaling $3,823,402, and amounts paidof $4,102,643.  Net cash used bydiscontinued operations was $2,333,630.

 

Net cash used by investing activities was $1,659,947 for the six monthsended December 31, 2001 compared to net cash used by investing activities of$1,119,077 for the six months ended December 30, 2000.  The net cash used by investing activitiesfor the current period ended December 31, 2001 resulted primarily frominvestments in 

 

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marketable securities.  The netcash used by investing activities during the six months ended December 30, 2000of $1,119,077 was due primarily to additions to property and equipment, andloans to the former CEO.

 

During the quarter ended December 31, 2001 financing activities reflectcash used for the cancellation of common shares for $12,500. This was the valueof 250,000 shares of the Company’s stock cancelled in December when the$150,000 note they were being used to collateralize was written off.  For the same period last year, $5,970,613was used to purchase Company stock under a stock repurchase program authorizedby the Board of Directors.

 

The Board of Directors is currently evaluating the Company’s financialposition, and believes the reduction in operating costs achieved from therestructuring process implemented in fiscal 2001, combined with analysis of thefuture strategic direction will allow the Company to meet its obligationsthrough the next twelve months.

 

Due to the Company’s failure to meet NASDAQ per share price criteria,the Company’s common stock was delisted from NASDAQ National Market on August21, 2001. In addition, the Company’s ability to obtain additional financingthrough the issuance of common stock or securities convertible into commonstock could be adversely affected.

 

The Company incurred a net loss of $467,630 for the six-month periodended December 31, 2001, and has an accumulated deficit of $32,646,849 as ofDecember 31, 2001.  The Company expectsto incur losses for the remainder of its current fiscal year.  There can be no assurance that the Companywill not incur additional losses for a longer period, will generate positivecash flow from its operations, or that the Company will attain or thereaftersustain profitability in any future period. To the extent the Company continues to incur losses or grows in thefuture, its operating and investing activities may use cash and, consequently,such losses or growth will require the Company to obtain additional sources offinancing in the future or to reduce operating expenses.

#####  

*Cautionary Statements*

 

Certain statements contained in this Form 10-Q and other written and oral statements made from time to time by us may not relate strictly to historical or current facts. As such, they are considered “forward-looking statements” which provide current expectations or forecasts of future events. Such statements can be identified by the use of terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “could,” “possible,” “plan,” “project,” “should,” “will,” “forecast” and similar words or expressions. One must carefully consider forward-looking statements and understand that such statements involve a variety of risks and uncertainties, known and unknown, and may be affected by inaccurate assumptions, including, among others, those discussed below. Consequently, no forward-looking statement can be guaranteed and actual results may vary materially. We undertake no obligation to update any forward-looking statement, but investors are advised to consult any further disclosures by us on this subject in our filings with the Securities and Exchange Commission, especially on Forms 10-K, 10-KSB, 10-Q, 10-QSB and 8-K (if any), in which we discuss in more detail various important factors that could cause actual results to differ from expected or historic results. We note these factors as permitted by the Private Securities Litigation Reform Act of 1995. It is not possible to foresee or identify all such factors. As such, investors should not consider any list of such factors to be an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions.

 

*Legal Proceedings*

 

Legal proceedings involving the Company are significant to theCompany’s financial position.  Thefinancial statements include accrued amounts sufficient to adequately reflectpayments required under terms of the various settlements and related legalexpenses incurred subsequent to December 31, 2001.  The Company is unaware of any material existing or potentialfuture legal proceedings for which additional amounts would need to be accrued.

 

*Business Acquisition Opportunities*

 

The Company is currently not operating any revenue-generatingbusiness.  However, the Companycontinues to 

 

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incur general and administrative expenses, principally for compensationof its directors, insurance, and accounting and legal expenses.  There is no guarantee that the Company willbe able to identify an adequate business acquisition opportunity and togenerate revenues before its financial resources are exhausted.

 

ITEM 3: QUANTITATIVE ANDQUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

There have not been any material changes in the sources and effects ofthe Company’s market risk since June 30, 2001.

 

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PART II.  OTHER INFORMATION

 

ITEM 1:  LEGAL PROCEEDINGS

 

We are involved in various disputes and litigation as follows:

 

In accordance with the terms of the DGBU sale, theCompany retained certain liabilities related to claims made by customers whopurchased equipment from the DGBU prior to the sale. Also, the DGBU buyerwithheld $1,000,000, pending the receipt of consents from Masters related tothe transferability of certain leases. These consents were obtained under terms of the Global SettlementAgreement with Masters.  When payment ofthe holdback was requested from the buyer, the Company was notified of thebuyer’s intent to deduct from the holdback $821,481 to settle $322,000 inunsubstantiated product liability claims, and other unsubstantiated claimsunrelated to the initial purpose of the holdback.  Management intends to vigorously pursue collection of theholdback.

 

 

ITEM 2:  CHANGES IN SECURITIES

 

None

 

**ITEM3:  DEFAULTS UPON SENIOR SECURITIES**

 

None

 

**ITEM4:  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

None

 

**ITEM5:**  OTHER INFORMATION

 

None

 

**ITEM6:**  EXHIBITS AND REPORTS ON FORM8-K

 

(a)   Listing ofExhibits

 

99.1.                  Certification Pursuant to 18U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-OxleyAct of 2002

 

(b) Reports onForm 8-K

 

Transactions withBusiness Transition Services, Inc. filed on November 28, 2001

 

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SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                   | VIRTUALFUND.COM, INC.                                           |
|------------------------|-----------------------------------------------------------------|
|                   | (Registrant)                                                    |
|                   |                                                            |
| Date: January 13, 2003 | /s/ Timothy Duoos                                               |
|                   | Timothy Duoos, Chairman of the Board                            |
|                   |                                                            |
|                   |                                                            |
| Date: January 13, 2003 | /s/ Joseph D. Pupel                                             |
|                   | Joseph D. Pupel, Interim Chief Executive Officer                |
|                   | (Duly Authorized Officer and  Principal Financial Officer) |

 

 

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CERTIFICATIONUNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Joseph D.Pupel, the Interim Chief Executive and Duly Authorized  Principal Accounting Officer, hereby certifythat:

 

1.     I have reviewed this quarterly report on Form10-Q of VirtualFund.com, Inc.;

 

2.     Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.     Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, theperiods presented in this quarterly report;

 

Date: January 13, 2003

 
|   | /s/ Joseph D. Pupel                                                                             |
|--------|-------------------------------------------------------------------------------------------------|
|   | Joseph D. Pupel                                                                                 |
|   | Interim Chief Executive  Officer (principal executive officer and principal accounting officer) |

 

EXPLANATORY NOTE REGARDING CERTIFICATION:Representations 4, 5 and 6 of the Certification as set forth in Form 10-Q havebeen omitted, consistent with the Transition Provisions of SEC Exchange ActRelease No. 34-46427, because this Quarterly Report on Form 10-Q covers aperiod ending before the Effective Date of Rules 13a-14 and 15d-14.

 

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