** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

** **

**FORM 10-QSB**

** **

**(Mark One)**

**ý****                                 QUARTERLY REPORT UNDERSECTION 13 OR 15(d) OF THE**

**                                                SECURITIESEXCHANGE ACT OF 1934**

** **

**Forthe quarterly period ended:  September30, 2002**

** **

**or**

** **

**o****                                 TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT**

** **

**For thetransition period from                to               **

** **

**CommissionFile No.: 0-18114**

** **

**VIRTUALFUND.COM, INC.**

(Exact name of smallbusiness issuer as specified in its 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**

(Issuer’s telephone number)

 

 

(Former name, former address and former fiscal year,if changed since last report)

 

 

APPLICABLE ONLY TOCORPORATE ISSUERS:

 

State the number of shares outstanding of each of the issuer’s classesof common equity, as of the latest practicable date:

 

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

 

 
| Transitional  Small Business Disclosure Format (Check one):   Yes o    No ý |
|------------------------------------------------------------------------------------------------------|

 

 

----

 

 

**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 OR PLAN OF OPERATIONS |   |   |
|                             | ITEM 3.  | CONTROLS AND  PROCEDURES                                         |   |   |
| 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

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PART I. FINANCIAL INFORMATION

 

ITEM 1.  FINANCIALSTATEMENTS

 

The financialstatements of the Registrant required to be filed with this 10-QSB QuarterlyReport were prepared by management, and commence on the following page,together with Related Notes.  In theopinion of management, the Financial Statements fairly present the financialcondition of the Registrant as of and for the periods then ended.

 

3

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VIRTUALFUND.COM,INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 
|                                                                                                                   |   | **September  30,** |      | **June 30,** |   |
|------------------------------------------------------------------------------------------------------------------------|--------|--------------------|-----------|--------------|--------|
|                                                                                                                   |   | **2002**           |      | **2002**     |   |
|                                                                                                                   |   | **(Unaudited)**    |      |         |   |
| ASSETS                                                                                                                 |   |               |      |         |   |
| CURRENT ASSETS                                                                                                         |   |               |      |         |   |
| Cash and cash  equivalents                                                                                             |   | $                  | 1,829,599 |         | $      | 2,486,908 |   |
| Marketable  securities                                                                                                 |   | 1,145,732          |      | 1,186,011    |   |
| Receivables                                                                                                            |   | 24,661             |      | 18,035       |   |
| Notes  receivable, less allowance of $300,000                                                                          |   | 203,838            |      | 197,599      |   |
| Prepaid expenses                                                                                                       |   | 1,335,063          |      | 1,435,553    |   |
| TOTAL CURRENT  ASSETS                                                                                                  |   | 4,538,893          |      | 5,324,106    |   |
|                                                                                                                   |   |               |      |         |   |
| PROPERTY AND  EQUIPMENT, NET                                                                                           |   | 2,500              |      | 2,500        |   |
|                                                                                                                   |   |               |      |         |   |
| NOTES RECEIVABLE                                                                                                       |   | 73,386             |      | 126,746      |   |
|                                                                                                                   |   |               |      |         |   |
| NOTES RECEIVABLE  — RELATED PARTIES                                                                               |   | 158,808            |      | 155,852      |   |
|                                                                                                                   |   |               |      |         |   |
| MARKETABLE  SECURITIES                                                                                                 |   | 252,610            |      | 153,440      |   |
|                                                                                                                   |   |               |      |         |   |
| OTHER INVESTMENT                                                                                                       |   | 200,000            |      | 200,000      |   |
|                                                                                                                   |   |               |      |         |   |
|                                                                                                                   |   | $                  | 5,226,197 |         | $      | 5,962,644 |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                              |   |               |      |         |   |
|                                                                                                                   |   |               |      |         |   |
| CURRENT  LIABILITIES                                                                                                   |   |               |      |         |   |
| Accounts payable                                                                                                       |   | $                  | 516,956   |         | $      | 607,940 |   |
| Accrued  nonrecurring and restructuring charges                                                                        |   | —             |      | 383,966      |   |
| Accrued expenses                                                                                                       |   | —             |      | 72,296       |   |
| Net liabilities  of discontinued operations                                                                            |   | 205,155            |      | 705,155      |   |
| TOTAL CURRENT  LIABILITIES                                                                                             |   | 722,111            |      | 1,769,357    |   |
|                                                                                                                   |   |               |      |         |   |
| 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 authorized shares; 15,203,617 shares issued and  outstanding)                |   | 152,036            |      | 152,036      |   |
| Additional  paid-in capital                                                                                            |   | 36,142,472         |      | 36,142,472   |   |
| Accumulated  other comprehensive income                                                                                |   | 533,781            |      | 399,356      |   |
| Accumulated  deficit                                                                                                   |   | (32,324,203        | )         | (32,500,577  | )      |
|                                                                                                                   |   | 4,504,086          |      | 4,193,287    |   |
|                                                                                                                   |   |               |      |         |   |
|                                                                                                                   |   | $                  | 5,226,197 |         | $      | 5,962,644 |   |

See notes toconsolidated financial statements.

 

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VIRTUALFUND.COM, INC. ANDSUBSIDIARIES

 

CONSOLIDATED STATEMENTS OFOPERATIONS

(Unaudited)
|                                                                 |   | **Three  Months Ended September 30,** |       |
|----------------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                                 |   | **2002**                              |       | **2001** |   |
|                                                                 |   |                                  |       |   |   |
| NET SALES                                                            |   | $                                     | —     |   | $ | — |   |
|                                                                 |   |                                  |       |   |   |
| COST OF SALES                                                        |   | **—**                            | ** ** | **—** | ** ** |
|                                                                 |   |                                  |       |   |   |
| GROSS PROFIT                                                         |   | **—**                            | ** ** | **—** | ** ** |
|                                                                 |   |                                  |       |   |   |
| OPERATING  EXPENSES                                                  |   |                                  | ** ** |   | ** ** |
| General and  administrative                                          |   | 377,352                               |       | 626,316 |   |
| Restructuring  recoveries                                            |   | —                                |       | (8,320 | ) |
|                                                                 |   | 377,352                               |       | 617,996 |   |
|                                                                 |   |                                  |       |   |   |
| OPERATING LOSS                                                       |   | (377,352                              | )          | (617,996 | ) |
|                                                                 |   |                                  |       |   |   |
| OTHER INCOME  (EXPENSE)                                              |   |                                  |       |   |   |
| Interest expense                                                     |   | —                                |       | (986 | ) |
| Interest income                                                      |   | 20,854                                |       | 81,474 |   |
| Other                                                                |   | 32,872                                |       | (62,660 | ) |
|                                                                 |   | 53,726                                |       | 17,828 |   |
|                                                                 |   |                                  |       |   |   |
| LOSS FROM  CONTINUING OPERATIONS BEFORE INCOME TAXES                 |   | (323,626                              | )          | (600,168 | ) |
|                                                                 |   |                                  |       |   |   |
| INCOME TAX  PROVISION                                                |   | —                                |       | — |   |
|                                                                 |   |                                  |       |   |   |
| LOSS FROM  CONTINUING OPERATIONS                                     |   | (323,626                              | )          | (600,168 | ) |
|                                                                 |   |                                  |       |   |   |
| INCOME FROM  DISCONTINUED OPERATIONS                                 |   |                                  |       |   |   |
| Net of income  tax provision of $-0-                                 |   | 500,000                               |       | 92,750 |   |
|                                                                 |   |                                  |       |   |   |
| NET  INCOME (LOSS)                                              |   | $                                     | 176,374    |   | $ | (507,418 | ) |
|                                                                 |   |                                  |       |   |   |
| INCOME (LOSS)  PER COMMON SHARE — BASIC AND DILUTED             |   |                                  |       |   |   |
| Continuing  operations                                               |   | $                                     | (0.02      | ) | $ | (0.04 | ) |
| Discontinued  operations                                             |   | 0.03                                  |       | 0.01 |   |
|                                                                 |   | $                                     | 0.01       |   | $ | (0.03 | ) |
|                                                                 |   |                                  |       |   |   |
| WEIGHTED AVERAGE  COMMON SHARES OUTSTANDING — BASIC AND DILUTED |   | 15,203,617                            |       | 15,631,404 |   |
|                                                                 |   |                                  |       |   |   |

See notes to consolidated financial statements.

 

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VIRTUALFUND.COM, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASHFLOWS

(Unaudited)

 
|                                                                                            |   | **Three  Months Ended September 30,** |      |
|-------------------------------------------------------------------------------------------------|--------|---------------------------------------|-----------|
|                                                                                            |   | **2002**                              |      | **2001** |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES                                                           |   |                                  |      |   |   |
| Net income  (loss)                                                                              |   | $                                     | 176,374   |   | $ | (507,418 | ) |
| Adjustment to  reconcile net income (loss) to net cash provided (used) by operating activities: |   |                                  |      |   |   |
| Discontinued  operations                                                                        |   | (500,000                              | )         | (166,286 | ) |
| Loss on sale or  disposal of property and equipment                                             |   | —                                |      | 20,867 |   |
| Gain on sale of  marketable securities                                                          |   | (3,744                                | )         | — |   |
| Depreciation and  amortization                                                                  |   | —                                |      | 6,000 |   |
| Change in assets  and liabilities:                                                              |   |                                  |      |   |   |
| Accounts and  notes receivable                                                                  |   | (12,865                               | )         | 1,301,936 |   |
| Prepaid expenses                                                                                |   | 100,490                               |      | 101,896 |   |
| Accounts payable                                                                                |   | (30,785                               | )         | (203,003 | ) |
| Accrued  nonrecurring and restructuring charges                                                 |   | (383,966                              | )         | (219,816 | ) |
| Accrued expenses                                                                                |   | (72,296                               | )         | 6,223 |   |
| Net cash  provided (used) by operating activities                                               |   | (726,792                              | )         | 340,399 |   |
|                                                                                            |   |                                  |      |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                                           |   |                                  |      |   |   |
| Proceeds from  notes receivable                                                                 |   | 53,359                                |      | — |   |
| Loans to related  parties                                                                       |   | (2,956                                | )         | (146,948 | ) |
| Proceeds from  sale of marketable securities                                                    |   | 19,080                                |      | — |   |
| Proceeds from  sale of property and equipment                                                   |   | —                                |      | 4,500 |   |
| Net cash  provided(used) by investing activities                                                |   | 69,483                                |      | (142,448 | ) |
|                                                                                            |   |                                  |      |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                                           |   | —                                |      | — |   |
|                                                                                            |   |                                  |      |   |   |
| INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                               |   | (657,309                              | )         | 197,951 |   |
|                                                                                            |   |                                  |      |   |   |
| CASH AND CASH  EQUIVALENTS                                                                      |   |                                  |      |   |   |
| Beginning of  period                                                                            |   | 2,486,908                             |      | 8,439,552 |   |
|                                                                                            |   |                                  |      |   |   |
| End of period  (2001 includes $2,000,000 of restricted cash)                                    |   | $                                     | 1,829,599 |   | $ | 8,637,503 |   |

 

 

See notes to consolidated financial statements.

 

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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-QSB 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-KSB of VirtualFund.com,Inc. and subsidiaries (the “Company”) for the year ended June 30, 2002. In theopinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a fair presentation have been included.Operating results for the three months ended September 30, 2002 are notnecessarily indicative of the results that may be expected for the year endingJune 30, 2003.

 

2.       Comprehensive Income (Loss)-

 

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

 

|                                      |   | **Three  Months Ended September 30,** |    |
|-------------------------------------------|--------|---------------------------------------|---------|
|                                      |   | **2002**                              |    | **2001** |   |
| Net income  (loss)                        |   | $                                     | 176,374 |   | $ | (507,418 | ) |
| Other comprehensive income:               |   |                                  |    |   |   |
| Unrealized gain  on marketable securities |   | 134,425                               |    | — |   |
| Total comprehensive income (loss)         |   | $                                     | 310,799 |   | $ | (507,418 | ) |
|                                      |   |                                  |    |   |   |

 

3.       Discontinued Operations -

 

During the quarter endedSeptember 30, 2002, the Company made a $500,000 adjustment to the netliabilities of discontinued operations to reflect a reduction of previouslyaccrued product and sales tax liabilities.

 

4.       Earnings Per Share Calculation -

 

The following tablesummarizes securities that could potentially dilute basic earnings per share inthe future but were not included in the computation of diluted earnings pershare because to do so would have been antidilutive:

 

|          |   | **Three  Months Ended September 30,** |   |
|---------------|--------|---------------------------------------|--------|
|          |   | **2002**                              |   | **2001** |   |
| Stock Options |   | 1,460,000                             |   | 2,530,433 |   |
| Warrants      |   | 1,862,714                             |   | 4,054,953 |   |
|          |   | 3,322,714                             |   | 6,585,386 |   |

 

 

7

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5.       Convertible Notes Receivable -

 

OnNovember 8, 2001, the Company entered into an arrangement with Cash Systems,Inc. (“Borrower”), a national provider of cash access services to the gamingand retail industries, to loan them up to $500,000 in convertible notes.  On November 8, 2001, the Company loaned theBorrower $200,000, an additional $200,000 was loaned on March 1, 2002, and thefinal loan of $100,000 was made on November 21, 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 securityinterest in a cash account which is required to be maintained at a minimum of$300,000 during the term of the loan. Additionally, the agreement contains a personal guarantee of thePresident and CEO of the Borrower and a pledge of certain shares of his stock.  The notes are convertible into common stockof the Borrower at an exercise price of $2 per share.  The Company received warrants to purchase 125,000 shares ofcommon stock of Borrower.  The exerciseprice of the warrants is $2 per share. Commissions of $65,000 and common stock purchase warrants for 50,000shares were paid and issued respectively, by Borrower to Equity SecuritiesInvestments, Inc., whose president is Vice-chairman of VirtualFund.com, Inc.

 

6.       Supplemental Disclosures of Cash FlowInformation -

 

|                                                                                             |   | **Three  Months Ended September 30,** |   |
|--------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                                             |   | **2002**                              |   | **2001** |   |
|                                                                                             |   |                                  |   |   |   |
| Interest Paid                                                                                    |   | $                                     | — |   | $ | 986 |   |
|                                                                                             |   |                                  |   |   |   |
| Non-cash  investing and financing activities:                                                    |   |                                  |   |   |   |
| Purchase of  shares of public company for investment not settled until after September 30,  2001 |   | —                                |   | 110,608 |   |
| Net unrealized  gain on marketable securities                                                    |   | 134,425                               |   | — |   |
| Marketable  securities transferred under terms of lawsuit settlement                             |   | 60,200                                |   | — |   |
|                                                                                                  |        |                                       |        |  |  |  |  |

 

7.       Legal Proceeding -

 

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 the September 29, 2000, Software Licensing Agreement byfailing to timely deliver “ConnectTrade” software to it.  A few days later, Metiom filed a suit againstthe Company in the United States District Court for the District of New York,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.

 

8.       Certain Related Party Transactions -

 

Directors ConsultingCompensation 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.  In addition, theChairman receives a monthly directors fee of $3,000.  For the three months ended September 30, 2002 the Companyreimbursed the Chairman $3,493 in expenses.

 

8

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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, compensation is generally continued until the end ofthe agreement.  In addition, theChairman receives a monthly directors fee of $3,000.  For the three months ended September 30, 2002 the Companyreimbursed the Vice-Chair $8,434 in expenses.

 

Directors Loan Program

 

In July 2001, theBoard of Directors approved a loan program, whereby the Company is authorizedto loan to Directors up to $500,000, in total, to buy stock in theCompany.  The Chairman and Vice-Chaireach borrowed $73,314 in August 2001 to purchase 488,759 and 488,758 shares ofthe Company’s common stock, respectively. As of September 30, 2002, theChairman and Vice-Chair each owes the Company approximately $79,350 under termsof their loan agreements, the amount originally borrowed plus interest accruedat the annual rate of 8%.  The loans aredue 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 quarter ended September 30, 2002, the Company paid FinancialDrivers, Ltd. $30,750 for Mr. Pupel’s services and $27,625 for financialservices provided by other employees of Financial Drivers, Ltd.

 

Directors Options

 

During the quarter ended September 30, 2002, the Board of Directorsapproved the issuance to each director an option for 100,000 shares of the Company’scommon stock outside the Company’s stock option plan.  Each option is exercisable for five years, vests immediately, andis exercisable at $.05 per share.

 

9.       Subsequent Events -

 

Acquisition ofBusiness

 

On January 10,2003, the Company 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 ofRestricted Stock

 

In January 2003the Company engaged a consultant to provide assistance in establishingfinancial services operations to be based in California. As compensation forsuch services, 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 will beforfeited by the consultant and cancelled.

 

ShareholderMatters

 

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.

 

9

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ITEM 2.  MANAGEMENT’S DISCUSSIONAND ANALYSIS OR PLAN OF OPERATION.

 

The following management’s discussion and analysis of financialcondition and results of operations should be read in connection with theaccompanying consolidated financial statements and related notes theretoincluded elsewhere in this Report.

 

**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 ofOperations

 

*Generaland Administrative Expenses*.  General andadministrative expenses for the quarter ended September 30, 2002 were $377,352,compared to $626,316 for the same period last year.  The decrease in general and administrative costs is a result ofthe restructuring plan implemented in December 2000 that included headcountreductions, the discontinuance of the Internet Services Business Unit whichincluded the termination of all activities related to B2Bxchange and the saleof RSPNetwork, Inc. (RSPN), and the elimination of facility-related expenses.

 

*OtherIncome and Expense*.Interest income was $20,854 for the quarter ended September 30, 2002, comparedto $81,474 for the same period last year. The decrease in interest income was primarily attributable to areduction in the amount of invested cash that was received from the sale of theDigital Graphics Business Unit (DGBU), which occurred on June 13, 2000.

 

*Income(loss) from Discontinued Operations.* For thequarter ended September 30, 2002, there was $500,000 income from discontinuedoperations, compared to $92,750 for the same period last year.  Both amounts result from reductions inaccruals for product liability and other expenses established in the DGBU salein June of 2000, based on a change in estimate.

 

##### Liquidity and Capital Resources

 

At September 30, 2002, the Company had cash and cash equivalents of$1,829,599, a decrease of $657,309 from June 30, 2002.

 

In September 2001, the Company placed $2,000,000 in a restrictedinterest bearing bank account pending resolution of a lawsuit which was paid inFebruary 2002 as part of the final settlement.

 

Operations used cash of $726,792 during the three months endedSeptember 30, 2002 primarily for general and administrative purposes andpayment of restructuring charges.

 

Net cash provided by investing activities was $69,483 for the threemonths ended September 30, 2002 compared to net cash used by investingactivities of $142,448 for the three months ended September 30, 2001.  The net cash provided by investingactivities for the current period resulted primarily from collections on notesreceivable, and the sale of marketable securities.  The net cash used by investing activities during the three monthsended September 30, 2001 of $142,448 was due primarily to loans to theCompany’s Chairman and Vice-Chairman to purchase Company stock, net of $4,500received from the sale of property and equipment.

 

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 the futurestrategic direction will allow the Company to meet its obligations through thenext 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. As a result, the Company’s ability to obtain 

 

10

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additional financing through the issuance of common stock or securitiesconvertible into common stock could be adversely affected.

 

The Company has an accumulated deficit of $32,324,203 as of September30, 2002.  The Company expects to incurlosses for the remainder of its current fiscal year.  There can be no assurance that the Company will not incuradditional losses for a longer period, will generate positive cash flow fromits operations, or that the Company will attain or thereafter sustainprofitability in any future period.  Tothe extent the Company continues to incur losses or acquire investments, itsoperating and investing activities may use cash and, consequently, such lossesor growth will require the Company to obtain additional sources of financing inthe future or to reduce operating expenses.

 

CautionaryStatements

 

Certain statements contained in this Form 10-QSB 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 Companyhave been and may be significant to the Company’s financial position. TheCompany is unaware of any material existing or potential future legalproceedings for which additional amounts would need to be accrued on the financialstatements.

 

*Business AcquisitionOpportunities.*TheCompany is currently not operating any sales-generating business.  However, the Company continues to incurgeneral and administrative expenses, principally for compensation of itsdirectors, 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.

 

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ITEM 3. CONTROLS AND PROCEDURES

 

(a)        Evaluation of disclosurecontrols and procedures. The term “disclosure controls and procedures” isdefined in Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934(“Exchange Act”). These rules refer to the controls and other procedures of a company that aredesigned to ensure that information required to be disclosed by the company inthe reports that it files under the Exchange Act is recorded, processed,summarized and reported, within the required time periods.  The Company’s Interim Chief ExecutiveOfficer (principal executive officer and principal accounting officer) hasevaluated the effectiveness of the Company’s disclosure controls and proceduresas of a date within 90 days before the filing of this quarterly report (the“Evaluation Date”), and has concluded that, as of the Evaluation Date, suchcontrols and procedures were effective at ensuring that required informationwill be disclosed in the Company’s reports filed under the Exchange Act.

 

(b)       Changes in internal controls. There were no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect these controls subsequent to the Evaluation Date.

 

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PART II.  OTHER INFORMATION

 

ITEM 1:  LEGAL PROCEEDINGS.

 

We are involved in variousdisputes and litigation as follows:

 

Inaccordance with the terms of the Asset Purchase Agreement between MacDermidGraphic Arts (MacDermid) and us, we retain certain liability relating to claimsmade by customers who purchased equipment from the DGBU prior to its sale toMacDermid in June of 2000. Also, under terms of the Asset Purchase Agreement,MacDermid withheld $1,000,000 pending the receipt of consents from MelvinMasters (Masters) related to the transferability of certain leases.  These consents were obtained under terms ofthe Global Settlement Agreement with Masters on March 11, 2002.  When payment of the holdback was requestedfrom MacDermid, we were notified of their intent to deduct from the holdbackamount a total of $821,481 to settle $322,000 in unsubstantiated productliability claims, and other unsubstantiated claims unrelated to the initialpurpose of the holdback.  It is ourintention to vigorously pursue through all legal avenues available collectionof this amount.

 

 

ITEM 2:  CHANGES IN SECURITIES.

 

None

 

 

**ITEM 3: DEFAULTS UPON SENIOR SECURITIES.**

 

None

 

 

**ITEM 4:  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**

 

None

 

 

**ITEM 5:  OTHER INFORMATION.**

 

None

 

 

**ITEM 6:  EXHIBITS AND REPORTS ON FORM 8-K.**

 

(a)           Listingof Exhibits

 

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

 

(b)                                 Reports on Form 8-K

 

None

 

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SIGNATURE

 

In accordance with the requirements of the Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|   | VIRTUALFUND.COM, INC. |
|--------|-----------------------|
|   |                  |   |
|   | By                    | /s/ Joseph D. Pupel |
|   |                  | Joseph D. Pupel |
|   | Title:                | Interim Chief Executive Officer |
|   |                  | (Principal executive officer and  Principal accounting officer) |
|   | Date:                 | January 13, 2003 |
|        |                       |  |  |

 

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CERTIFICATION UNDERSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Joseph D. Pupel, certify that:

 

1.               I have reviewed this quarterly report on Form 10-QSBof VirtualFund.com, Inc.;

 

2.               Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

 

3.               Based on my knowledge, the financial statements, andother financial information included in this quarterly report, fairly presentin all material respects the financial condition, results of operations andcash flows of the registrant as of, and for, the periods presented in this quarterlyreport;

 

4.               The registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant andhave:

 

a)              designed such disclosure controls and procedures toensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

 

b)             evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this quarterly report (the “Evaluation Date”); and

 

c)              presented in this quarterly report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officers and I havedisclosed, based on our most recent evaluation, to the registrant’s auditorsand the audit committee of registrant’s board of directors (or personsperforming the equivalent functions):

 

a)              all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)             any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

 

6.               The registrant’s other certifying officers and I haveindicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantly affectinternal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
|   | /s/ Joseph D. Pupel                                           |
|--------|---------------------------------------------------------------|
|   | Joseph D. Pupel                                               |
|   | Interim Chief Executive Officer                               |
|   | (Principal Executive Officer and Principal Financial Officer) |
|   | Dated:   January 13, 2003                                |

 

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