** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

** **

**FORM 10-Q**

**(Mark One)**

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

**                                                SECURITIESEXCHANGE ACT OF 1934**

** **

**Forthe quarterly period ended:  March 31,2002**

** **

**or**

** **

**o****                                 TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE**

**                                                SECURITIESEXCHANGE 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 telephonenumber, including area code)

 

 

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

                Yeso    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. FINANCIALINFORMATION

                ITEM 1.  FINANCIAL STATEMENTS

 CONSOLIDATED BALANCE SHEETS

 CONSOLIDATED STATEMENTS OF OPERATIONS

 CONSOLIDATED STATEMENTS OF CASH FLOWS

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSUREABOUT MARKET RISK

PART II.  OTHER INFORMATION

                ITEM1.  LEGAL PROCEEDINGS

                ITEM 2.  CHANGES IN SECURITIES

                ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

                ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS

                ITEM5.  OTHER INFORMATION

                ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURES

 

2

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PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

VIRTUALFUND.COM, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS
|                                                                                                                                 |   | **March 31,**   |      | **June 30,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|-----------|--------------|--------|
|                                                                                                                                 |   | **2002**        |      | **2001**     |   |
|                                                                                                                                 |   | **(Unaudited)** |      |         |   |
| ASSETS                                                                                                                               |   |            |      |         |   |
| CURRENT ASSETS                                                                                                                       |   |            |      |         |   |
| Cash and cash  equivalents                                                                                                           |   | $               | 2,460,258 |         | $      | 8,439,552 |   |
| Marketable  securities                                                                                                               |   | 3,328,568       |      | —       |   |
| Receivables,  less allowance for doubtful accounts of $-0- and $1,600                                                                |   | 137,291         |      | 1,355,933    |   |
| Receivables —  related parties, less allowance of $1,925,400 in 2001                                                            |   | —          |      | 135,671      |   |
| Notes receivable                                                                                                                     |   | 491,550         |      | —       |   |
| Prepaid expenses                                                                                                                     |   | 1,578,290       |      | 1,615,984    |   |
| TOTAL CURRENT  ASSETS                                                                                                                |   | 7,995,957       |      | 11,547,140   |   |
|                                                                                                                                 |   |            |      |         |   |
| PROPERTY AND  EQUIPMENT, NET                                                                                                         |   | 2,500           |      | 58,022       |   |
|                                                                                                                                 |   |            |      |         |   |
| NOTES RECEIVABLE                                                                                                                     |   | 178,473         |      | —       |   |
|                                                                                                                                 |   |            |      |         |   |
| NOTES RECEIVABLE  — RELATED PARTIES                                                                                             |   | 146,628         |      | —       |   |
|                                                                                                                                 |   |            |      |         |   |
| MARKETABLE  SECURITIES                                                                                                               |   | 598,470         |      | —       |   |
|                                                                                                                                 |   |            |      |         |   |
|                                                                                                                                 |   | $               | 8,922,028 |         | $      | 11,605,162 |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                            |   |            |      |         |   |
|                                                                                                                                 |   |            |      |         |   |
| CURRENT  LIABILITIES                                                                                                                 |   |            |      |         |   |
| Notes payable  and accrued interest — related parties, 9.25%, unsecured                                                         |   | $               | —    |         | $      | 820,343 |   |
| Accounts payable                                                                                                                     |   | 936,224         |      | 717,004      |   |
| Accrued  nonrecurring and restructuring charges                                                                                      |   | 627,360         |      | 1,883,280    |   |
| Accrued expenses                                                                                                                     |   | 398,094         |      | 138,745      |   |
| Other current  liabilities                                                                                                           |   | —          |      | 1,856,780    |   |
| Net liabilities  of discontinued operations                                                                                          |   | 1,234,286       |      | 2,061,221    |   |
| TOTAL CURRENT  LIABILITIES                                                                                                           |   | 3,195,964       |      | 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; 15,321,404 and 15,631,404  shares issued and outstanding, respectively) |   | 153,214         |      | 156,314      |   |
| Additional  paid-in capital                                                                                                          |   | 36,141,294      |      | 36,150,694   |   |
| Accumulated  other comprehensive income                                                                                              |   | 2,614,855       |      | —       |   |
| Accumulated  deficit                                                                                                                 |   | (33,183,299     | )         | (32,179,219  | )      |
|                                                                                                                                 |   | 5,726,064       |      | 4,127,789    |   |
|                                                                                                                                 |   |            |      |         |   |
|                                                                                                                                 |   | $               | 8,922,028 |         | $      | 11,605,162 |   |

See notes toconsolidated financial statements

 

3

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VIRTUALFUND.COM,INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OFOPERATIONS

(Unaudited)

 
|                                                                 |   | **Three Months  Ended March 31,** |     | **Nine  Months Ended March 31,** |   |
|----------------------------------------------------------------------|--------|-----------------------------------|----------|----------------------------------|--------|
|                                                                 |   | **2002**                          |     | **2001**                         |   | **2002** |   | **2001** |   |
|                                                                 |   |                              |     |                             |   |   |   |   |   |
| NET SALES                                                            |   | $                                 | —   |                             | $      | — |   | $ | — |   | $ | — |   |
|                                                                 |   |                              |     |                             |   |   |   |   |   |
| COST OF SALES                                                        |   | —                            |     | —                           |   | — |   | — |   |
|                                                                 |   |                              |     |                             |   |   |   |   |   |
| GROSS PROFIT                                                         |   | —                            |     | —                           |   | — |   | — |   |
|                                                                 |   |                              |     |                             |   |   |   |   |   |
| OPERATING  EXPENSES                                                  |   |                              |     |                             |   |   |   |   |   |
| General and  administrative                                          |   | 575,255                           |     | 398,118                          |   | 1,891,816 |   | 4,420,260 |   |
| Restructuring  charges (recoveries)                                  |   | —                            |     | 2,058,035                        |   | (101,119 | ) | 13,526,076 |   |
|                                                                 |   | 575,255                           |     | 2,456,153                        |   | 1,790,697 |   | 17,946,336 |   |
|                                                                 |   |                              |     |                             |   |   |   |   |   |
| OPERATING LOSS                                                       |   | (575,255                          | )        | (2,456,153                       | )      | (1,790,697 | ) | (17,946,336 | ) |
|                                                                 |   |                              |     |                             |   |   |   |   |   |
| OTHER INCOME  (EXPENSE)                                              |   |                              |     |                             |   |   |   |   |   |
| Interest expense                                                     |   | (2,626                            | )        | (7,078                           | )      | (3,612 | ) | (10,432 | ) |
| Interest income                                                      |   | 16,625                            |     | 168,825                          |   | 168,333 |   | 1,123,072 |   |
| Other                                                                |   | 24,806                            |     | (30,385                          | )      | (37,854 | ) | 6,165 |   |
|                                                                 |   | 38,805                            |     | 131,362                          |   | 126,867 |   | 1,118,805 |   |
| LOSS FROM  CONTINUING OPERATIONS BEFORE INCOME TAXES                 |   | (536,450                          | )        | (2,324,791                       | )      | (1,663,830 | ) | (16,827,531 | ) |
|                                                                 |   |                              |     |                             |   |   |   |   |   |
| INCOME TAX  PROVISION                                                |   | —                            |     | —                           |   | — |   | — |   |
|                                                                 |   |                              |     |                             |   |   |   |   |   |
| LOSS FROM  CONTINUING OPERATIONS                                     |   | (536,450                          | )        | (2,324,791                       | )      | (1,663,830 | ) | (16,827,531 | ) |
|                                                                 |   |                              |     |                             |   |   |   |   |   |
| INCOME FROM  DISCONTINUED OPERATIONS                                 |   |                              |     |                             |   |   |   |   |   |
| Net of income  tax provision of $-0-                                 |   | —                            |     | (331,064                         | )      | 659,750 |   | (5,879,422 | ) |
|                                                                 |   |                              |     |                             |   |   |   |   |   |
| NET LOSS                                                             |   | $                                 | (536,450 | )                                | $      | (2,655,855 | ) | $ | (1,004,080 | ) | $ | (22,706,953 | ) |
|                                                                 |   |                              |     |                             |   |   |   |   |   |
| NET LOSS PER  COMMON SHARE — BASIC AND DILUTED                  |   |                              |     |                             |   |   |   |   |   |
| Continuing  operations                                               |   | $                                 | (0.03    | )                                | $      | (0.15 | ) | $ | (0.10 | ) | $ | (1.04 | ) |
| Discontinued  operations                                             |   | —                            |     | (0.02                            | )      | .04 |   | (0.36 | ) |
|                                                                 |   | $                                 | (0.03    | )                                | $      | (0.17 | ) | $ | (0.06 | ) | $ | (1.40 | ) |
|                                                                 |   |                              |     |                             |   |   |   |   |   |
| WEIGHTED AVERAGE  COMMON SHARES OUTSTANDING — BASIC AND DILUTED |   | 15,374,737                        |     | 15,631,404                       |   | 15,520,638 |   | 16,173,405 |   |
|                                                                 |   |                              |     |                             |   |   |   |   |   |

 

See notes to consolidated financial statements

 

4

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VIRTUALFUND.COM, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASHFLOWS

Unaudited

 
|                                                                        |   | **Nine  Months Ended March 31,** |       |
|-----------------------------------------------------------------------------|--------|----------------------------------|------------|
|                                                                        |   | **2002**                         |       | **2001** |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES                                       |   |                             |       |   |   |
| Net loss                                                                    |   | $                                | (1,004,080 | ) | $ | (22,706,953 | ) |
| Adjustment to  reconcile net loss to net cash used by operating activities: |   |                             |       |   |   |
| Discontinued  operations                                                    |   | (826,935                         | )          | (2,821,115 | ) |
| Loss on sale or  disposal of property and equipment                         |   | 42,649                           |       | (3,112 | ) |
| Restructuring  charges                                                      |   | —                           |       | 4,135,938 |   |
| Depreciation and  amortization                                              |   | 6,596                            |       | 362,132 |   |
| Change in assets  and liabilities:                                          |   |                             |       |   |   |
| Accounts and  notes receivable                                              |   | 548,618                          |       | (136,323 | ) |
| Receivables —  related parties                                         |   | (10,957                          | )          | — |   |
| Prepaid expenses                                                            |   | 37,694                           |       | (1,833,216 | ) |
| Accounts payable                                                            |   | 219,217                          |       | (292,198 | ) |
| Accrued  nonrecurring and restructuring charges                             |   | (1,255,919                       | )          | 2,295,233 |   |
| Accrued expenses                                                            |   | 259,349                          |       | (422,011 | ) |
| Income taxes  payable                                                       |   | —                           |       | (866,530 | ) |
| Other current  liabilities                                                  |   | (1,856,780                       | )          | 12,181 |   |
| Net cash used by  operating activities                                      |   | (3,840,548                       | )          | (22,275,974 | ) |
|                                                                        |   |                             |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                       |   |                             |       |   |   |
| Purchases of  marketable securities and investment                          |   | (1,312,183                       | )          | — |   |
| Loans to related  parties                                                   |   | (2,170,343                       | )          | (522,548 | ) |
| Collections from  related parties                                           |   | 1,350,000                        |       | — |   |
| Purchases of  property and equipment                                        |   | —                           |       | (595,076 | ) |
| Proceeds from sale  of property and equipment                               |   | 6,280                            |       | 195,096 |   |
| Additions to  other assets                                                  |   | —                           |       | (7,964 | ) |
| Net cash used by  investing activities                                      |   | (2,126,246                       | )          | (930,492 | ) |
|                                                                        |   |                             |       |   |   |
| 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  ANDCASH EQUIVALENTS                                       |   | (5,979,294                       | )          | (29,177,079 | ) |
|                                                                        |   |                             |       |   |   |
| CASH AND CASH  EQUIVALENTS                                                  |   |                             |       |   |   |
| Beginning of  period                                                        |   | 8,439,552                        |       | 39,533,688 |   |
|                                                                        |   |                             |       |   |   |
| End of period                                                               |   | $                                | 2,460,258  |   | $ | 10,356,609 |   |

 

See notes to consolidated financial statements

 

5

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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-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 nine months ended March 31, 2002 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 which areincluded in operations as follows:

                                                                                                                             
|                                 |   | **Allowance**          |      |                                   |   |           |   |        |       | **Allowance**       |   |
|--------------------------------------|--------|------------------------|-----------|----------------------------------------|--------|----------------|--------|-------------|------------|---------------------|--------|
|                                 |   | **And**                |      | **Three  Months Ended March 31, 2002** |   | **and**        |   |
|                                 |   | **Accrual at**         |      |                                   |   | **Asset**      |   | **Amounts** |       | **Accrual at**      |   |
|                                 |   | **December  31, 2001** |      | **Recoveries**                         |   | **Write-offs** |   | **Paid**    |       | **March 31,  2002** |   |
| NONRECURRING                         |   |                   |      |                                   |   |           |   |        |       |                |   |
| Allowance for  doubtful accounts (a) |   | $                      | 1,925,369 |                                   | $      | —         |   | $           | (1,925,369 | )                   | $      | — |   | $ | — |   |
|                                 |   |                   |      |                                   |   |           |   |        |       |                |   |
| RESTRUCTURING                        |   |                   |      |                                   |   |           |   |        |       |                |   |
| Product  discontinuance (b)          |   | 707,372                |      | —                                 |   | (89,897        | )      | —      |       | 617,475             |   |
| Facilities costs  (c)                |   | 663,373                |      | —                                 |   | (53,488        | )      | (600,000    | )          | 9,885               |   |
|                                 |   | 1,370,745              |      | —                                 |   | (143,385       | )      | (600,000    | )          | 627,360             |   |
|                                 |   |                   |      |                                   |   |           |   |        |       |                |   |
|                                 |   | $                      | 3,296,114 |                                   | $      | —         |   | $           | (2,068,754 | )                   | $      | (600,000 | ) | $ | 627,360 |   |
|                                 |   |                   |      |                                   |   |           |   |        |       |                |   |
|                                      |        |                        |           |                                        |        |                |        |             |            |                     |        |  |  |  |  |  |  |

 

6

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|                                 |   | **Allowance**      |      |                                  |   |           |   |        |       | **Allowance**       |   |
|--------------------------------------|--------|--------------------|-----------|---------------------------------------|--------|----------------|--------|-------------|------------|---------------------|--------|
|                                 |   | **and**            |      | **Nine  Months Ended March 31, 2002** |   | **and**        |   |
|                                 |   | **Accrual at**     |      |                                  |   | **Asset**      |   | **Amounts** |       | **Accrual at**      |   |
|                                 |   | **June 30,  2001** |      | **Recoveries**                        |   | **Write-offs** |   | **Paid**    |       | **March 31,  2002** |   |
| NONRECURRING                         |   |               |      |                                  |   |           |   |        |       |                |   |
| Allowance for  doubtful accounts (a) |   | $                  | 1,925,369 |                                  | $      | —         |   | $           | (1,925,369 | )                   | $      | — |   | $ | — |   |
|                                 |   |               |      |                                  |   |           |   |        |       |                |   |
| RESTRUCTURING                        |   |               |      |                                  |   |           |   |        |       |                |   |
| Product  discontinuance (b)          |   | 855,076            |      | —                                |   | (237,601       | )      | —      |       | 617,475             |   |
| Employee  separation costs           |   | 46,956             |      | —                                |   | —         |   | (46,956     | )          | —              |   |
| Facilities costs  (c)                |   | 981,248            |      | (101,119                              | )      | (137,244       | )      | (733,000    | )          | 9,885               |   |
|                                 |   | 1,883,280          |      | (101,119                              | )      | (374,845       | )      | (779,956    | )          | 627,360             |   |
|                                 |   |               |      |                                  |   |           |   |        |       |                |   |
|                                 |   | $                  | 3,808,649 |                                  | $      | (101,119       | )      | $           | (2,300,214 | )                   | $      | (779,956 | ) | $ | 627,360 |   |

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(a)          Allowance foruncollectible receivables from Melvin Masters (Masters), the Company’s formerChief Executive Officer (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 March 31, 2002 and 2001 were $-0- and $1,482,892, respectively, and$130,408 and $4,563,246 for the nine month periods ended March 31, 2002 and2001, respectively.

 

7

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4.       Comprehensive Income (Loss) -

 

Comprehensive income forthe Company includes net loss and unrealized gains on marketable securities andwas as follows:

 
|                                      |   | **Three  Months Ended March 31,** |      | **Nine  Months Ended March 31,** |   |
|-------------------------------------------|--------|-----------------------------------|-----------|----------------------------------|--------|
|                                      |   | **2002**                          |      | **2001**                         |   | **2002** |   | **2001** |   |
| Net loss                                  |   | $                                 | (536,450  | )                                | $      | (2,655,855 | ) | $ | (1,004,080 | ) | $ | (22,706,953 | ) |
| Other  comprehensive income:              |   |                              |      |                             |   |   |   |   |   |
| Unrealized gain  on marketable securities |   | 2,756,708                         |      | —                           |   | 2,614,855 |   | — |   |
| Total comprehensive income (loss)         |   | $                                 | 2,220,258 |                             | $      | (2,655,855 | ) | $ | 1,610,775 |   | $ | (22,706,953 | ) |
|                                      |   |                              |      |                             |   |   |   |   |   |

 

5.       EarningsPer 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:

 

|          |   | **March 31,** |   |
|---------------|--------|---------------|--------|
|          |   | **2002**      |   | **2001** |   |
| Stock Options |   | 1,649,183     |   | 2,941,184 |   |
| Warrants      |   | 1,862,714     |   | 4,354,953 |   |
|          |   | 3,511,897     |   | 7,296,137 |   |
|          |   |          |   |   |   |

 

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.  In August2001, the Company also authorized a one-time special consulting fee in theamount of $30,000 for services provided to the Company outside of the agreementfor his monthly consulting services.  Inaddition, the Vice-Chair receives a monthly directors fee of $3,000.  Additionally the Vice-Chair was reimbursedexpenses 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.

 

8

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Directors Loan Program

 

In July 2001, the Board of Directors approved a loan program whereby theCompany 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 March 31, 2002, theChairman and Vice-Chair each owes the Company approximately $76,500 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.

 

ConsultingAgreement — 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 Executive Officerand Financial Drivers, Ltd. is paid $100 per hour for his services. During thequarter ended March 31, 2002,  theCompany paid Financial Drivers, Ltd. $49,445 for Mr. Pupel’s services and$22,257 for financial services provided by other employees of FinancialDrivers, Ltd.  For the nine months endedMarch 31, 2002, the Company paid Financial Drivers, Ltd. $96,234 for Mr.Pupel’s services and $59,089 for financial services provided by other employeesof 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 - Common Stock

 

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 securitiespurchased through Equity.  The agreementalso requires 20% of the appreciation on certain securities and reflected atDecember 31 to be paid to Equity. In May and June 2002, 235,100 of these shares were sold for a net gainof $446,874.  Commissions ofapproximately $121,086 related to these transactions were also paid to Equity.

 

Investment — TemporarySubordinated Loan Agreement

 

OnOctober 30, 2001, the Company entered into a Temporary Subordinated LoanAgreement with Equity.  Under terms ofthe loan, the Company agreed to lend Equity $1,350,000 at 10% interest.  The loan was repaid with interest onDecember 28, 2001.

 

Investment - ConvertibleNotes

 

OnNovember 8, 2001, the Company entered into an arrangement with Cash Systems,Inc. (Borrower), a national provider of cash access services to the gaming andretail industries, to loan them up to $500,000 in the form of convertiblenotes.  On November 8, 2001, the Companyloaned the Borrower $200,000 and an additional $200,000 was loaned on March 1,2002.  The notes mature on November 8,2003, pay interest at 12.5%, pay 

 

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principaland interest on a monthly basis, and require the Borrower to grant the Companya security interest in a cash account which is required to maintain a minimumof $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 agreement also provides that the Company will receivewarrants to purchase up to 125,000 shares of common stock of the Borrower,dependent upon the level of borrowings. The exercise price of the warrants is $2 per share.  Commissions of $65,000 and warrants topurchase 50,000 shares of common stock were paid and issued, respectively, bythe 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

 
|                                          |   | **Nine  Months Ended March 31,** |   |
|-----------------------------------------------|--------|----------------------------------|--------|
|                                          |   | **2002**                         |   | **2001** |   |
|                                          |   |                             |   |   |   |
| Interest paid                                 |   | $                                | 3,612  |   | $ | 10,432 |   |
|                                          |   |                             |   |   |   |
| Non-cash  investing and financing activities: |   |                             |   |   |   |
| Net unrealized  gain on marketable securities |   | 2,614,855                        |   | — |   |
|                                          |   |                             |   |   |   |
|                                               |        |                                  |        |  |  |  |  |

 

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 Aternative 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 theCompany’s assets pertaining specifically and solely to B2BXchange, and pay toMasters or his designee the amount of $600,000, which included payment ofMasters’ attorneys’ fees.  Masters, inturn, agreed to transfer to the Company all shares of Company stock and allwarrants owned or controlled by Masters, GRAMPI, Masters Trust I, TimeMasters,any parent, sibling, spouse (whether current or future), child, or grandchild.

 

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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. Thesuit also alleges that Vitesse interfered with the contractual rights ofRSPNetwork that prevented Mr. Kittrell from competing against it and theCompany and recruiting employees of RSPNetwork and theCompany.  Finally, the suit alleges certain securities law violationsand misrepresentations by Mr. Kittrell in connection with the conversionand sale of Company stock.  Inconnection with this lawsuit, Mr. Kittrell made a demand for arbitration,alleging breach of contract and breach of implied covenants of good faith andfair dealing.  Kittrell and the Companyfiled cross motions in the trial court regarding an arbitration clause in oneof the contracts at issue in the case. Prior to the Court hearing these motions, Kittrell and the Companyagreed to arbitrate the disputes between them. The suit against Vitesse was settled with Vitesse agreeing to pay$10,000, and both parties agreeing to drop all further claims.  The lawsuit against Kittrell went toarbitration in January 2002, with Kittrell prevailing.  The arbitrator awarded Kittrell, net ofcertain offsets, $2,708,073. Under terms of the final settlement, the Companypaid Kittrell $2,137,547, transferred to him 400,000 shares of Muller Media,Inc. stock being held by the Company for investment purposes (having a bookvalue of $60,188), and also transferred to him the rights to future earnoutpayments (having no recorded value) due the Company under terms of theagreement 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 judgment thatMetiom breached a September 29, 2000, Software Licensing Agreement by failingto timely deliver “ConnectTrade” software to it.  A few days later, Metiom filed a suit against the Company in theUnited States District Court for the District of New York, alleging that theCompany breached the September 29, 2000, Software Licensing Agreement andis seeking $1,250,000, plus interest at 1% per month.  In July of 2002, a negotiated settlement was reached.  Under terms of the settlement, the Companypaid Metiom $365,000 and entered into a mutual release of all current andfuture actions, causes of action, individual or class action claims or demandsof 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 claimsagainst Feltl were relinquished under terms of the March 11, 2002, GlobalSettlement Agreement - Masters.

 

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 of 

 

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the 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 necessary documentsto restrict Masters’ or GRAMPI’s ability to convey any of the affected parcelsof real property while the lawsuit was pending.  This action was dropped under terms of the Global SettlementAgreement - 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 allegedthat Manugistics was guilty of conversion and was unjustly enriched.  It also sought a declaratory judgment thatthe contract was null and void, or that the Court rescind the contract.  The parties settled the litigation onJuly 6, 2001.  Manugistics paid theCompany $1.3 million in July 2001, and the parties agreed to mutually andcompletely 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, ColorspanCorporation, alleging that he is entitled to severance payments and performanceoptions based upon an employment agreement with Colorspan.  Mr. Ryan sought damages of $175,000 inaddition to performance options and attorney fees.  The 

 

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matter was triedbefore a jury and on October 2, 2001, the jury entered a verdict in favorof the Company.  Mr. Ryan is seeking toappeal 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 and transactionsthat were contrary to the Company’s interest, and failing to perform the tasksand duties of her position due to excessive, unexplained absenteeism. TheCompany claimed that Vatland as Vice President of Advanced TechnologyDevelopment and/or Chief Technology Officer breached his duties because hefailed to disclose and furthered contracts and transactions by corporateofficers and/or directors that were contrary to the Company’s interest, andbecause he furthered the use of Company funds and/or assets, which were not infurtherance of the Company’s interest and were not authorized or were incontravention of directives issued or restrictions placed by the Company’sBoard of Directors.  All defendantsdenied the Company’s claims and raised various counterclaims, includingcounterclaims for severance payments, breach of contract and violation of theWorkers Adjustment Retraining Notification Act.  Vatland and Thurn claimed to be entitled to 12 months ofseverance pay and Masters Sawyer claimed to be entitled to 36 months ofseverance pay. Vatland further contended that he was entitled to $75,000 peryear, covering a period of time after he voluntarily had his base compensationreduced from $250,000 to $175,000. The Company settled all claims in June 2001.  In consideration for payments from the Company in the amounts of$157,500, $45,000, and $55,000 to Vatland, Thurn, and Masters Sawyer,respectively, the parties mutually released each other from any further claimsand agreed to execute a stipulation for dismissal with prejudice.

 

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 ownedsubsidiary of the Company. Edward M. Graca, a director of the Company, was thesole shareholder of Marquest. In connection with the acquisition, Mr. Gracaentered into 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 will 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’S DISCUSSION AND ANALYSIS OF

        FINANCIAL CONDITION ANDRESULTS 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 nine-month periods ended March 31,2002 were $575,255 and $1,891,816, respectively, compared to $398,118 and$4,420,260 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-relatedexpenses. The year-to-date credit of $101,119 in 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.  An additional credit of$26,339 is the net recovery from various claims that were originallyestablished in the cost of restructuring.

 

*OtherIncome and Expense*.Interest income for the quarter and nine-month period ended March 31, 2002 was$16,625 and $168,333, respectively, compared to $168,825 and $1,123,072 for thesame periods last year.  The decrease ininterest income was primarily attributable to a reduction in the amount ofinvested cash that was received from the sale of the Digital Graphics BusinessUnit (DGBU), which occurred on June 13, 2000. This decrease was caused by useof cash for operating expenses during the first three quarters of fiscal year2000, and restructuring charges incurred during the last two quarters of fiscalyear 2001.

 

*Income(Loss) from Discontinued Operations. * For the quarter ended March 31, 2002 there was no income fromdiscontinued operations.  Theyear-to-date income of $659,750 results from reductions in accruals for salestax liability and other expenses established on sale of the DGBU in June of2000, based on a changes in estimate. For the quarter and nine month periods ended March 31, 2001, the$331,064 and $5,879,422 losses, respectively, are from discontinued operationsresulting from the reclassification of business segments sold or discontinuedas part of the restructuring program, including the sale of RSPN and theshutting down of B2BXchange.

 

##### *Liquidityand Capital Resources*

 

At March 31, 2002, the Company had cash, restricted cash and cashequivalents of $2,460,258, a decrease of $5,979,294 from June 30, 2001.

 

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

 

Operating activities from continuing operations used cash of $3,840,548during the nine months ended March 31, 2002, primarily for general andadministrative purposes, payment of restructuring charges, and payments tosettle lawsuits.  For the comparable periodlast year, net cash used by operating activities for the nine month periodended March 31, 2001 was $22,275,974, including the net of accruedrestructuring charges of $13,526,076, reduced by asset write-offs of $4,135,938and payments totaling $7,092,525.  Theeffects of discontinued operations was $2,821,115, and prepaid expensesincreased resulting from a deposit of $1,500,000 for estimated legal expenses.

 

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Net cash used by investing activities was $2,126,246 for the ninemonths ended March 31, 2002 compared to net cash used by investing activitiesof $930,492 for the nine months ended March 31, 2001.  The net cash used by investing activities in 2002 resultedprimarily from investments in marketable securities.  The net cash used by investing activities during the nine monthsended March 31, 2001 was due primarily to additions to property and equipment,and loans to the former CEO.

 

Financing activities for the nine months ended March 31, 2002 reflectfunds used for the repurchase of common shares for $12,500. This was the valueof 250,000 shares of the Company’s stock cancelled in December when a $150,000collateralized note was written off. For the same period last year, $5,970,613 was used to purchase Companystock under a stock repurchase program authorized by 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. As a result, 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 $1,004,080 for the nine-month periodended March 31, 2002, and has an accumulated deficit of $33,183,299 as of March31, 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 grows in the future, 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.

 

*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 March 31, 2002.  The Company is unaware of any material existing or potentialfuture legal proceedings for which additional amounts would need to be accrued.

 

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*Business Acquisition Opportunities*

 

The Company is currently not operating any revenue-generatingbusiness.  However, the Companycontinues to incur general and administrative expenses, principally forcompensation of its directors, insurance, and accounting and legalexpenses.  There is no guarantee thatthe Company will be able to identify an adequate business acquisitionopportunity and to generate revenues before its financial resources areexhausted.

 

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 invarious disputes and litigation as follows:

 

Inaccordance with the terms of the Asset Purchase Agreement between MacDermid andus, we retain certain liability relating to claims made by customers whopurchased equipment from the DGBU prior to its sale to MacDermid in June of2000. Also, under terms of the Asset Purchase Agreement, MacDermid withheld$1,000,000 pending the receipt of consents from Masters related to thetransferability of certain leases. These consents were obtained under terms of the Global SettlementAgreement with Masters on March 11, 2002. When payment of the holdback was requested from MacDermid, we werenotified of their intent to deduct from the holdback amount a total of $821,481to settle $322,000 in unsubstantiated product liability claims, and otherunsubstantiated claims unrelated to the initial purpose of the holdback.  It is our intention to vigorously pursuethrough all legal avenues available collection of 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:  OTHERINFORMATION**

 

None

 

 

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

 

Settlement Agreement with Former Chief Executive Officerand Arbitration Award Against Company filed on March 25, 2002

 

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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 andDuly Authorized  Principal AccountingOfficer, hereby certify that:

 

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

 

2.       Based on my knowledge,this quarterly report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect 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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