** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

**FORM 10-K**

 
| **ý** | **ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(D) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|--------------------------------------------------------------------------------------------|

** **

For the fiscal year ended June30, 2001

OR

 
| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OF 15(D) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------------------------------------------------------------------------------------------|

 

For the transition period from ____________ to____________.

 

**Commission file number: **0-18114

**VirtualFund.com, Inc.**

(Exact name of registrant asspecified in its charter)

 
| **Minnesota**                                                  |   | **41-1612861**                         |
|----------------------------------------------------------------|--------|----------------------------------------|
| (State or other jurisdictionof  incorporation or organization) |   | (I.R.S. EmployerIdentification Number) |

 

**13911Ridgedale Drive, Suite 477, Minnetonka, Minnesota  55305**(Address ofprincipal executive office, including zip code)

 

Registrant’s telephonenumber, including area code:  (952)345-0480

** **

**Securitiesregistered pursuant to Section 12(b) of the Act:**  None.

** **

**Securitiesregistered pursuant to Section 12(g) of the Act:**Common Stock, $.01 par value per share

 

Check whether the Issuer(1) has filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes o  No ý

 

Check if disclosure of delinquent filers inresponse to Item 405 of Regulation S-K is not contained herein, and will not becontained, to the best of Registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  o

 

The aggregate market value of the Common Stockheld by nonaffiliates of the Registrant as of November 14, 2002 wasapproximately $995,687 based upon the closing price of the Registrant’s CommonStock on such date.

 

There were 15,203,617 sharesof Common Stock outstanding as of November 14, 2002.

 

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**DOCUMENTS INCORPORATED BY REFERENCE**

None

 

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**PART I**

 

**ITEM 1.  BUSINESS**

 

VirtualFund.com, Inc.,referred to as “VirtualFund,” “VFND,” “the Company,” “Management,” “us,” “our,”and “we” in this Form 10-K, was incorporated under the laws of Minnesota asAcquerre Corporation in April 1988. After various name changes, the Company changed its name to VirtualFund.com,Inc. on April 3, 1998.

 

The Company formerlyoperated two business segments: the Digital Graphics Business Unit (“DGBU”) andthe Internet Services Business Unit (“ISBU”):

 

•                  The DGBU—comprised of ColorSpan Corporation, itssubsidiaries and Kilborn Photo Products, Inc.—designed, manufactured, marketedand sold wide-format digital color printers, print servers, color managementsoftware, inks and specialty-coated media for graphic arts professionals.

 

•                  The ISBU, started in fiscal 1999, designed anddeveloped technology solutions for the Internet-based B2B economy.  ISBU products and technologies targetedSmall businesses, Middle-market companies and Enterprise workgroups (“SMEcompanies”).  The ISBU was divided intotwo operating groups, the Venture Resource Group and the Commerce EnvironmentOperating System.  Venture ResourceGroup included two subsidiaries wholly owned by VFND: (i) B2BXchange, Inc.(“B2BXchange”) (this subsidiary was formed in fiscal year 2001 after theinitial product debut in October 1999) and (ii) RSPNetwork, Inc.(“RSPNetwork”).  The ISBU also includedshort-lived activities related to Rymatics Software, LLC and a company calledManugistics.

 

In June 2000, the Companysold the DGBU, the principal source of its revenue, to MacDermid Graphic Arts(“MacDermid”), a wholly owned subsidiary of MacDermid Incorporated, for $45.8million. Following the sale, Melvin Masters (“Masters”), who was at that timethe Company’s CEO, told the Board of his intent to use the proceeds from thatsale to change the Company’s business strategy and build a business-to-businessexchange (“B2BXchange”) capability for small and medium-sized companies.  Over the next six months, Masters attemptedto implement this plan.  In December2000, as a result of an evaluation of Masters’ business plan by respectedindependent consultants, the Board decided in December 2000 to abandon theB2BXchange strategy.

 

On July 23, 2001, the Company became a party toan Asset Purchase Agreement between RSPNetwork, Inc. (“RSPN”), the Company (assole shareholder of RSPN), and RSP Acquisitions, LLC.  Pursuant to the Asset Purchase Agreement, RSPN sold substantiallyall of its assets and business to RSP Acquisitions, LLC for a purchase priceconsisting of the assumption of certain liabilities and payments of up to$1,000,000 based on an earn out formula.

 

Currently, the Company isnot operating as a revenue-generating business, but is examining variouspotential business acquisitions and other options for utilization or distributionof its assets.

 

The Company currently hasno employees, and is being managed by a consultant who reports to the Chairmanand the Vice-Chairman.

 

 

**ITEM 2.  DESCRIPTIONOF PROPERTY**

 

As of September 30, 2001we leased an aggregate of 7,420 square feet of office space in Eden Prairie,Minnesota, which was not from a related party. The monthly base rent for this space was $11,748.  This lease was for two years, and was notrenewed after it expired on April 30, 2002.

 

We also leased 6,435square feet of warehouse space located at 6815-25 Shady Oak Road, Eden Prairie,Minnesota, which is not from a related party. This property was subleased to MacDermid through September 30,2001.  This lease, which calls for abase monthly rent of $3,590, expires on March 31, 2003.  Beginning October 

 

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2001, we subleased theproperty to a third party, under the same terms and conditions as contained inthe original lease.

 

During fiscal 2001, the leases for propertyin Santa Clara, California, San Jose, California, and Chicago, Illinois wereterminated with no remaining obligations to the Company.

 

In July 2001, our lease commitment in CedarFalls, Iowa was assigned to the acquirer of the RSPNetwork business.

 

As of September 30, 2001we were involved in legal proceedings regarding the office and warehouse spacewe occupied until January 2001 in Eden Prairie and regarding premisespreviously leased by us in Montana. These legal proceedings were resolved in March 2002.  SeeItem 3, Legal Proceedings.

 

**ITEM3.  LEGAL PROCEEDINGS**

 

**Kittrell Litigation**

 

In August 2000, theCompany and a wholly owned subsidiary commenced suit against JaffrayCommunications, Inc., doing business as Vitesse Networks, Inc. (“Vitesse”), andthe Company’s former President and COO Mark Kittrell in Hennepin CountyDistrict Court in the State of Minnesota. The lawsuit alleged that Mr. Kittrellviolated his agreement not to compete against VirtualFund and its subsidiariesand that he, contrary to his contractual promises, recruited RSPNetworkemployees to Vitesse and its subsidiaries. The suit also alleged that Vitesseinterfered with the contractual rights of RSPNetwork that prohibited Mr.Kittrell from: (a) competing against it and VirtualFund; and (b) recruitingemployees of RSPNetwork and VirtualFund. Finally, the suit alleged certainsecurities law violations and misrepresentations by Mr. Kittrell in connectionwith the conversion and sale of VirtualFund stock.  In connection with this lawsuit, Mr. Kittrell made a demand forarbitration, alleging breach of contract and breach of implied covenants ofgood faith and fair dealing. Kittrell and the Company had filed cross motionsin the trial court regarding an arbitration clause in one of the contracts atissue in the case. Prior to the Court hearing these motions, Kittrell and theCompany agreed to arbitrate the disputes between them, and the Company placed$2,000,000 with an escrow agent.  Thesuit against Vitesse was settled with Vitesse agreeing to pay $10,000 toVirtualFund, and both parties to the suit agreeing to drop all furtherclaims.  The suit against Kittrell wentto arbitration in January 2002, with Kittrell prevailing.  The arbitrator awarded Kittrell, net ofcertain offsets, $2,708,073.  Underterms of the final settlement, the Company paid Kittrell $2,137,547,transferred to him the rights to future earn out payments due the Company underterms of an Asset Purchase Agreement dated July 23, 2001 betweenVirtualFund.com, Inc. and RSP Acquisitions, LLC (see Item 13. CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS), and also transferred to Kittrell400,000 shares of Muller Media common stock having a book value of $60,188.

 

**Ryan Litigation**

 

In September 2000, formerExecutive Vice President Thomas Ryan brought a lawsuit in Hennepin CountyDistrict 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 matter was tried before a jury, and on October 2, 2001 thejury entered a verdict in favor of the Company.  Ryan is pursuing an appeal.

 

**ManugisticsLitigation**

 

In November, 2002,contrary to explicit instructions received from the majority of the Board ofDirectors, Masters signed—on behalf of the Company—a software licensingagreement with Manugistics, and initiated the wire transfer of an initialpayment in the amount of $2.5 million to Manugistics.  The Company refused to honor the contract, alleging thatManugistics was aware of Masters acting outside of his powers and authoritieswhen 

 

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signing the contract andwiring the money.  Manugistics commencedan action against the Company in federal court in Maryland on December 5, 2000,alleging breach of contract. The Company filed in early February 2001 itsAnswer and Counterclaims for Rescission and Declaratory Judgment that thealleged contract was not valid. The Company requested on November 22, 2000 thatthe Court impose a constructive trust over the $2.5 million paid toManugistics. It alleged that Manugistics was guilty of conversion and wasunjustly enriched. It also sought a declaratory judgment that the contract wasnull and void, or that the Court rescind the contract, ab initio.  The parties settled the litigation on July6, 2001 with Manugistics paying $1,300,000 back to the Company.  The parties agreed to mutually andcompletely release each other from any further claims.

 

**FeltlLitigation**

 

In November 2000, Mastersand Grandchildren’s Realty Alternative Program I, L.P. (“GRAMPI”) attempted toconvey to John E. Feltl certain real estate that subsequently became subject tolitigation (see Montana Litigation below). The Company joined Feltl as defendant in the Montana Litigation,claiming that the conveyances were fraudulent. The Company’s claims against Feltl were relinquished under terms of theGlobal Settlement Agreement reached with Masters on March 11, 2002 (see below).

 

**MastersLitigation**

 

On December 1, 2000,Masters, purporting to act both individually and derivatively on behalf of theCompany, filed an action in Minnesota state court against the Company and three(3) of its directors, Edward S. Adams, Timothy R. Duoos and Roger Wikner.Masters’ complaint alleged breach of fiduciary duty, corporate waste andviolations of the Minnesota Business Corporation Act and requested that theCourt act to temporarily restrain the defendants from (i) selling shares of theCompany or its subsidiaries, (ii) terminating or changing the job descriptionof any employee of the Company, (iii) selling assets of the Company or itssubsidiaries except in the ordinary course of business, (iv) materiallychanging any business relationship of the Company, (v) interfering withMasters’ scheduling of a shareholders’ meeting to elect new directors or removeall directors with the exception of Masters and Steve Fisher, (vi) diminishingthe global operating performance of the Company’s web site, and (vii)preventing employees or directors from communicating with Masters. Moreover,Masters wanted to be allowed to remove his personal property from the Company’spremises. On December 5, 2000, the Court denied Masters’ motion for a temporaryrestraining 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 filed motionsto dismiss Masters’ complaint, Masters stipulated to the dismissal of hisclaims. The Court dismissed his derivative claims with prejudice on February12, 2001 and any personal claims were dismissed without prejudice.  The Court entered a judgment against Mastersregarding the repayment of personal loans; the Company agreed to releaseMasters from this judgment under terms of the Global Settlement Agreement datedMarch 11, 2002 (see below).

 

**MontanaLitigation**

 

On December 18, 2000, theCompany filed an action in Montana state court against Melvin Masters and twoother entities affiliated with Melvin Masters. The Company asserted thatMasters and/or GRAMPI, a Minnesota limited partnership controlled by Masters,purported to grant a security interest to the Company in Montana propertiesactually owned by another Master’s affiliate, Masters Trust I. The Deed ofTrust necessary to create the security interest was never recorded. Thecomplaint sought a declaration that the Company has a security interest in 3parcels of real property owned by the Masters’ affiliate. This action wasdropped under terms of the Global Settlement Agreement dated March 11, 2002between the Company and Masters (see below).

 

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**GRAMPILitigation**

 

On January 10, 2001, theCompany and a wholly owned subsidiary commenced an action in Hennepin CountyDistrict Court in Minnesota against Masters and GRAMPI. The action sought,among other things, to void the subsidiary’s lease of space in a businesscomplex owned by GRAMPI, on the grounds that the lease was unfair,unreasonable, and unduly benefited Masters, in violation of Masters’ fiduciaryduties to the Company and its subsidiary. The action also sought the return of any profits realized by Masters asa result of his self-dealing regarding the purchase of the business complex,the lease, and other real estate transactions with the Company and itssubsidiaries. In March 2001, GRAMPI asserted a counterclaim against the Companyfor breach of the lease contract.  TheGRAMPI claims against the Company exceeded $9 million, and Masters asserted apersonal counterclaim at that time for breach of an alleged employment contractwith the Company.  Both the Company’sand Master’s actions were withdrawn under terms of the Global SettlementAgreement dated March 11, 2002 (see below).

 

**Global Settlement Agreement—Masters**

 

On March 11, 2002, the Company (VirtualFund.com, Inc. and ColorSpanCorporation) entered into a Global Settlement Agreement with Masters, TMI,GRAMPI, David Norlander—individually and as Trustee of and on behalf of MastersTrust I, Realty Settlement, LLC, and Jessica Tran-Masters.  The parties executed mutual and completereleases from any claims and judgments, thereby ending the legal proceedingssummarized above (“Feltl,” “Masters,” “Montana,” and “GRAMPI”).  The Company agreed to convey to Masters orhis designee all of the Company’s assets pertaining specifically and solely toB2BXchange, and pay to Masters or his designee $600,000, which included paymentof Masters’ attorneys’ fees.  Masters,in turn, agreed to transfer, or cause to be transferred, to the Company allshares of VirtualFund stock and all warrants owned or controlled by Masters,GRAMPI, Masters Trust I, TimeMasters, any parent, sibling, spouse (whethercurrent or future), child, or grandchild.

 

**WiskusLitigation**

 

In January 2001, Michael S. Wiskus brought anaction against the Company in Minnesota state court, Hennepin County, forbreach of contract and promissory estoppel related to unpaid expenses incurredfor the refurbishment of an aircraft, and early termination of a sponsorshipagreement. This action was dropped by Wiskus on May 1, 2002, with the Companyagreeing to pay Wiskus $95,000 in exchange for his release of all present andfuture claims against VirtualFund.com, Inc.

 

**MetiomLitigation**

 

In February 2001, theCompany commenced an action in the United States District Court for theDistrict of Minnesota against Metiom, Inc. (“Metiom”) seeking a declaratoryjudgment that Metiom breached a September 29, 2000 Software Licensing Agreementby failing to timely deliver “ConnectTrade” software to it.  A few days later, Metiom filed a suitagainst VirtualFund in the United States Bankruptcy Court for the SouthernDistrict of New York, alleging that VirtualFund breached the September 29, 2000Software Licensing Agreement and seeking $1,250,000, plus interest at 1% permonth. In April of 2002, the New York bankruptcy court denied Metiom’s motionfor summary judgment. Prior to that, the Minnesota court denied Metiom’s claimof jurisdiction in New York.  Thediscovery period ended on April 30, 2002 although a motion was pending onVirtualFund’s request for more discovery. In July of 2002, VirtualFund and Metiom reached a negotiatedsettlement.  Under terms of theconfidential Settlement Agreement and General Release, the Company agreed topay $365,000, and entered into a mutual release of all actions, causes ofaction, individual or class action claims or demands of any kind.

 

**Thurnet al. Litigation**

 

In February 2001, theCompany commenced an action in Hennepin County District Court against TimothyN. Thurn, Nancy Masters Sawyer, and Danny J. Vatland. The Company sought moneydamages against the defendants for breaches of their employment agreementsand/or their fiduciary duties. Moreover, VirtualFund 

 

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sought to have the Courtdeclare that the defendants breached their respective employment agreements andwere therefore not entitled to any further compensation or benefits under thoseagreements and that these agreements are rescinded. The Company claimed thatDefendant Thurn violated his contractual and/or fiduciary duties as ChiefFinancial Officer and/or Treasurer of the Company, one of the violations beingthe transfer of $2.5 million to Manugistics on November 21, 2000, even thoughhe was aware or should have been aware that the Company’s Board had restrictedMasters’ authority to enter into the transaction with Manugistics. DefendantMasters Sawyer was claimed to have breached her duties as formerSecretary/Assistant Treasurer and most recently as Vice-President ofOperations, amongst others, by receiving excessive unapproved compensation,failing to disclose contracts and transactions that were contrary to theCompany’s interest, and failing to perform the tasks and duties of her positiondue to excessive, unexplained absenteeism. The Company claimed that DefendantVatland as Vice President of Advanced Technology Development and/or ChiefTechnology Officer breached his duties because he failed to disclose andfurthered contracts and transactions by corporate officers and/or directorsthat were contrary to the Company’s interest, and because he furthered the useof corporate funds and/or assets which were not in furtherance of the Company’sinterest and were not authorized or in contravention of directives issued orrestrictions placed by VirtualFund’s Board. All defendants denied the Company’sclaims and raised various counterclaims, including counterclaims for severancepayments, breach of contract and violation of the Workers Adjustment RetrainingNotification Act. Messrs. Vatland and Thurn claimed to be entitled to 12 monthsseverance pay and Ms. Masters Sawyer claimed to be entitled to 36 months ofseverance pay. Mr. Vatland further contended that he was entitled to $75,000per year of pay covering a period of time after he voluntarily had his basecompensation reduced from $250,000 to $175,000.  The Company settled all claims in June 2001.  In consideration for payments from theCompany in the amounts of $157,500, $45,000, and $55,000, respectively, toMessrs. Vatland, Thurn, and Ms. Masters Sawyer, respectively, the partiesmutually released each other from any further claims and agreed to execute astipulation for dismissal with prejudice.

 

 

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

 

In November 2000, VirtualFund suspended its then ChiefExecutive Officer, Melvin Masters, in connection with his actions regarding theB2Bxchange and the software licensing agreement with Manugistics.  Subsequently, the Board terminated Masters’employment for cause and called a Special Meeting of the Company’s shareholdersto remove Masters as director of the Company.

 

At the special meeting on May 18, 2001Masters was removed from the Board of Directors with 9,317,864 shares cast infavor of Masters’ removal and 1,039,831 shares voted in favor of Masters’retention.  The holders of 354,885shares abstained from voting, and 4,918,824 shares were not voted.

 

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**PART II**

 

**ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATEDSTOCKHOLDER MATTERS**

 

The Company’s Common Stock was listed on the NasdaqNational Market under the symbol “VFND.” Effective with the opening of business on August 16, 2001, the stock wasdelisted from the Nasdaq National Market for failure to maintain the minimumvalue of public float and minimum bid price required by Nasdaq for continuedlisting.  Subsequently, VirtualFund’sCommon Stock was traded on the Over the Counter Bulletin Board (OTCBB) underthe symbol “VFND.”  Effective with theopening of business on November 20, 2001, the stock was deleted from the OTCBBfor failure to make the filings with the SEC as required under the SecuritiesExchange Act of 1934 within a thirty-day grace period.  The following table provides the high and low salesprices for the quarters indicated. Quotations are based on information provided by IDD InformationServices, Tradeline® on Lexis®.

 
|                               |   | **High** |       | **Low** |       |
|------------------------------------|--------|----------|------------|---------|------------|
| **July  1, 1999 to June 30, 2000** |   |     |       |    |       |
| First quarter                      |   | $        | 4.13       |    | $          | 1.14 |   |
| Second quarter                     |   | 6.38     |       | 1.22    |       |
| Third quarter                      |   | 11.50    |       | 4.63    |       |
| Fourth quarter                     |   | 5.88     |       | 1.56    |       |
| **July 1, 2000 to June 30, 2001**  |   |     | ** ** |    | ** ** |
| First quarter                      |   | 2.91     |       | 1.78    |       |
| Second quarter                     |   | 2.91     |       | 0.50    |       |
| Third quarter                      |   | 0.25     |       | 0.12    |       |
| Fourth quarter                     |   | 0.39     |       | 0.09    |       |
|                                    |        |          |            |         |            |  |  |

 

On November 14, 2002 the highestbid price of the Common Stock was $0.07 per share.

 

As of November 14, 2002 therewere 262 shareholders of record of the Company’s Common Stock (not includingthe owners of shares held in street name).

 

To date, the Company has paid nocash dividends to its shareholders.  TheCompany has no plans to pay cash dividends in the near future.

 

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**ITEM 6.          SELECTEDFINANCIAL DATA**

 

The statement ofoperations data set forth below for each of the years ended June 30, 2001, 2000and 1999 and the balance sheet data as of June 30, 2001 and 2000 are derivedfrom audited financial statements included elsewhere in this Form 10-K.The statement of operations data set forth below for the years ended June 30,1998 and 1997 and the balance sheet data as of June 30, 1999, 1998 and1997 are derived from audited financial statements which are not included inthis Form 10-K.  All years prior tofiscal 2001 have been reclassified to reflect discontinued operations.  You should read the data set forth below inconjunction with the audited financial statements and notes thereto and“Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” appearing elsewhere in this Form 10-K.

 
|                                                                 |   | **Fiscal  Years Ended June 30,**              |    |
|----------------------------------------------------------------------|--------|-----------------------------------------------|---------|
|                                                                 |   | **2001**                                      |    | **2000** |   | **1999** |   | **1998** |   | **1997** |   |
|                                                                 |   | **(In  thousands, except per share amounts)** |    |
| Statement of Operations Data:                                        |   |                                          |    |   |   |   |   |   |   |   |   |
| **Continuing  Operations**                                           |   |                                          |    |   |   |   |   |   |   |   |   |
| Net Sales                                                            |   | $                                             | -0-     |   | $ | -0- |   | $ | -0- |   | $ | -0- |   | $ | -0- |   |
| Cost of goods sold                                                   |   | -0-                                           |    | -0- |   | -0- |   | -0- |   | -0- |   |
| Gross profit                                                         |   | -0-                                           |    | -0- |   | -0- |   | -0- |   | -0- |   |
| Operating expenses:                                                  |   |                                          |    |   |   |   |   |   |   |   |   |
| Sales and marketing                                                  |   | -0-                                           |    | -0- |   | -0- |   | -0- |   | -0- |   |
| Research and development                                             |   | -0-                                           |    | -0- |   | -0- |   | 203 |   | -0- |   |
| General and administrative                                           |   | 5,702                                         |    | 6,098 |   | 3,467 |   | 2,475 |   | 2,359 |   |
| Nonrecurring and restructuring charges                               |   | 7,762                                         |    | -0- |   | -0- |   | -0- |   | -0- |   |
| Operating loss                                                       |   | (13,464                                       | )       | (6,098 | ) | (3,467 | ) | (2,678 | ) | (2,359 | ) |
| Other income (primarily interest)                                    |   | 1,237                                         |    | 156 |   | 8 |   | -0- |   | -0- |   |
| Loss from continuing operations before taxes                         |   | (12,227                                       | )       | (5,942 | ) | (3,459 | ) | (2,678 | ) | (2,359 | ) |
| Income tax (provision) benefit                                       |   | -0-                                           |    | 1,165 |   | (4,627 | ) | 920 |   | (1,289 | ) |
| Loss from continuing operations                                      |   | (12,227                                       | )       | (4,777 | ) | (8,086 | ) | (1,758 | ) | (3,648 | ) |
| Income (loss) from discontinued operations, net of  income taxes     |   | (11,191                                       | )       | (11,920 | ) | 263 |   | 3,599 |   | (12,836 | ) |
| Gain (loss) on sale of discontinued operations, net  of income taxes |   | (588                                          | )       | 35,778 |   | -0- |   | -0- |   | -0- |   |
| Net income (loss)                                                    |   | $                                             | (24,006 | ) | $ | 19,081 |   | $ | (7,823 | ) | $ | 1,841 |   | $ | (16,484 | ) |
|                                                                 |   |                                          |    |   |   |   |   |   |   |   |   |
| Basic and diluted net income (loss) per common  share:               |   |                                          |    |   |   |   |   |   |   |   |   |
| Loss from continuing operations                                      |   | $                                             | (.76    | ) | $ | (.29 | ) | $ | (.51 | ) | $ | (.11 | ) | $ | (.25 | ) |
| Income (loss) from discontinued operations                           |   | (.70                                          | )       | (.72 | ) | .01 |   | .23 |   | (.90 | ) |
| Gain (loss) on sale of discontinued operations                       |   | (.04                                          | )       | 2.17 |   | -0- |   | -0- |   | -0- |   |
| Net income (loss) per common share                                   |   | $                                             | (1.50   | ) | $ | 1.16 |   | $ | (.50 | ) | $ | .12 |   | $ | (1.15 | ) |
|                                                                 |   |                                          |    |   |   |   |   |   |   |   |   |
| Weighted average common shares outstanding                           |   | 16,037                                        |    | 16,480 |   | 15,783 |   | 15,316 |   | 14,306 |   |

 
|                                       |   | **June 30,**        |   |
|--------------------------------------------|--------|---------------------|--------|
|                                       |   | **2001**            |   | **2000** |   | **1999** |   | **1998** |   | **1997** |   |
| Balance Sheet Data:                        |   | **(In  thousands)** |   |
|                                       |   |                |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                  |   | $                   | 8,440  |   | $ | 39,534 |   | $ | 143 |   | $ | 5,011 |   | $ | 610 |   |
| Net assets of discontinued operations      |   | -0-                 |   | -0- |   | 13,341 |   | -0- |   | -0- |   |
| Total assets                               |   | 11,605              |   | 42,197 |   | 10,841 |   | 26,843 |   | 22,357 |   |
| Net liabilities of discontinued operations |   | 2,061               |   | 2,270 |   | -0- |   | 9,480 |   | 9,195 |   |
| Long-term debt, less current maturities    |   | -0-                 |   | -0- |   | -0- |   | 67 |   | 2,244 |   |
| Stockholders’ equity:                 |   |                |   |   |   |   |   |   |   |   |   |
| Preferred                                  |   | -0-                 |   | -0- |   | 7,500 |   | -0- |   | -0- |   |
| Common                                     |   | 4,128               |   | 33,074 |   | 5,944 |   | 13,860 |   | 9,894 |   |
|                                            |        |                     |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**ITEM 7.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

** **

For an understanding of thesignificant factors that influenced the Company’s performance during the pastthree years, the following discussion should be read in conjunction with thefinancial statements and the other information appearing elsewhere in thisreport.

 

Whenused in this report, the words “expects,” “anticipates,” “estimates,” “intends”and similar expressions are intended to identify forward-looking statementswithin the meaning of Section 27A under the Securities Act of 1933 and Section21E under the Securities Exchange Act of 1934. Such statements include but are not limited to statements regarding theability to obtain favorable product allocations and the ability to increasegross profit while controlling expenses. These statements are subject to risks and uncertainties that could causeactual results to differ materially, including those risks described inCAUTIONARY STATEMENTS below.

 

**Background**

 

TheCompany received $45.8 million from the sale of the DGBU in June 2000, and had$39.5 million in cash and cash equivalents and $32.5 million in net currentassets after current liabilities at the end of its fiscal year on June 30,2000.  During the first two quarters offiscal 2001, the Company attempted to develop in the ISBU a new operatingdivision in the business-to-business electronic commerce market.  The development of this market required substantialcash which was taken from the proceeds from the sale of DGBU.

 

While formermanagement believed the DGBU sale proceeds would be sufficient to meet workingcapital requirements for the foreseeable future, it became clear to the Boardof Directors during the second quarter of fiscal 2001 that product development,market opportunities and additional financing alternatives were deficient,diminished, and deteriorated, respectively, to the point where the continuingof the Company’s operations and its survival were at significant risk.  Additionally, at this time, it wasdiscovered that the Company’s then Chief Executive Officer, Melvin Masters, wasacting contrary to the directions of the Board and against the interests of theCompany.  Masters was initiallysuspended from his officer duties and then terminated as an officer of theCompany and removed as a member of all Board committees by actions of themajority of the members of the Board. Masters was removed from the Board by vote of the Company’s shareholdersat a special meeting in May 2001. See Item 4, “Submission of Matters to a Vote of Security Holders.”

 

With the sale ofRSPNetwork in July 2001, the Company reported as if it exited the ISBU segmentin the fourth quarter of fiscal 2001 and discontinued ISBU operations.  Under Generally Accepted AccountingPrinciples (GAAP), the Company financial statements for all periods presentedreflect ISBU activity in discontinued operations.

 

The Company iscurrently not operating any business, is in the process of resolvingoutstanding disputes, and is actively pursuing options regarding theutilization or distribution of its residual assets.

 

 

**Liquidity and Capital Resources**

 

As of June 30,2001, the Company had cash and cash equivalents of $8.4 million that constitutethe remainder of the proceeds from the sale of the DGBU.  Outstanding receivables and prepaid expensestotal approximately $3.1 million, $1.5 million of which has been collected and$1.3 million of which is a refundable legal retainer fee.  After resolving numerous disputes subsequentto its June 30, 2001 fiscal year end (see above, Item 3, Legal Proceedings),the Company believes it has settled all known material legal claims againstit.  Current liabilities of the Companyat June 30, 2001 amounted to $7.5 million, which includes liabilities fromlitigation costs and claims subsequently settled and disbursed.  Under agreements entered into in July 2001with two directors of the Company, Messrs. Adams and Duoos, which expire inJuly 2004, the Company is also obligated to make monthly payments of $21,667and $12,500, respectively, to them for consulting services for an aggregatecommitment of approximately $1.25 million (see below, Item 11, ExecutiveCompensation, Compensation of Directors). Current 

 

9

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management of theCompany is not aware of any additional future liabilities of the Companyresulting from prior events.  Managementtherefore expects that the Company’s cash and cash equivalents will besufficient to meet its known actual and potential liabilities.

 

**Resultsof Operations**

 

Effect ofDiscontinuing the Company’s Operations

 

The DGBU and ISBUoperations are disclosed in the consolidated financial statements for allperiods presented as discontinued operations.

 

General and AdministrativeExpenses

 

The general andadministrative expenses of the Company amounted to $5.7 million, $6.1 millionand $3.5 million in fiscal years 2001, 2000 and 1999, respectively.  The general and administrative expenses ofthe Company for fiscal 2001 reflect the continued expansion of the Companyduring the first six months of the fiscal year as well as legal and other costsrelated to the (i) litigation commenced by and against the Company, (ii)Special Meeting in May 2001, and (iii) sale of the Company’s operatingbusiness.  The increase in general andadministrative expenses in fiscal 2000 compared to 1999 is attributable toincreases in personnel costs, professional and legal costs and other overheadexpenses in connection with the intended expansion of the Company.

 

Restructuring Charges

 

For fiscal 2001,the Company’s statement of operations includes non-recurring and restructuringcharges totaling $7.8 million.  Thecharges include employee separation costs such as severance payments andrelated legal costs of approximately $4.9 million, an allowance foruncollectable receivables from a related party of approximately $1.9 million,and facilities costs of approximately $1.5 million.

 

Interest Income

 

Interest incomeamounted to $1.2 million, $187,000 and $62,000 in fiscal 2001, 2000 and 1999,respectively.  The increase in theinterest income results from the interest earned on the proceeds of the DGBUsale.

 

Income Taxes

 

On June 30, 2001,the net carrying value of the Company’s deferred tax assets was zero due to theuncertainty of any realization of the benefits in the future. The valuationallowance for deferred tax assets was approximately $10.9 million, an increaseof approximately $7.5 million from June 30, 2000. The Company had net federal operatingloss carryforwards of approximately $20.9 million which were available tooffset future taxable income and the gain from the sale of the DGBU. TheCompany also had alternative minimum tax credit carryforwards of approximately$225,000 available to reduce future federal income taxes, if any, over anindefinite period and research credit carryforwards of approximately $872,000available to reduce future federal income tax, if any, through 2005.

 

On June 30, 2000, thevaluation allowance for deferred taxes was approximately $3.4 million. The netchange in the total valuation allowance for the year ended June 30, 2000 was adecrease of approximately $10.7 million.

 

Net Loss from Discontinued Operations

 

The net income (loss) ofthe Company from discontinued operations was ($11.2 million), ($11.9 million)and $263,000 in fiscal 2001, 2000 and 1999, respectively.  The losses were caused by the lack ofsufficient revenues, combined with expenses for personnel, marketing andproduct development for RSPN and B2BXchange, the ISBU divisions.

 

10

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Gain/Loss on Sale of Discontinued Operations

 

On sale of the DGBU, theCompany recorded a $35.8 million gain in fiscal 2000.  The sale of the RSPN division of the ISBU resulted in a loss of$588,000 in fiscal 2001.

 

Recent Accounting Pronouncements

 

In June 2001, theFinancial Accounting Standards Board (FASB) issued Statement of AccountingStandards (SFAS) No. 141 “Business Combinations.”  SFAS No. 141 eliminates the pooling-of-interests method ofaccounting for business combinations except for qualifying businesscombinations that were initiated prior to July 1, 2001.  In addition, SFAS No. 141 further clarifiesthe criteria to recognize intangible assets separately from goodwill.  The requirements of SFAS No. 141 areeffective for any business combination accounted for by the purchase methodthat is completed after June 30, 2001. The Company believes the adoption of SFAS No. 141 will not have amaterial effect on the Company’s consolidated financial position or results ofoperations.

 

In June 2001, the FASBadopted SFAS No. 142 “Goodwill and Other Intangible Assets.”  SFAS No. 142 discontinues the amortizationof recorded goodwill for fiscal years beginning after December 15, 2001.  The Company believes the adoption of SFASNo. 142 will not have a material effect on the Company’s consolidated financialposition or results of operations.

 

In June 2001, the FASBissued SFAS No. 143 “Accounting for Asset Retirement Obligations.”  SFAS No. 143 addresses accounting forobligations associated with long-lived asset retirements and is effective forfiscal years beginning after June 15, 2002. The Company believes the adoption of SFAS No. 143 will not have amaterial effect on the Company’s consolidated financial position or results ofoperations.

 

In August 2001, the FASB issued SFAS No. 144“Accounting for the Impairment or Disposal of Long-Lived Assets.”  SFAS No. 144 supersedes SFAS No. 121.  SFAS 144 primarily addresses significantissues relating to the implementation of SFAS 121 and develops a singleaccounting model for long-lived assets to be disposed of, whether primarilyheld, used or newly acquired.  Theprovisions of SFAS 144 will be effective for fiscal years beginning afterDecember 15, 2001.  The provisions ofSFAS No. 144 generally are to be applied prospectively.  The Company believes the adoption of SFASNo. 144 will not have a material effect on the Company’s consolidated financialposition or results of operations.

 

 

**CAUTIONARY STATEMENTS**

 

Certain statements contained in this Form 10-K and other written and oral statements made from time to time by us do 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. Our forward-looking statements generally relate to the legal proceedings the Company is involved in and the business acquisition opportunities the Company is investigating. 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.

 

11

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Legal Proceedings

 

Legal proceedingsinvolving the Company are significant to the Company’s financial position.  The financial statements include accruedamounts sufficient to adequately reflect payments required under terms of thevarious settlements and related legal expenses incurred subsequent to June 30,2001.  The Company is unaware of anymaterial existing or potential future legal proceedings for which additionalamounts would need to be accrued.

 

Business Acquisition Opportunities

 

The Company is currentlynot operating any revenue-generating business. However, the Company continues to incur general and administrativeexpenses, especially for the compensation of its directors, consultant (interimCEO), insurance, and for accounting and legal expenses.  There is no guarantee that the Company willbe able to identify an adequate business acquisition opportunity and togenerate revenues before its financial resources are exhausted.

 

 

**ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The Company does notbelieve that there is any material exposure to market risk with respect toderivative or other financial instruments that would require disclosure underthis item.

 

 

**ITEM 8.  FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

See Financial Statementsand Supplementary Data attached.

 

 

**ITEM 9.  CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE**

 

Effective June 5,2001, KPMG LLP resigned as the Company’s independent accounting firm.

 

KPMG LLP reportedon the financial statements of the Company for the fiscal year ending June 30,2000.  Such report neither contained anadverse opinion or a disclaimer of opinion, nor was qualified or modified as touncertainty, audit scope, or accounting principles.

 

During theCompany’s 2000 fiscal year and the interim period through June 5, 2001, therewere no disagreements with KPMG LLP, whether or not resolved, on any matter ofaccounting principles or practices, financial statement disclosure, or auditingscope or procedure, which, if not resolved to the satisfaction of KPMG LLP,would have caused it to make reference to the subject matter of thedisagreement(s) in connection with its report.

 

Effective July 16, 2001, Lurie Besikof Lapidus& Company, LLP (LBLCO) was engaged as the Company’s independent accountingfirm.  The decision to engage LBLCO asthe Company’s accountants was recommended by the Company’s Audit Committee andapproved by the Company’s Board of Directors effective July 16, 2001.

 

During the Company’s two fiscal years ended June30, 2000, and the subsequent interim period prior to engaging LBLCO as theCompany’s accountant on July 16, 2001, the Company did not consult LBLCO on anymatter.

 

 

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**PART III**

 

**ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS**

 

**Directors**

 
| **Name, Age, Positions, Principal Occupations, Directorships**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | **Year  Became Director** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                      |   |
| Timothy R. Duoos, age  46, was President and Chief Executive Officer of Lyndale Garden Center, Inc.  in Minneapolis from October 31, 1986 until 2000.  Mr. Duoos also held a part-time position as Chairman of the  Board and Chief Executive Officer of Sunbelt Nursery Group, Inc. (“Sunbelt”)  based in Fort Worth, Texas, from November 1994 through May 1998, and  President from October 1997 through May 1998.  He served as a part-time consultant to Sunbelt from May 1998 to  December 1998.  Sunbelt filed a  voluntary petition under the U.S. Bankruptcy Code in May 1998.  Mr. Duoos served as a Director of Pinnacle  Financial, Inc., a privately held company from June 1996 through June  1997.  Mr. Duoos is currently  self-employed. |   | 1999                      |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                      |   |
| Edward S. Adams, age  39, has been a Professor of Law at the University of Minnesota School of Law  since 1992 and is Co-Director for the Kommerstad Center for Business Law and  Entrepreneurship at the University of Minnesota School of Law.  Mr. Adams has also been a principal in  Equity Securities Investments, Inc. in Golden Valley, Minnesota since 1995.                                                                                                                                                                                                                                                                                                                                                                                                                   |   | 1999                      |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                      |   |
| John Cavanaugh, age 44,  served as Chief Executive Officer of Gateway Telecommunications Inc. from  1990 to 2000.  Gateway was acquired by  United Asset Coverage Inc. (“UAC”) in October 2000.  Mr. Cavanaugh currently holds the position of Senior Vice  President Equipment Division with UAC, the nation’s leading maintenance  provider for Avaya and Nortel Telecommunications with 50 offices located  throughout the United States.                                                                                                                                                                                                                                                                                                                        |   | 2000                      |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                      |   |
| Stephen Fisher, age 45,  is President of TEAM Technologies, formerly a wholly owned subsidiary  (RSPNetwork) of the Company.  Mr.  Fisher has held this position since July, 2001 when RSPN was purchased from  the Company.  TEAM Technologies is a  systems integrator specializing in Internet hosting, integration, and support  services.  From 1992 to 1998, Mr.  Fisher was President and CEO of TEAM Technologies prior to its acquisition by  VirtualFund.                                                                                                                                                                                                                                                                                                           |   | 1999                      |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                      |   |
| Kelly Johnson, age 42,  is the Managing Director of a Portland, Oregon office of a full service  investment banking and brokerage services firm.  He has been involved in a variety of duties that include  strategic planning, personnel management, market analysis, sales and  marketing, and corporate/municipal underwriting.  Mr. Johnson has served in numerous capacities related to the  investment and securities industry since 1986.                                                                                                                                                                                                                                                                                                                                   |   | 2001                      |   |

 

 

**Executive Officers**

 

ChiefExecutive Officer

 

MelvinL. Masters, age 46, founded the Company in February 1986 and was Chairman,Chief Executive Officer and President of the Company from May 1989 until histermination for cause in November 2000. He was a director of the Company from 1989 until his removal from theCompany’s Board of Directors at the Special Meeting of Shareholders on May 18, 2001.  Mr. Masters is also the sole shareholder,director and CEO of TimeMasters, Inc., a company established in 1986 for thepurpose of property management, which has additional investments in the fieldsof wireless voice/data communications, and various Internet services.

 

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Robert E. Kelly, age 46,was appointed the Company’s President on October 23, 2000 under terms of theRymatics acquisition agreement.  He wasmade acting chief executive officer, serving as CEO from November 20, 2000until January 2001.

 

Douglass E. Coy, age 60,acted as Chief Executive Officer of the Company from January 15, 2001 untilApril 30, 2001.  He is the principal ofCoy and Associates, Inc., a management consulting firm specialized in providingconsulting services in areas such as company reorganizations, litigationsupport, asset management and liquidation.

 

Monte S. Johnson, age 43, was named Chief ExecutiveOfficer and performed the duties of the Chief Financial Officer of the Companyfrom May 2001 to October 2001 when he resigned.  Mr.Johnson, an MBA and CPA, was the Chief Financial Officer and Senior VicePresident of Pro Staff Personnel Services prior to joining the Company.Previously he served as Director of Business Development and Mergers &Acquisitions at Honeywell, Inc. Prior to that, Mr. Johnson was a Senior Managerat Deloitte & Touche International.

 

ChiefOperating Officer

 

Robert J. Wenzel, age 49,was the Chief Operating Officer of the Company from October 1991 until histermination in May 2001.  Mr. Wenzel wasalso the President of ColorSpan Corporation, the Company’s principal operatingsubsidiary of its Digital Graphics Business Unit (“DGBU”), from October 1989until May 2001.

 

Chief Financial Officer

 

Timothy N. Thurn, age 44,assumed the duties of Chief Financial Officer from April 2000 until histermination in November 2000.  Mr. Thurnwas also the Treasurer of the Company from June 1989 until his termination. Hewas Treasurer of ColorSpan Corporation from March 1987 until June 2000. Mr.Thurn has experience as both a public and private accountant.  Mr. Thurn is a Certified Public Accountant(CPA) and Certified Management Accountant (CMA).

 

Michael P. Coughlin, age41, assumed the duties of Acting Chief Financial Officer in November 2000 untilMay 2001.

 

Senior Vice President

 

Joseph Beckman, age 37, assumed the duties of theCompany’s General Counsel in February 2000. In December 2000, he accepted additional duties as Senior Vice Presidentand Secretary, and held all three positions until his resignation from theCompany in May 2001.  Prior to joiningVirtualFund, Mr. Beckman worked as an attorney in private practice at the lawfirm of Gough, Shanahan, Johnson & Waterman in Helena, Montana (1996 to1999).

 

**Legal Proceedings involving Directors and Executive Officers**

 

See Item 3, Legal Proceedings,concerning legal proceedings involving former directors and executive officersof the Company.

 

**Compliancewith Section 16(a) of the Securities Exchange Act**

 

Under federal securitieslaws, the Company’s directors and officers, and any beneficial owner of morethan 10 percent of a class of equity securities of the Company, are required toreport their ownership of the Company’s equity securities and any changes insuch ownership to the Securities and Exchange Commission (the “Commission”) andthe securities exchange on which the equity securities are registered. Specificdue dates for these reports have been established by the Commission, and theCompany is required to disclose in its Form 10-K any delinquent filing of suchreports and any failure to file such reports.

 

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TheCompany is aware that its former Chief Executive Officer, Melvin Masters, fileda Form 5 for fiscal year 2000 belatedly, on October 31, 2000.  None of the current directors of theCompany, the individuals who served as executive officers during fiscal year2001, and/or the known beneficial owners of more than ten percent of theCompany’s common stock furnished to the Company any Forms 3, 4 or 5 andamendments thereto.

 

 

**ITEM 11.  EXECUTIVECOMPENSATION**

 

**Summary Compensation Table**

 

The following table sets forth all cashcompensation paid or to be paid by the Company, as well as certain othercompensation, paid or accrued, during each of the Company’s last three fiscalyears to the (acting) Chief Executive Officer. As of the end of fiscal year 2001, Monte Johnson was the only executiveofficer of the Company.  The table alsoincludes information on two individuals who were not serving as executiveofficers of the Company at the end of its fiscal year 2001, but who would havebeen the most highly compensated executive officers of the Company if theystill had worked for the Company.  Theirtotal annual salary and bonus paid or accrued during fiscal year 2001 exceeded$100,000.

 
|                                               |   |             |    |                     |    |          |   |          |   | **Long Term  Compensation**       |      |                                    |   |
|----------------------------------------------------|--------|------------------|---------|--------------------------|---------|---------------|--------|---------------|--------|-----------------------------------|-----------|-----------------------------------------|--------|
|                                               |   |             |    | **Annual  Compensation** |    | **Awards**    |   | **Payouts**   |   |                              |      |
| **Name and Principal Position**                    |   | **Fiscal  Year** |    | **Salary ($)**           |    | **Bonus ($)** |   | **Other ($)** |   | **Restricted  Stock Awards  ($)** |      | **Securities  Underlying Options  (#)** |   | **LTIP  Payouts ($)** |   | **All Other  Compen-sation  ($)** |   |
|                                               |   |             |    |                     |    |          |   |          |   |                              |      |                                    |   |   |   |   |   |
| Melvin L. Masters  Former CEO                      |   | 2001             |    | $                        | 305,707 |          | $      | —        |   | $                                 | —    |                                    | $      | — |   | — |   | $ | — |   | $ | — |   |
|                                               | 2000   |             | 278,125 |                     |    |          | — |          | — |                              | 1,000,000 | (1)                                     | — |   | — |   |
|                                               | 1999   |             | 175,000 |                     |    |          | — |          | — |                              | —    |                                    | — |   | — |   |
|                                               |   |             |    |                     |    |          |   |          |   |                              |      |                                    |   |   |   |   |   |
| Robert Kelly  Former CEO                           |   | 2001             |    | $                        | 383,167 |          | $      | —        |   | $                                 | —    |                                    | $      | — |   | — |   | $ | — |   | $ | — |   |
|                                               |   |             |    |                     |    |          |   |          |   |                              |      |                                    |   |   |   |   |
|                                               |   |             |    |                     |    |          |   |          |   |                              |      |                                    |   |   |   |   |   |
| Douglass E. Coy  Former CEO                        |   | 2001             |    | $                        | 129,518 | (2)           | $      | —        |   | $                                 | —    |                                    | $      | — |   | — |   | $ | — |   | $ | — |   |
|                                               |   |             |    |                     |    |          |   |          |   |                              |      |                                    |   |   |   |   |
|                                               |   |             |    |                     |    |          |   |          |   |                              |      |                                    |   |   |   |   |   |
| Monte S. Johnson  Acting CEO on June 30, 2001 |   | 2001             |    | $                        | 70,562  | (3)           | $      | —        |   | $                                 | —    |                                    | $      | — |   | — |   | $ | — |   | $ | — |   |
|                                               |   |             |    |                     |    |          |   |          |   |                              |      |                                    |   |   |   |   |
|                                               |   |             |    |                     |    |          |   |          |   |                              |      |                                    |   |   |   |   |
|                                               |   |             |    |                     |    |          |   |          |   |                              |      |                                    |   |   |   |   |   |
| Robert Wenzel  Former COO                          |   | 2001             |    | $                        | 562,742 |          | $      | —   |   | $                                 | —    |                                    | $      | — |   | —  |   | $ | — |   | $ | — |   |
|                                               | 2000   |             | 209,375 |                     | 10,000  |          | — |          | — |                              | 300,000   | (4)                                     | — |   | — |   |
|                                               | 1999   |             | 175,000 |                     | —  |          | — |          | — |                              | —    |                                    | — |   | — |   |
|                                               |   |             |    |                     |    |          |   |          |   |                              |      |                                    |   |   |   |   |   |
| Joseph Beckman  Former Sr. VP, Counsel, Secretary  |   | 2001             |    | $                        | 247,719 |          | $      | —        |   | $                                 | —    |                                    | $      | — |   | — |   | $ | — |   | $ | — |   |
|                                               | 2000   | (5)              | 44,774  |                     | 10,000  |          | — |          | — |                              | —    |                                    | — |   | — |   |
|                                               |   |             |    |                     |    |          |   |          |   |                              |      |                                    |   |   |   |   |
|                                               |   |             |    |                     |    |          |   |          |   |                              |      |                                    |   |   |   |   |   |

(1)     Forfeited pursuant to the Global Settlement Agreementbetween Company and Mel Masters, dated March 11, 2002; see below, EmploymentContracts and Termination of Employment.

(2)     Paid pursuant to Consulting Agreement between Companyand Coy & Associates Inc., dated as of January 15, 2001, and includes adeposit in the amount of $30,000 (see below, Employment Contracts andTermination of Employment and Change-in-Control Arrangements).

 

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(3)     Paid pursuant to Consulting Agreement between Companyand Monte S. Johnson, effective as of May 1, 2001, and includes a deposit inthe amount of $15,000 (see below, Employment Contracts and Termination ofEmployment and Change-in-Control Arrangements).

(4)     Forfeited pursuant to Settlement Agreement betweenCompany and Robert Wenzel, dated May 8, 2001; see below, Employment Contractsand Termination of Employment.

(5)     Reflects payments received from February 2000, whenMr. Beckman started at the Company, until June 30, 2000, the end of fiscal2000.

 

**Option Grants During 2001 Fiscal Year**

 

The Company maintains two stock option plans pursuant towhich executive officers, other employees and certain non-employees providingservices to the Company may receive options to purchase the Company’s commonstock.  These plans are the 1990Restated Stock Option Plan (as amended May 19, 1991) and the 1996 StockIncentive Plan.  Options can no longer begranted under the 1990 Restated Stock Option Plan.

 

The following table provides information regarding stock options grantedduring fiscal 2001 to the named executive officers in the Summary CompensationTable.  The Company has not granted anystock appreciation rights.

 
| **Name**          |   | **Number of  Shares  Underlying  Options Granted** |   | **Percent of  Total  Options Granted  to Employees in  Fiscal Year** |   | **Exercise  or  Base Price  Per Share** |   | **Expiration  Date** |    |
|-------------------|--------|----------------------------------------------------|--------|----------------------------------------------------------------------|--------|-----------------------------------------|--------|----------------------|---------|
| Melvin L. Masters |   | -0-                                                |   | Not Applicable                                                       |   | Not Applicable                          |   | Not Applicable       |    |
| Robert Kelly      |   | 160,000                                            |   | 22.5                                                                 | %      |                                    | $.60   |                 | 1/24/06 |   |
| Douglass E. Coy   |   | -0-                                                |   | Not Applicable                                                       |   | Not Applicable                          |   | Not Applicable       |    |
| Monte S. Johnson  |   | -0-                                                |   | Not Applicable                                                       |   | Not Applicable                          |   | Not Applicable       |    |
| Robert Wenzel     |   | -0-                                                |   | Not Applicable                                                       |   | Not Applicable                          |   | Not Applicable       |    |
| Joseph Beckman    |   | -0-                                                |   | Not Applicable                                                       |   | Not Applicable                          |   | Not Applicable       |    |
|                   |        |                                                    |        |                                                                      |        |                                         |        |                      |         |  |

 

 

**Option Exercises During 2001 Fiscal Yearand Fiscal Year-End Option Values**

 

No options were exercised by the named executive officers during fiscal2001.  The following table providesinformation related to the number and value of options held on June 30, 2001:

 
|              |   | **Number of  Securities  Underlying Unexercised  Options at Fiscal Year End** |   | **Value of  Unexercised  In-the-Money Options  at Fiscal Year End(1)** |   |
|-------------------|--------|-------------------------------------------------------------------------------|--------|------------------------------------------------------------------------|--------|
| **Name**          |   | **Exercisable**                                                               |   | **Unexercisable**                                                      |   | **Exercisable** |   | **Unexercisable** |   |
| Melvin L. Masters |   | -0-                                                                           |   | -0-                                                                    |   | Not  Applicable |   | Not  Applicable |   |
| Robert Kelly      |   | 160,000                                                                       |   | -0-                                                                    |   |   | $0 |   | Not  Applicable |   |
| Douglass E. Coy   |   | -0-                                                                           |   | -0-                                                                    |   | Not  Applicable |   | Not  Applicable |   |
| Monte Johnson     |   | -0-                                                                           |   | -0-                                                                    |   | Not  Applicable |   | Not  Applicable |   |
| Robert Wenzel     |   | -0-                                                                           |   | -0-                                                                    |   | Not  Applicable |   | Not  Applicable |   |
|                   |        |                                                                               |        |                                                                        |        |  |  |  |  |  |

 

(1)           Valueis calculated on the basis of the difference between the option exercise priceand $0.17, the average of the closing bid and ask price on June 30, 2001 asquoted on the OTC Bulletin Board.

 

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**Compensation of Directors**

 

Pursuant to letters fromthe Company dated August 23, 1999 and September 10, 1999, Messrs. Duoos andAdams, respectively, are entitled to receive a monthly fee of $3,000 each fortheir services on the Board of Directors. In fiscal 2001, Messrs. Duoos and Adams were paid $69,000 and $66,000,respectively, for their services as board members dating back to 2000.  The letters also granted each of Messrs.Duoos and Adams options to purchase 100,000 shares of the Company’s commonstock at $2.00 and $1.65 per share respectively.  Over a four-year period, on each anniversary date of the grant,25,000 of these options will vest.  InJuly 2001, the Board repriced these options to $.15 per share.

 

For services performed inconnection with the reorganization of the Company after the termination of theformer Chief Executive Officer and President, Mr. Masters, Messrs. Adams andDuoos each received a payment of $100,000 in June 2001.  For services performed in connection withthe review of merger and acquisition possibilities, Mr. Cavanaugh received atthe same time a payment of $30,000. Simultaneously, the Company granted to each of Messrs. Adams and Duoosimmediately exercisable 5-year options to purchase 250,000 shares of theCompany’s common stock exercisable at $.16 per share.  These options were repriced to $.15 per share in July 2001.  In June 2001, Mr. Cavanaugh receivedimmediately exercisable 5-year options to purchase 50,000 shares of theCompany’s common stock at $.16 per share.

 

The Board of Directorsdecided on July 10, 2001 to grant to each of Messrs. Adams, Cavanaugh, Duoosand Johnson on each anniversary date of the Board action non-qualified 5-yearoptions to purchase 100,000 shares of the Company’s common stock at a price of$.15 per share.  The options weregranted in fiscal year 2003 together with a similar option for Mr. Fisher, at aprice of $.05 per share.  Such optionswere granted outside of the Company’s Stock Option Plan.

 

In connection with their serviceon the Special Acquisition/Investment Committee, Messrs. Adams and Duoos eachentered into agreements with the Company dated July 1, 2001.  Under the terms of the agreements, they areobligated to find business opportunities, investments, and/or transactions toenhance shareholder value by performing the following consulting services:contact investment bankers and brokers to identify and effectuate transactions,conduct and oversee the due diligence required to analyze transaction options,review and analyze proposals for transactions, present details to the Board ofDirectors for consideration, negotiate the structure, parameters and valuationwith respect to any transaction, coordinate all necessary legal, accounting orother necessary professional assistance to successfully consummatetransactions, negotiate with any lending or financial institutions, ifnecessary, to consummate transactions. Under their respective agreements, Messrs. Duoos and Adams receivemonthly base compensation in the amount of $21,667 and $12,500,respectively.  On each anniversary dateof the agreements, the Company will grant to each of them options under theCompany’s Stock Option Plan to purchase 100,000 shares of the Company’s commonstock at $.15 per share.  Moreover,Messrs. Duoos and Adams are eligible to participate in any bonus or performancebased incentive compensation plans which may be established by or provided forthe Board of Directors.  Any reasonableand necessary out-of-pocket expenses incurred by Messrs. Duoos and Adams inconnection with their services under the agreements will be reimbursed by theCompany.  The agreements shall expire onJuly 1, 2004, unless terminated earlier upon death or disability or with or withoutcause.  If an agreement is terminated byreason of death or disability, payments under the agreements are made throughthe date of termination.  If anagreement is terminated by the Company without cause or with cause by Messrs.Duoos or Adams, respectively, payment of the base compensation is continued asseverance payment until the end of the term of the agreement.  Upon termination of an agreement for causeby the Company or without cause by Messrs. Duoos or Adams, respectively,payments will only be made through the date of termination.

 

In August 2001, the Boardof Directors approved the reimbursement of relocation expenses to Mr.Duoos.  The Company reimbursed Mr. Duoosexpenses in the amount of $202,527.  Atthe same time, Mr. Adams received a one-time special consulting fee in the amountof $30,000 for services provided to the Company outside of the agreement forhis work on the Special Acquisition/Investment Committee.

 

17

----

 

**Employment Contracts and Termination of Employment and Change-in-ControlArrangements**

 

See Item 3, LegalProceedings, regarding the legal proceedings concerning the employmentrelationships between the Company and its former officers, Messrs. Masters,Vatland, Thurn, Ryan and Wenzel.

 

Under a ConsultingAgreement dated January 15, 2001, the Company paid Mr. Coy for his services atan hourly rate of $195 and a minimum fee of $5,000 to be paid by theCompany.  Upon execution of theAgreement, the Company paid a deposit in the amount of $30,000.  The Agreement could be terminated by eitherparty at any time without cause.  TheAgreement was terminated as of April 30, 2001.

 

The Company entered intoa Consulting Agreement with MSJ & Associates, LLC (“Consultant”), which iscontrolled by its principal, Monte Johnson, effective May 1, 2001.  Under the Consulting Agreement, Mr. Johnsonwas designated as acting Chief Executive Officer of the Company and had thepowers and authorities, as well as the duties and obligations, inherent in suchoffice.  The Company paid $175 per hourfor services provided under the Consulting Agreement.  Upon execution of the Agreement, the Company deposited withConsultant the amount of $15,000 to be held as deposit by Consultant until thetermination of the Agreement.  TheAgreement was entered into for an indefinite term and could be terminated byeither party upon five days written notice. Consultant terminated the Agreement in October 2001.

 

In connection with thetermination of its employment relationship with Robert J. Wenzel, who had beenthe Company’s Chief Operating Officer since 1991, the Company entered into aSettlement Agreement and Mutual General Release dated May 8, 2001.  Under the agreement, Wenzel receivedpayments in the total amount of $349,000 (including reimbursement of his attorney’sfees).  The parties agreed to releaseeach other from any and all claims, including non-compete obligations Wenzelwas subject to.

 

The Company and itsSenior Vice President and General Counsel, Joseph Beckman, entered into anAgreement and Release effective as of May 21, 2001.  The parties agreed that Beckman’s employment with the Companyterminated as of May 21, 2001 and that Beckman resigned from all offices he hadheld with the Company as of such date. Moreover, the parties agreed to mutually release each other from anyclaims.  Beckman agreed to keep anyconfidential information of the Company confidential for an unlimited period,except as may be required by law or legal process.  In consideration for the promises made in the agreement and theservices he rendered to the Company through the end of his employment, Beckmanreceived, in addition to the salary due to him until the end of his employmentwith the Company, a settlement payment of $65,000.

 

 

**Compensation Committee Interlocks and InsiderParticipation**

 

Prior to his termination the former Chief ExecutiveOfficer of the Company,Melvin L. Masters, was a member of the Compensation Committee. Mr. Masters’compensation was set by the Board of Directors as a whole with Mr. Mastersabstaining.

 

18

----

 

**Board Compensation Committee Report on ExecutiveCompensation**

 

One of the primary goalsin setting compensation policies is to maintain competitive, progressiveprograms to attract, retain and motivate high caliber executives, and maximizethe financial success of the Company by appropriately rewarding suchindividuals for their achievements. Another goal is to provide an incentive to executives to focus efforts onlong-term strategic goals for the Company by closely aligning their financialinterests with stockholder interests. To attain these goals the Company’s executive compensation program wasdesigned to include base salary, incentive bonuses and long-term incentives inthe form of stock options.

 

Base Salary.  Salaries for executives are reviewed by theCompensation Committee on a periodic basis and may be increased (or decreased)at any time based on:  (1) the CompensationCommittee’s evaluation of the individual’s performance; and (2) the Company’sfinancial condition.  Increases inmedian competitive pay levels are a secondary factor.

 

During Mr. Masters tenureas Chief Executive Officer, compensation for him as the Company’s ChiefExecutive Officer was set by the Board of Directors as a whole, with Mr.Masters abstaining.  The compensationfor his successors was set by the Compensation Committee.  The amounts earned by the various peopleholding the office of the Company’s Chief Executive Officer in fiscal 2001 aredisclosed in the summary compensation table.

 

The Compensation Committeeconsists of the following members:

 

John Cavanaugh

Steve Fisher

Kelly Johnson

 

 

**Performance Graph**

 

The following tablecompares the cumulative total return on the common stock of the Company for thelast five years with the Nasdaq Composite Indexand with an index of computer corporations listed on Nasdaq, in each caseassuming an investment of $100 on June 30, 1996 and the reinvestment of alldividends:

 
|                  |   | **6/96** |   | **12/96** |   | **6/97** |   | **12/97** |   | **6/98** |   | **12/98** |   | **6/99** |   | **12/99** |   | **6/00** |   | **12/00** |   | **6/01** |   |
|-----------------------|--------|----------|--------|-----------|--------|----------|--------|-----------|--------|----------|--------|-----------|--------|----------|--------|-----------|--------|----------|--------|-----------|--------|----------|--------|
| NASDAQ US INDEX       |   | $        | 100    |      | $      | 109      |   | $         | 122    |     | $      | 134       |   | $        | 161    |      | $      | 188      |   | $         | 231    |     | $      | 350 |   | $ | 341 |   | $ | 213 |   | $ | 186 |   |
| NASDAQ COMPUTER INDEX |   | $        | 100    |      | $      | 117      |   | $         | 128    |     | $      | 142       |   | $        | 207    |      | $      | 308      |   | $         | 386    |     | $      | 653 |   | $ | 710 |   | $ | 392 |   | $ | 328 |   |
| VFND STOCK PRICE      |   | $        | 100    |      | $      | 76       |   | $         | 27     |     | $      | 61        |   | $        | 62     |      | $      | 28       |   | $         | 21     |     | $      | 66 |   | $ | 33 |   | $ | 8 |   | $ | 2 |   |

 

 

19

----

 

**ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

The following tableprovides information as of November 14, 2002 (the “Record Date”) concerning thebeneficial ownership of the Company’s Common Stock by (i) each director of theCompany, (ii) each executive officer named in the Summary Compensation Table,(iii) the persons known by the Company to own more than 5% of the Company’soutstanding Common Stock, and (iv) all directors and executive officers as agroup.  Except as otherwise indicated,the persons named in the table have sole voting and investment power with respectto all shares of Common Stock owned by them. On the Record Date, 15,203,617 shares of Common Stock of the Companywere issued and outstanding.

 
| **Name or Identity of Group**                  |   | **Number of  Shares  Beneficially Owned** |   | **Percent of  Common  Stock Outstanding(1)** |   |
|------------------------------------------------|--------|-------------------------------------------|--------|----------------------------------------------|--------|
| Edward S. Adams                                |   | 913,758                                   | (2)    | 5.85                                         | %      |
| Timothy R. Duoos                               |   | 915,759                                   | (3)    | 5.86                                         | %      |
| John Cavanaugh                                 |   | 150,000                                   | (4)    | *                                            |   |
| Steven Fisher                                  |   | 100,000                                   | (5)    | *                                            |   |
| Melvin Masters(6)                              |   | —                                    |   | —                                       |   |
| Robert Kelly                                   |   | 160,000                                   | (7)    | 1.04                                         | %      |
| Douglass Coy                                   |   | —                                    |   | —                                       |   |
| Monte S. Johnson                               |   | —                                    |   | —                                       |   |
| All current officers and  directors as a group |   | 2,239,517                                 | (8)    | 13.60                                        | %      |
| John E. and Mary Joanne Feltl                  |   | 1,044,420                                 |   | 6.87                                         | %      |
| Sihl Zurich Paper Mill                         |   | 2,742,858                                 | (9)    | 16.55                                        | %      |

----

*                      Less than 1%.

 

(1)               For each person or group, any securitiesthat the person or group has the right to acquire within 60 days pursuant tooptions, warrants, conversion privileges or other rights, have been added tothe total amount of outstanding shares when determining the percent owned bysuch person or group.

 

(2)               Includes 425,000 shares of common stocksubject to options exercisable within 60 days after the Record Date.

 

(3)               Includes 425,000 shares of common stocksubject to options exercisable within 60 days after the Record Date.

 

(4)               Includes 150,000 shares of common stocksubject to options exercisable within 60 days after the Record Date.

 

(5)               Includes 100,000 shares of common stocksubject to options exercisable within 60 days after the Record Date.

 

(6)               Under terms of the Global SettlementAgreement dated March 22, 2002 all shares of the Company’s stock ownedbeneficially or directly by Melvin Masters were surrendered, and all warrantsand options cancelled.

 

(7)               Includes 160,000 shares of common stocksubject to options exercisable within 60 days after the Record Date.

 

(8)               Includes 1,260,000 shares of common stocksubject to options exercisable within 60 days after the Record Date.

 

(9)               Includes 1,371,429 shares of common stocksubject to warrants exercisable within 60 days after the Record Date.

 

20

----

 

**ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

On July 23, 2001,VirtualFund.com, Inc. (the “Company”) entered into an Asset Purchase Agreementwith its wholly owned subsidiary, RSPNetwork, Inc. and RSP Acquisitions,LLC.  Pursuant to the Asset PurchaseAgreement, RSPNetwork, Inc. sold substantially all of its assets and businessto RSP Acquisitions, LLC for a purchase price consisting of the assumption ofcertain liabilities, up to $1,000,000 based on an earnout formula and otherterms, conditions and provisions detailed in the Asset Purchase Agreement.  Mr. Steven Fisher, President of RSPAcquisitions, LLC, is a director of the Company.  The Company has received a fairness opinion relating to thesale.  The assets involved in thetransaction related to RSPNetwork, Inc.’s business of information systemsintegration providing IT solutions for businesses, and included accountsreceivables, inventory, prepaid expenses, contracts, proprietary rights,equipment, records and customer deposits.

 

As of July 1, 2001, theBoard established a loan program whereby the Company will loan up to $500,000to the outside directors based on their seniority to buy stock fromshareholders at a mutually agreed upon price. In connection with the sale of RSPNetwork, Messrs. Adams and Duoos eachreceived a loan in the amount of $73,313.75 to purchase 488,758 and 488,759shares of common stock, respectively, from two shareholders at a purchase priceof $.15 per share.  The Sarbanes-OxleyAct of 2002 restricts future loans to directors.

 

On November 8, 2001, CashSystems, Inc. and a wholly owned subsidiary of Cash Systems, Inc. issued aconvertible promissory note to VirtualFund in the amount of up to$500,000.  Advances totaling $400,000were made under such note.  EquitySecurities Investments, Inc. received as agent of Cash Systems, Inc. acommission of $65,000 and warrants to purchase 50,000 shares of common stock ofCash Systems, Inc.  Mr. Edward Adams,Vice-Chairman of the Board of VirtualFund, is President and a principal ofEquity Securities Investments, Inc.

 

Since October 2001,Equity Securities Investments, Inc. has provided various brokerage andinvestment banking services in transactions involving the Company, earningcommissions and fees from the Company or other parties to the transactiontotaling $355,000, plus warrants of unspecified value.   Mr. Edward Adams, Vice-Chairman of theBoard of VirtualFund, is President and a principal of Equity SecuritiesInvestments, Inc.

 

For other agreementsinvolving directors and/or officers of the Company, see Item 11: “Compensationof Directors” and “Employment Contracts and Termination of Employment andChange-in-Control Arrangements.”

 

21

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**ITEM 14**.  **EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K**

 
| (a)    | The following documents  are filed as part of this Form 10-K:                         |
|--------|---------------------------------------------------------------------------------------|
|   |                                                                                  |   |
|   | (1)                                                                                   | Consolidated Financial  Statements |
|   |                                                                                  |   |
|   |                                                                                  | The financial  statements (including the notes thereto) listed in the Index to Consolidated  Financial Statement Schedule (set forth in Item 8 of Part II of this form  10-K) are filed as part of this Annual Report on Form 10-K. |
|   |                                                                                  |   |
|   | (2)                                                                                   | Consolidated Financial  Statement Schedule  Schedule II: Valuation and Qualifying Accounts |
|   |                                                                                  |   |
|   |                                                                                  | Schedules not listed  above have been omitted because they are not required or the information  required to be set forth therein is included in the Consolidated Financial  Statements or Notes to Consolidated Financial Statements. |
|   |                                                                                  |   |
|   | (3)                                                                                   | Exhibits—See Exhibit  Index on page following signatures |
|   |                                                                                  |   |
| (b)    | Reports on Form 8–K.                                                             |
|   |                                                                                  |   |
|   | The following reports  on Form 8-K were filed during the quarter ended June 30, 2001: |
|   |                                                                                  |   |
|   | (1)                                                                                   | Form 8-K filed May 18,  2001, reporting under Item 5 about the special meeting of Company’s  shareholders. |
|   |                                                                                  |   |
|   | (2)                                                                                   | Form 8-K filed June 6, 2001,  reporting under Item 4 the resignation of KPMG LLP as independent accountant  of VirtualFund effective June 5, 2000. |
|   |                                                                                  |   |
| (c)    | Exhibits.   See Item 14(a) above.                                                |
|   |                                                                                  |   |
| (d)    | Financial Statements Schedules.  See Item 14(a) above.                           |

 

 

22

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VIRTUALFUND.COM, INC.

AND SUBSIDIARIES

 

CONSOLIDATED FINANCIAL STATEMENTS

 

June 30, 2001, 2000 and 1999

----

 

 

C O N T E N T S

 
|                                                  |   |     |   |
|-------------------------------------------------------|--------|----------|--------|
|                                                  |   | **Page** |   |
|                                                  |   |     |   |
| INDEPENDENT AUDITORS’  REPORTS                   |   | F-1      |   |
|                                                  |   |     |   |
| FINANCIAL STATEMENTS                                  |   |     |   |
|                                                  |   |     |   |
| Consolidated balance  sheets                          |   | F-4      |   |
|                                                  |   |     |   |
| Consolidated  statements of operations                |   | F-5      |   |
|                                                  |   |     |   |
| Consolidated  statements of stockholders’ equity |   | F-6      |   |
|                                                  |   |     |   |
| Consolidated  statements of cash flows                |   | F-7      |   |
|                                                  |   |     |   |
| Notes to  consolidated financial statements           |   | F-8      |   |

 

----

 

INDEPENDENTAUDITOR’S REPORT

 

 

 

 

Board of Directors and Stockholders

VirtualFund.com, Inc. and Subsidiaries

Minnetonka, Minnesota

 

 

We have audited the accompanyingconsolidated balance sheet of VirtualFund.com, Inc. and Subsidiaries (Company)as of June 30, 2001, and the related consolidated statements of operations,stockholders’ equity, and cash flows for the year then ended and theconsolidated financial statement schedule listed in the index at Item14(a)(2).  These consolidated financialstatements and financial statement schedule are the responsibility of theCompany’s management.  Ourresponsibility is to express an opinion on these consolidated financialstatements and financial statement schedule based on our audit.

 

We conducted our audit inaccordance with auditing standards generally accepted in the United States ofAmerica.  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether theconsolidated financial statements are free of materialmisstatement.  An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the consolidated financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

In our opinion, the consolidatedfinancial statements referred to above present fairly, in all materialrespects, the financial position of VirtualFund.com, Inc. and Subsidiaries asof June 30, 2001, and the results of their operations and their cash flowsfor the year then ended in conformity with accounting principles generallyaccepted in the United States of America. Also, in our opinion, the consolidated financial statement schedule,when considered in relation to the basic consolidated financial statementstaken in a whole, presents fairly in all material respects the information setforth therein.

 

The Company has significantrelated party transactions and legal proceedings as discussed in Notes 10 and12, respectively.

 

 

 

 

/s/ Lurie Besikof Lapidus & Company, LLP

 

Minneapolis, Minnesota

September 10, 2001,except for Notes 4, 12 and 13 as to which the date is July 29, 2002.

 

 

F-1

----

 

INDEPENDENT AUDITORS’ REPORT

 

 

The Board of Directors and Stockholders

VirtualFund.com, Inc.

Eden Prairie, Minnesota

 

 

We have audited the accompanying consolidated balance sheet of VirtualFund.com, Inc. (the Company) and subsidiaries as of June 30, 2000, and the related statements of operations, stockholders’ equity and cash flows for the fiscal year ended June 30, 2000, and the financial statement schedule listed in the index at Item 14(a)(2). These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

 

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of VirtualFund.com, Inc. and subsidiaries as of June 30, 2000, and the results of their operations and their cash flows for the fiscal year ended June 30, 2000, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ KPMG LLP

Minneapolis, Minnesota

September 19, 2000

 

 

 

F-2

----

 

**INDEPENDENTAUDITORS’ REPORT**

 

 

Board of Directors and Stockholders

VirtualFund.com, Inc. and Subsidiaries

Eden Prairie, Minnesota

 

We have audited theconsolidated statements of operations, stockholders’ equity, and cash flows ofVirtualFund.com, Inc. and Subsidiaries (the Company) for the year ended June30, 1999 and the financial statement schedule listed in the index at Item14(a)(2) for the year ended June 30, 1999. These consolidated financial statements and financial statement scheduleare the responsibility of the Company’s management.  Our responsibility is to express an opinion on the consolidatedfinancial statements and financial statement schedule based on our audit.

 

We conducted our audit inaccordance with auditing standards generally accepted in the United States ofAmerica.  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether theconsolidated financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the consolidatedfinancial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, theresults of operations and cash flows of the Company for the year endedJune 30, 1999 in conformity with accounting principles generally acceptedin the United States of America.  Also,in our opinion, such financial statement schedule, when considered in relationto the basic consolidated financial statements taken as a whole, presents fairlyin all material respects the information therein set forth.

 

The accompanyingconsolidated financial statements have been prepared assuming that the Companywill continue as a going concern.  TheCompany is experiencing difficulty in generating sufficient cash flow to meetits obligations and sustain its operations, which raises substantial doubtabout its ability to continue as a going concern.  The consolidated financial statements do not include anyadjustments that might result from the outcome of this uncertainty.

 

 

/s/Deloitte &Touche LLP

Minneapolis, Minnesota

October 21, 1999

 

 

F-3

----

VIRTUALFUND.COM, INC. AND SUBSIDIARIES

 

CONSOLIDATEDBALANCE SHEETS

 

 

 
|                                                                                                                  |   | **June 30,** |       |
|-----------------------------------------------------------------------------------------------------------------------|--------|--------------|------------|
|                                                                                                                  |   | **2001**     |       | **2000** |   |
| ASSETS                                                                                                                |   |         |       |   |   |
| CURRENT ASSETS                                                                                                        |   |         |       |   |   |
| Cash and cash equivalents                                                                                             |   | $            | 8,439,552  |   | $ | 39,533,688 |   |
| Receivables, less allowance for doubtful accounts of  $1,600 and $-0-                                                 |   | 1,355,933    |       | 8,021 |   |
| Receivables — related parties, less allowance of  $1,925,400 and $-0-                                            |   | 135,671      |       | 1,915,405 |   |
| Prepaid expenses                                                                                                      |   | 1,615,984    |       | 187,900 |   |
| TOTAL CURRENT ASSETS                                                                                                  |   | 11,547,140   |       | 41,645,014 |   |
|                                                                                                                  |   |         |       |   |   |
| PROPERTY AND EQUIPMENT, NET                                                                                           |   | 58,022       |       | 552,019 |   |
|                                                                                                                  |   | $            | 11,605,162 |   | $ | 42,197,033 |   |
|                                                                                                                  |   |         |       |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                             |   |         |       |   |   |
|                                                                                                                  |   |         |       |   |   |
| CURRENT LIABILITIES                                                                                                   |   |         |       |   |   |
| Notes payable and accrued interest — related  parties, 9.25%, unsecured                                          |   | $            | 820,342    |   | $ | 2,398,381 |   |
| Accounts payable                                                                                                      |   | 717,004      |       | 3,112,436 |   |
| Accrued nonrecurring and restructuring charges                                                                        |   | 1,883,280    |       | — |   |
| Accrued payroll and payroll taxes                                                                                     |   | 138,745      |       | 492,970 |   |
| Income taxes payable                                                                                                  |   | —       |       | 843,440 |   |
| Other current liabilities                                                                                             |   | 1,856,780    |       | 6,446 |   |
| Net liabilities of discontinued operations                                                                            |   | 2,061,222    |       | 2,269,744 |   |
| TOTAL CURRENT LIABILITIES                                                                                             |   | 7,477,373    |       | 9,123,417 |   |
|                                                                                                                  |   |         |       |   |   |
| 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; 15,631,404 and 17,577,002 shares issued and outstanding) |   | 156,314      |       | 175,770 |   |
| Additional paid-in capital                                                                                            |   | 36,150,694   |       | 41,171,851 |   |
| Accumulated deficit                                                                                                   |   | (32,179,219  | )          | (8,172,755 | ) |
| Receivable from exercise of stock options                                                                             |   | —       |       | (101,250 | ) |
|                                                                                                                  |   | 4,127,789    |       | 33,073,616 |   |
|                                                                                                                  |   |         |       |   |   |
|                                                                                                                  |   | $            | 11,605,162 |   | $ | 42,197,033 |   |

 

See notes to consolidated financial statements.

 

 

F-4

----

 

VIRTUALFUND.COM, INC. ANDSUBSIDIARIES

 

CONSOLIDATED STATEMENTS OFOPERATIONS

 
|                                                                     |   | **Year Ended  June 30,** |        |
|--------------------------------------------------------------------------|--------|--------------------------|-------------|
|                                                                     |   | **2001**                 |        | **2000** |   | **1999** |   |
|                                                                     |   |                     |        |   |   |   |   |
| NET SALES                                                                |   | $                        | —      |   | $ | — |   | $ | — |   |
|                                                                     |   |                     |        |   |   |   |   |
| COST OF SALES                                                            |   | —                   |        | — |   | — |   |
|                                                                     |   |                     |        |   |   |   |   |
| GROSS PROFIT                                                             |   | —                   |        | — |   | — |   |
|                                                                     |   |                     |        |   |   |   |   |
| OPERATING EXPENSES                                                       |   |                     |        |   |   |   |   |
| General and administrative                                               |   | 5,701,648                |        | 6,097,758 |   | 3,467,229 |   |
| Nonrecurring and restructuring charges                                   |   | 7,762,632                |        | — |   | — |   |
|                                                                     |   | 13,464,280               |        | 6,097,758 |   | 3,467,229 |   |
|                                                                     |   |                     |        |   |   |   |   |
| OPERATING LOSS                                                           |   | (13,464,280              | )           | (6,097,758 | ) | (3,467,229 | ) |
|                                                                     |   |                     |        |   |   |   |   |
| OTHER INCOME (EXPENSE)                                                   |   |                     |        |   |   |   |   |
| Interest expense                                                         |   | (12,280                  | )           | (22,454 | ) | (53,985 | ) |
| Interest income                                                          |   | 1,234,006                |        | 186,721 |   | 62,348 |   |
| Other                                                                    |   | 15,669                   |        | (8,373 | ) | (109 | ) |
|                                                                     |   | 1,237,395                |        | 155,894 |   | 8,254 |   |
|                                                                     |   |                     |        |   |   |   |   |
| LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                      |   | (12,226,885              | )           | (5,941,864 | ) | (3,458,975 | ) |
|                                                                     |   |                     |        |   |   |   |   |
| INCOME TAX PROVISION (BENEFIT)                                           |   | —                   |        | (1,165,000 | ) | 4,627,000 |   |
|                                                                     |   |                     |        |   |   |   |   |
| LOSS FROM CONTINUING OPERATIONS                                          |   | (12,226,885              | )           | (4,776,864 | ) | (8,085,975 | ) |
|                                                                     |   |                     |        |   |   |   |   |
| INCOME (LOSS) FROM DISCONTINUED OPERATIONS                               |   |                     |        |   |   |   |   |
| Net of income tax provision (benefit) of $-0-,  $(627,000), and $139,000 |   | (11,191,459              | )           | (11,919,915 | ) | 262,862 |   |
|                                                                     |   |                     |        |   |   |   |   |
| GAIN (LOSS) ON SALE OF DISCONTINUED OPERATIONS                           |   |                     |        |   |   |   |   |
| Net of income tax provision of $-0-, $2,271,000, and  $-0-               |   | (588,120                 | )           | 35,778,202 |   | — |   |
|                                                                     |   |                     |        |   |   |   |   |
| NET INCOME (LOSS)                                                        |   | $                        | (24,006,464 | ) | $ | 19,081,423 |   | $ | (7,823,113 | ) |
|                                                                     |   |                     |        |   |   |   |   |
| INCOME (LOSS) PER COMMON SHARE — BASIC AND DILUTED                  |   |                     |        |   |   |   |   |
| Continuing operations                                                    |   | $                        | (.76        | ) | $ | (.29 | ) | $ | (.51 | ) |
| Discontinued operations                                                  |   | (.70                     | )           | (.72 | ) | .01 |   |
| Sale of discontinued operations                                          |   | (.04                     | )           | 2.17 |   | — |   |
|                                                                     |   |                     |        |   |   |   |   |
|                                                                     |   | $                        | (1.50       | ) | $ | 1.16 |   | $ | (.50 | ) |
|                                                                     |   |                     |        |   |   |   |   |
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING — BASIC  AND DILUTED     |   | 16,036,791               |        | 16,479,857 |   | 15,782,770 |   |

 

See notes to consolidated financial statements.

 

F-5

----

 

VIRTUALFUND.COM, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 
|                                      |   |          |   |              |       |          |   |            |   |         |       | **Receivable** |   |        |   |
|-------------------------------------------|--------|---------------|--------|-------------------|------------|---------------|--------|-----------------|--------|--------------|------------|----------------|--------|-------------|--------|
|                                      |   |          |   |              |       |          |   |            |   |         |       | **from**       |   |        |   |
|                                      |   |          |   |              |       |          |   | **Additional**  |   |         |       | **Exercise**   |   |        |   |
|                                      |   | **Preferred** |   | **Common  Stock** |       | **Paid-In**   |   | **Accumulated** |   | **of Stock** |       |           |   |
|                                      |   | **Stock**     |   | **Shares**        |       | **Par Value** |   | **Capital**     |   | **Deficit**  |       | **Options**    |   | **Total**   |   |
|                                      |   |          |   |              |       |          |   |            |   |         |       |           |   |        |   |
| BALANCE, JUNE 30, 1998                    |   | $             | — |              | 15,778,866 |          | $      | 157,789         |   | $            | 33,015,420 |           | $      | (19,312,764 | )      | $ | — |   | $ | 13,860,445 |   |
|                                      |   |          |   |              |       |          |   |            |   |         |       |           |   |        |   |
| Exercise of stock options                 |   | —        |   | 25,000            |       | 250           |   | 24,750          |   | —       |       | —         |   | 25,000      |   |
| Other                                     |   | —        |   | —            |       | —        |   | —          |   | (118,301     | )          | —         |   | (118,301    | )      |
| Acquisition of K&R                    |   | 7,500,000     |   | —            |       | —        |   | —          |   | —       |       | —         |   | 7,500,000   |   |
| Net loss                                  |   | —        |   | —            |       | —        |   | —          |   | (7,823,113   | )          | —         |   | (7,823,113  | )      |
|                                      |   |          |   |              |       |          |   |            |   |         |       |           |   |        |   |
| BALANCE, JUNE 30, 1999                    |   | 7,500,000     |   | 15,803,866        |       | 158,039       |   | 33,040,170      |   | (27,254,178  | )          | —         |   | 13,444,031  |   |
|                                      |   |          |   |              |       |          |   |            |   |         |       |           |   |        |   |
| Exercise of stock options                 |   | —        |   | 373,138           |       | 3,731         |   | 936,934         |   | —       |       | (101,250       | )      | 839,415     |   |
| Preferred shares converted                |   | (7,000,000    | )      | 1,399,998         |       | 14,000        |   | 6,986,000       |   | —       |       | —         |   | —      |   |
| Repurchase of preferred  shares           |   | (500,000      | )      | —            |       | —        |   | —          |   | —       |       | —         |   | (500,000    | )      |
| Issuance of 70,000 warrants               |   | —        |   | —            |       | —        |   | 77,388          |   | —       |       | —         |   | 77,388      |   |
| Other                                     |   | —        |   | —            |       | —        |   | 47,359          |   | —       |       | —         |   | 47,359      |   |
| Stock option tax benefit                  |   | —        |   | —            |       | —        |   | 84,000          |   | —       |       | —         |   | 84,000      |   |
| Net income                                |   | —        |   | —            |       | —        |   | —          |   | 19,081,423   |       | —         |   | 19,081,423  |   |
|                                      |   |          |   |              |       |          |   |            |   |         |       |           |   |        |   |
| BALANCE, JUNE 30, 2000                    |   | —        |   | 17,577,002        |       | 175,770       |   | 41,171,851      |   | (8,172,755   | )          | (101,250       | )      | 33,073,616  |   |
|                                      |   |          |   |              |       |          |   |            |   |         |       |           |   |        |   |
| Exercise of warrant                       |   | —        |   | 8,302             |       | 83            |   | (83             | )      | —       |       | —         |   | —      |   |
| Cancellation of exercised  stock options  |   | —        |   | (37,500           | )          | (375          | )      | (100,875        | )      | —       |       | 101,250        |   | —      |   |
| Repurchase of common shares               |   | —        |   | (2,416,400        | )          | (24,164       | )      | (5,946,449      | )      | —       |       | —         |   | (5,970,613  | )      |
| Shares issued on  acquisition of Rymatics |   | —        |   | 500,000           |       | 5,000         |   | 1,026,250       |   | —       |       | —         |   | 1,031,250   |   |
| Net loss                                  |   | —        |   | —            |       | —        |   | —          |   | (24,006,464  | )          | —         |   | (24,006,464 | )      |
|                                      |   |          |   |              |       |          |   |            |   |         |       |           |   |        |   |
| BALANCE, JUNE 30, 2001                    |   | $             | — |              | 15,631,404 |          | $      | 156,314         |   | $            | 36,150,694 |           | $      | (32,179,219 | )      | $ | — |   | $ | 4,127,789 |   |
|                                           |        |               |        |                   |            |               |        |                 |        |              |            |                |        |             |        |  |  |  |  |  |  |  |

 

See notes to consolidated financial statements.

 

F-6

----

VIRTUALFUND.COM, INC. AND SUBSIDIARIES

 

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

 
|                                                                                 |   | **Year Ended  June 30,** |        |
|--------------------------------------------------------------------------------------|--------|--------------------------|-------------|
|                                                                                 |   | **2001**                 |        | **2000** |   | **1999** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                 |   |                     |        |   |   |   |   |
| Net income (loss)                                                                    |   | $                        | (24,006,464 | ) | $ | 19,081,423 |   | $ | (7,823,113 | ) |
| Adjustment to reconcile net income (loss) to net  cash used by operating activities: |   |                     |        |   |   |   |   |
| Discontinued operations                                                              |   | 822,728                  |        | (27,680,200 | ) | (1,192,602 | ) |
| Depreciation and amortization                                                        |   | 302,137                  |        | 501,619 |   | 316,966 |   |
| Loss on sale or disposal of property and equipment                                   |   | 823,239                  |        | 26,920 |   | 109 |   |
| Deferred income taxes                                                                |   | —                   |        | — |   | 4,766,000 |   |
| Stock option tax benefit                                                             |   | —                   |        | 84,000 |   | — |   |
| Warrants issued for services                                                         |   | —                   |        | 77,388 |   | — |   |
| Other                                                                                |   | —                   |        | 47,359 |   | — |   |
| Change in operating assets and liabilities:                                          |   |                     |        |   |   |   |   |
| Receivables                                                                          |   | (1,347,912               | )           | (20,360 | ) | (117,156 | ) |
| Receivables — related parties                                                   |   | 1,396,746                |        | — |   | — |   |
| Prepaid expenses                                                                     |   | (1,428,084               | )           | (94,935 | ) | 59,484 |   |
| Accounts payable                                                                     |   | (2,395,432               | )           | 1,812,261 |   | (118,867 | ) |
| Accrued nonrecurring and restructuring charges                                       |   | 1,883,280                |        | — |   | — |   |
| Accrued payroll and payroll taxes                                                    |   | (354,225                 | )           | (127,467 | ) | 404,488 |   |
| Income taxes payable                                                                 |   | (843,440                 | )           | 459,018 |   | 118,826 |   |
| Other current liabilities                                                            |   | 1,850,334                |        | 4,934 |   | (1,829 | ) |
| Net cash used by operating activities                                                |   | (23,297,093              | )           | (5,828,040 | ) | (3,587,694 | ) |
|                                                                                 |   |                     |        |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                 |   |                     |        |   |   |   |   |
| Collections from related parties                                                     |   | 382,988                  |        | — |   | — |   |
| Loans to related parties                                                             |   | —                   |        | (288,116 | ) | (1,092,443 | ) |
| Purchases of property and equipment                                                  |   | (805,721                 | )           | (383,329 | ) | (155,067 | ) |
| Proceeds from sale of property and equipment                                         |   | 174,342                  |        | 70 |   | — |   |
| Additions to acquired technology and other  intangible assets                        |   | —                   |        | (571,335 | ) | — |   |
| Proceeds from sale of discontinued operations                                        |   | —                   |        | 45,781,550 |   | — |   |
| Net cash provided (used) by investing activities                                     |   | (248,391                 | )           | 44,538,840 |   | (1,247,510 | ) |
|                                                                                 |   |                     |        |   |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                 |   |                     |        |   |   |   |   |
| Payments on notes and accrued interest — related  parties                       |   | (1,578,039               | )           | — |   | — |   |
| Payments on long-term debt                                                           |   | —                   |        | (159,862 | ) | (107,356 | ) |
| Payment of debenture                                                                 |   | —                   |        | — |   | (375,866 | ) |
| Repurchase of common shares                                                          |   | (5,970,613               | )           | — |   | — |   |
| Proceeds from exercise of stock options                                              |   | —                   |        | 839,415 |   | 25,000 |   |
| Net cash provided (used) by financing activities                                     |   | (7,548,652               | )           | 679,553 |   | (458,222 | ) |
|                                                                                 |   |                     |        |   |   |   |   |
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                     |   | (31,094,136              | )           | 39,390,353 |   | (5,293,426 | )  |
|                                                                                 |   |                     |        |   |   |   |   |
| CASH AND CASH EQUIVALENTS                                                            |   |                     |        |   |   |   |   |
| Beginning of year                                                                    |   | 39,533,688               |        | 143,335 |   | 5,436,761 |   |
|                                                                                 |   |                     |        |   |   |   |   |
| End of year                                                                          |   | $                        | 8,439,552   |   | $ | 39,533,688 |   | $ | 143,335 |   |

 

See notes to consolidated financial statements.

 

F-7

----

VIRTUALFUND.COM, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 1.                       Business andSignificant Accounting Policies -

 

                                   Business

 

VirtualFund.com, Inc. and Subsidiaries (Company)is an Internet venture resource company. The Company historically operated in two business segments: the InternetServices Business Unit (ISBU) and the Digital Graphics Business Unit (DGBU).

 

The ISBU provided information system design,implementation and support services, developed and sold Internet-basedelectronic commerce software, and provided Internet hosting services.  In the fourth quarter 2001, the Company discontinuedthe ISBU and in July 2001, sold the remaining ISBU assets and operations.

 

The DGBU designed, manufactured, marketed and soldwide-format digital color printers, aftermarket inks and specialty coated mediafor graphic arts professionals.  In June2000, the Company completed an asset sale of the DGBU operations.

 

The DGBU and ISBU operations are disclosed in theconsolidated financial statements as discontinued operations.  The consolidated financial statements for2000 and 1999, were restated to reflect the discontinued operations.

 

The Company currently has no operating businessunits.  Continuing operations consistprimarily of unallocable corporate general and administrative expenses.

 

                                   Principles ofConsolidation

 

The consolidated financial statements include theaccounts of VirtualFund.com, Inc. and its wholly owned subsidiaries,RSPNetwork, Inc. (RSPNetwork), B2Bxchange, Inc. (B2Bxchange), RymaticsSoftware, LLC (Rymatics), Kilborn Photo Products, Inc. (Kilborn), and ColorSpanCorporation (CSC), and CSC’s subsidiaries, ColorSpan Europe, Ltd. (CSE),ColorSpan Asia/Pacific, Ltd. (CSA), and ColorSpan Latin America, Ltd.(CSLA).  RSPNetwork, B2BXchange, andRymatics represented the ISBU.  Kilborn,CSC, and its subsidiaries represented the DGBU.  All significant intercompany balances and transaction wereeliminated.

 

                                   Use of Estimates

 

The preparation of these consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptions thatmay affect the reported amounts and disclosures in the financial statements andaccompanying notes.  Actual resultscould differ from these estimates. Significant management estimates relate to the valuation allowance ofdeferred income tax assets, nonrecurring and restructuring charges, andlitigation related allowances and liabilities (estimated legal fees related tolitigation liabilities have been accrued).

 

                                   Revenue Recognition

 

Sales were recognized when products or serviceswere delivered to the Company’s customers. The Company also provided design, implementation and support servicesunder fixed price and time and materials contracts.  For fixed price contracts, revenue was recorded based on theestimated percentage of completed services rendered.  Losses, if any, on fixed price contracts were recognized when theloss was determined.  For time andmaterials contracts, revenue was recognized at contractually agreed upon ratesas the costs were incurred.

 

 

F-8

----

                                   Concentration ofCredit Risk

 

Financial instruments which potentially subjectthe Company to concentration of credit risk are cash and cash equivalents andaccounts receivable.  To reduce risk forcash and cash equivalents, the Company maintains cash and cash equivalents atreputable financial institutions in deposit and money market accounts which, attimes, may exceed federally insured limits. The largest single concentration of cash equivalents at June 30, 2001,was approximately $6,500,000 in a certificate of deposit.  The Company has not experienced any materiallosses in such accounts and does not believe it is exposed to any significantcredit risk.  At June 30, 2001, theCompany’s customer base ranged from small local entities to Fortune 500companies located primarily in the Midwest and in the agriculturalindustry.  Receivables from thesecustomers are included in net liabilities of discontinued operations.  In 2001 and 2000, two Fortune 500 customerscontributed approximately 71% (48% and 23%) and 56%, respectively, of revenuefrom discontinued operations.

 

                                   Cash equivalents

 

All highly liquid cash investments with initialmaturities of three months or less are considered to be cash equivalents.

 

                                   Property andEquipment

 

Property and equipment are recorded at cost.  Depreciation is computed using thestraight-line method over the estimated useful lives of the assets of two toseven years.

 

                                   Goodwill

 

Goodwill represents the excess of the purchaseprice over the fair value of net assets acquired and was amortized on astraight-line basis over five years or written off when impaired.

 

                                   Research andDevelopment and Software Costs

 

                                   Expenditures relatedto the development of new products and processes, including significantimprovements and refinements to existing products, and the development ofsoftware were expensed as incurred, unless required to be capitalized.  No software development costs werecapitalized during 2001, 2000 and 1999.

 

                                   Acquired Technologyand Other Intangible Assets

 

                                   Acquired technologyand other intangible assets were amortized using the straight-line method overthe estimated useful lives of the assets, generally from two to three years. In2000, the Company acquired domain names for B2BXchange, an e-commerce marketplace.The recoverability of these assets were continually evaluated by comparing theremaining unamortized cost to the estimated future cash flows of the associatedassets.  During fiscal 2001, the balanceof acquired technology and other intangible assets was written off as impaired.

 

                                   Fair Value ofFinancial Instruments

 

                                   Cash and cash equivalents, receivables,notes receivable, accounts payable, and accrued liabilities are carried atamounts believed to approximate fair values. It is not practicable to determine the fair value of related partyreceivables and notes payable as the relationship of the parties to the Companymay influence the terms.

 

F-9

----

                                   Accounting for Stock-Based Compensation

 

                                   The Company accountsfor employee stock options under Accounting Principles Board Opinion (APB) No.25, “Accounting for Stock Issued to Employees,” and provides the pro formadisclosures required by Statement of Financial Accounting Standards (SFAS) No.123, “Accounting for Stock-Based Compensation.”

 

                                   Income (Loss) PerCommon Share

 

                                   Income (loss) percommon share - basic is determined by dividing the income (loss) by theweighted average common shares outstanding. Income (loss) per common share - diluted is computed by dividing theincome (loss) by the weighted average common shares outstanding and the commonshare equivalents (stock options, stock warrants, convertible debentures andshares issuable relating to the litigation settlement).  Common share equivalents are not included inthe computations as their effects were antiduilutive.

 

                                   Recent Accounting Pronouncements

 

                                   In June 1998, theFinancial Accounting Standard Board issued SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities,” effective for years beginningafter June 15, 2000, as amended.  Thestatement establishes accounting and reporting standards for derivativeinstruments and hedging activities. This pronouncement did not effect the Company’s consolidated financialstatements.

 

                                   In December 1999,the Securities and Exchange Commission (SEC) released Staff Accounting BulletinNo. 101 - “Revenue Recognition” (SAB No. 101). SAB No. 101 provides the SEC views in applying accounting principles generallyaccepted in the United States of America to selected revenue recognitionissues.  In June 2000, the SEC releasedStaff Accounting Bulletin No. 101B - “Second Amendment” (SAB No. 101B) delayingthe implementation date of SAB No. 101 to no later than the fourth fiscalquarter of registrants with fiscal years beginning after December 15,1999.  This pronouncement did not have amaterial effect on the Company’s consolidated financial statements.

 

                                   In June 2001, theFinancial Accounting Standards Board issued SFAS No. 141, “Business Combinations,”and SFAS No. 142, “Goodwill and Other Intangible Assets,” which are effectivefor fiscal years beginning after December 15, 2001.  These statements, in summary, eliminate the use of the pooling ofinterests method of accounting for future business combinations and discontinuethe amortization of acquired goodwill, subject to periodic impairmenttesting.  The Company does notanticipate the adoption of these standards will have a material impact on theCompany’s consolidated financial statements.

 

 2.                       Business Combination-

 

                                   In December 1998, the Company,through its wholly owned subsidiary RSPNetwork, issued 1,499,998 shares ofseries A convertible preferred stock and notes payable of $3,678,258, inexchange for all of the common stock of K&R Technical Services, Inc. d/b/a/Team Technologies (K&R), a privately held information technology consultingcompany.  Each share of series Aconvertible preferred stock was convertible into common stock of the Company, initiallyat the rate of one share of common stock for each share of series A convertiblepreferred stock.  The series Aconvertible preferred stock carried a $5.00 per share guaranteed value on thematurity date in December 2000.  Thepreferred stock was valued at $5 per share for the purchase.

 

F-10

----

The aggregatepurchase price of approximately $11,278,000, including transaction costs, wasallocated to assets and liabilities acquired as follows:

 
| Assets:                               |   |       |       |
|---------------------------------------|--------|------------|------------|
| Accounts receivable                   |   | $          | 983,000    |   |
| Notes receivable — related party |   | 444,000    |       |
| Property, plant and equipment         |   | 1,236,000  |       |
| Other assets                          |   | 195,000    |       |
| Goodwill                              |   | 11,471,000 |       |
|                                  |   | 14,329,000 |       |
|                                  |   |       |       |
| Liabilities:                          |   |       |       |
| Note payable                          |   | 568,000    |       |
| Term debt                             |   | 1,230,000  |       |
| Accounts payable                      |   | 346,000    |       |
| Accrued compensation                  |   | 423,000    |       |
| Other liabilities                     |   | 484,000    |       |
|                                  |   | 3,051,000  |       |
|                                  |   | $          | 11,278,000 |   |

 

The operatingresults of K&R are included as discontinued operations in the consolidatedstatements of operations from the date of acquisition.  Pro forma results of operations for 1999,assuming the acquisition occurred as of July 1, 1998, were as follows:

 
| Net sales (discontinued operations) |   | $          | 7,150,000 |   |
|-------------------------------------|--------|------------|-----------|--------|
| Net loss                            |   | (7,954,000 | )         |
| Loss per common share               |   | (.50       | )         |

 

 3.                       DiscontinuedOperations -

 

                                   ISBU

 

In October 2000, theCompany acquired Rymatics for $254,070 in cash, equal to the net book value asof the closing date, and 500,000 shares of common stock valued at$1,031,250.  Rymatics specialized insoftware engineering and related services. In January 2001, the Company ceased all operations of this acquisition,terminated all employees, returned all property and equipment to the seller andprovided Rymatics with $150,000 of operating funds.  To assist in the transition, Company also lent Rymatics $150,000,collateralized with 250,000 shares of Company stock.  A $1,031,250 write-off of goodwill relating to the acquisitionwas included in restructuring charges in fiscal year 2001.  No payment was received on the note, whichwas subsequently written off.

 

In early fiscal 2001,the Company formed B2BXchange, which was to allow businesses to develop websites and set up stores in vertically integrated trading communities on theInternet.  The Company discontinued thisoperation shortly after it was launched due to lack of product focus, potentialnear term revenue, and adequate resources to complete and bring the product tomarket.  Costs related to closing thisoperation are included in discontinued operations.

 

 

F-11

----

 

In July 2001, theCompany sold certain assets, liabilities and the operations of RSPNetwork to amember of the Company’s Board of Directors and a stockholder for contingentpayments based on future RSPNetwork revenue. Contingent payments from the sale are capped at $1,000,000 and will berecognized when received.  A loss onsale of discontinued operations totaling $588,120 was recognized for the yearended June 30, 2001.

 

The components ofnet assets (liabilities) of the ISBU’s discontinued operations are as follows:

 
|                               |   | **June 30,** |    |
|------------------------------------|--------|--------------|---------|
|                               |   | **2001**     |    | **2000** |   |
| Cash                               |   | $            | 41,570  |   | $ | 108,097 |   |
| Accounts receivable                |   | 201,506      |    | 303,250 |   |
| Other current assets               |   | **—**   |    | 41,198 |   |
| Property and equipment, net        |   | 862,653      |    | 1,145,193 |   |
| Other assets                       |   | —       |    | 658,993 |   |
| Accounts payable                   |   | (160,012     | )       | (226,363 | ) |
| Other current liabilities and debt |   | (283,235     | )       | (1,794,370 | ) |
| Deferred revenue                   |   | (241,548     | )       | (184,953 | ) |
|                               |   | $            | 420,934 |   | $ | 51,045 |   |

 

During fiscal 2000, the balance of goodwill associated with the K&Racquisition was written off as impaired.

 

Net sales of the ISBU were $5,811,758, $6,900,557, and $4,160,916 in2001, 2000, and 1999 respectively. Interest expense was $115,118, $319,531, and $108,409 in 2001, 2000, and1999, respectively, as related debt resided in the ISBU.  Net loss of the ISBU was $11,191,459,$16,943,635, and $2,291,692 in 2001, 2000, and 1999, respectively.

 

                                   DGBU

 

In June 2000, the Company sold the DGBU. In determining the $35.8million gain from this sale, cash proceeds of $45.8 million were reduced by netassets sold of $5.1 million, related income taxes of $2.3 million, and othercosts and adjustments of $2.6 million. Included in the adjustments areestimated future costs which included an accrual for contractualresponsibilities remaining from the sale of the DGBU and other miscellaneousanticipated expenses. The Company could receive an additional $1,000,000, whichwas not included in the cash proceeds above, when consents to assign facilityleases to the purchaser are received from the lessor.

 

Net sales of theDGBU were $62,858,444 and $71,578,364, in 2000 and 1999, respectively. Interestexpense was $1,026,441 in 2000, as related debt resided in the DGBU.  Net income of the DGBU was $5,023,720 and$2,554,554 in 2000 and 1999, respectively.

 

 

F-12

----

 

                                   The components of net assets(liabilities) of the DGBU’s discontinued operations are as follows:

 
|                               |   | **June 30,** |       |
|------------------------------------|--------|--------------|------------|
|                               |   | **2001**     |       | **2000** |   |
|                               |   |         |       |   |   |
| Accounts payable                   |   | $            | (1,894,036 | ) | $ | (2,141,000 | ) |
| Other current liabilities and debt |   | —       |       | (179,789 | ) |
|                               |   | $            | (1,894,036 | ) | $ | (2,320,789 | ) |

 

 

 4.                       Nonrecurring andRestructuring Charges -

 

In December 2000, as aresult of the discontinued operations and other actions, the Company adopted arestructuring plan and incurred certain nonrecurring and restructuring chargesin 2001, including subsequent settlements through July 29, 2002, which areincluded in operations as follows:

 
| ** **                          | ** ** | **Amount****Charged at  December 31,   2000** | ** ** | **3rd Quarter**Adjustments  (Recoveries)** | ** ** | **4th Quarter**Adjustments  (Recoveries)** | ** ** | **Asset  Write-offs** | ** ** | **Amounts  Paid** | ** ** | **Allowance  and  Accrual atJune 30, 2001** | ** ** |
|-------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|-----------------------|------------|-------------------|------------|---------------------------------------------|------------|
| NONRECURRING                        |       |                                          |       |                                       |       |                                       |       |                  |       |              |       |                                        |       |
| Allowance  for doubtful accounts(a) |       | $                                             | 1,927,833  |                                       | $          | (2,464                                     | )          | $                     | —     |              | $          | —                                      |       | $ | — |   | $ | 1,925,369 |   |
|                                |       |                                          |       |                                       |       |                                       |       |                  |       |              |       |                                        |       |
| RESTRUCTURING                       |       |                                          |       |                                       |       |                                       |       |                  |       |              |       |                                        |       |
| Product  discontinuance(b)          |       | 5,092,469                                     |       | 476,058                                    |       | (886,733                                   | )          | (1,916,854            | )          | (1,909,864        | )          | 855,076                                     |       |
| Employee  separating costs(c)       |       | 3,440,836                                     |       | 1,476,985                                  |       | (35,696                                    | )          | (206,884              | )          | (4,628,285        | )          | 46,956                                      |       |
| Facilities  costs(d)                |       | 1,006,903                                     |       | 107,456                                    |       | 400,067                                    |       | (89,211               | )          | (443,967          | )          | 981,248                                     |       |
|                                |       | 9,540,208                                     |       | 2,060,499                                  |       | (522,362                                   | )          | (2,212,949            | )          | (6,982,116        | )          | 1,883,280                                   |       |
|                                |       | $                                             | 11,468,041 |                                       | $          | 2,058,035                                  |       | $                     | (522,362   | )                 | $          | (2,212,949                                  | )          | $ | (6,982,116 | ) | $ | 3,808,649 |   |

----

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

 

(b)         Costs associatedwith the discontinuance of the Internet business-to-business software platform,B2Bxchange, and separate supply chain investment.  Approximately $1,585,000 related to the Rymatics termination ofoperations (including $1,031,250 of goodwill write-off) and $1,200,000 to theManugistics legal proceedings.

 

(c)          Severance andassociated legal and other fees related to the termination of approximately 100management and administrative employees and many unfavorable long-term employeecontracts.  Approximately $500,000related to legal and other related fees.

 

(d)         Payments to exitclosed and idle facilities leases.

 

Nonrecurring and restructuring charges totaling $13,067,190 wereallocated $7,762,632 to continuing operations and $5,304,558 to discontinuedoperations.

 

F-13

----

 5.                       Property andEquipment -

 

                                   Property and equipment are as follows:

 
|                          |   |        |   | **June 30,** |   |
|-------------------------------|--------|-------------|--------|--------------|--------|
|                          |   | **Life**    |   | **2001**     |   | **2000** |   |
|                          |   |        |   |         |   |   |   |
| Equipment                     |   | 2 - 5 years |   | $            | 53,432 |   | $ | 1,641,787 |   |
| Furniture and fixtures        |   | 5 - 7 years |   | 7,174        |   | 283,217 |   |
| Purchased software            |   | 3 years     |   | 11,872       |   | 102,766 |   |
| Vehicles                      |   | 5 years     |   | 26,840       |   | 71,789 |   |
| Leasehold improvements        |   | 5 years     |   | —       |   | 171,836 |   |
|                          |   |        |   | 99,318       |   | 2,271,395 |   |
| Less accumulated depreciation |   |        |   | 41,296       |   | 1,719,376 |   |
|                          |   |        |   | $            | 58,022 |   | $ | 552,019 |   |

 

 

6.                          Other FinancialStatement Data -

 

                                   Additionalinformation concerning selected balance sheet accounts is as follows:

 
|                                               |   | **June 30,** |      |
|----------------------------------------------------|--------|--------------|-----------|
|                                               |   | **2001**     |      | **2000** |   |
|                                               |   |         |      |   |   |
| Receivables, less allowance for doubtful accounts: |   |         |      |   |   |
| Manugistics receivable                             |   | $            | 1,300,000 |   | $ | — |   |
| Other                                              |   | 55,933       |      | 8,021 |   |
|                                               |   | $            | 1,355,933 |   | $ | 8,021 |   |
| Prepaid expenses:                                  |   |         |      |   |   |
| Legal fee retainers                                |   | $            | 1,392,000 |   | $ | — |   |
| Other                                              |   | 223,984      |      | 187,900 |   |
|                                               |   | $            | 1,615,984 |   | $ | 187,900 |   |
| Other current liabilities:                         |   |         |      |   |   |
| Litigation                                         |   | $            | 1,680,865 |   | $ | — |   |
| Other                                              |   | 175,915      |      | 6,446 |   |
|                                               |   | $            | 1,856,780 |   | $ | 6,446 |   |

 

 

7.                          Income Taxes -

 

                                   The provision (benefit) for income taxesis as follows:

 
|                                      |   | **Year Ended  June 30,** |   |
|-------------------------------------------|--------|--------------------------|--------|
|                                      |   | **2001**                 |   | **2000** |   | **1999** |   |
|                                      |   |                     |   |   |   |   |   |
| Continuing operations — deferred tax |   | $                        | — |   | $ | (1,165,000 | ) | $ | 4,627,000 |   |
|                                      |   |                     |   |   |   |   |   |
| Discontinued, primarily federal:          |   |                     |   |   |   |   |   |
| Operations                                |   | **—**               |   | (627,000 | ) | 139,000 |   |
| Sale of operations                        |   | **—**               |   | 2,271,000 |   | — |   |
|                                      |   | $                        | — |   | $ | 479,000 |   | $ | 4,766,000 |   |

 

F-14

----

 

A reconciliationof the expected federal income tax provision at the statutory 35% rate with theprovision (benefit) for income taxes is as follows:

 
|                                               |   | **Year Ended  June 30,** |       |
|----------------------------------------------------|--------|--------------------------|------------|
|                                               |   | **2001**                 |       | **2000** |   | **1999** |   |
|                                               |   |                     |       |   |   |   |   |
| Tax provision (benefit) computed at statutory rate |   | $                        | (8,402,000 | ) | $ | 6,846,000 |   | $ | (1,070,000 | ) |
| State income tax, net of federal benefit           |   | (480,000                 | )          | 392,000 |   | (198,000 | ) |
| Graduated tax brackets                             |   | 229,000                  |       | (195,000 | ) | 31,000 |   |
| Change in valuation allowance                      |   | 7,515,000                |       | (10,714,000 | ) | 6,399,000 |   |
| Goodwill impairment                                |   | —                   |       | 3,913,000 |   | — |   |
| Other                                              |   | 1,138,000                |       | 237,000 |   | (396,000 | ) |
|                                               |   | $                        | —     |   | $ | 479,000 |   | $ | 4,766,000 |   |

 

Temporarydifferences comprising net deferred tax assets are as follows:

 
|                                          |   | **June 30,** |    |
|-----------------------------------------------|--------|--------------|---------|
|                                          |   | **2001**     |    | **2000** |   |
| Current:                                      |   |         |    |   |   |
| Allowance for doubtful accounts               |   | $            | 717,000 |   | $ | 7,000 |   |
| Accrued vacation                              |   | —       |    | 112,000 |   |
| Lease holdback                                |   | 372,000      |    | 372,000 |   |
| Accrued restructuring                         |   | 527,000      |    | — |   |
| Other                                         |   | 89,000       |    | (24,000 | ) |
|                                          |   | 1,705,000    |    | 467,000 |   |
|                                          |   |         |    |   |   |
| Noncurrent:                                   |   |         |    |   |   |
| Property and equipment                        |   | 200,000      |    | 48,000 |   |
| Net operating loss carryforwards              |   | 7,515,000    |    | 268,000 |   |
| Research and development credit carryforwards |   | 872,000      |    | 1,424,000 |   |
| Alternative minimum tax credits               |   | 225,000      |    | 225,000 |   |
| Other                                         |   | 386,000      |    | 956,000 |   |
|                                          |   | 9,198,000    |    | 2,921,000 |   |
|                                          |   |         |    |   |   |
| Gross deferred tax assets                     |   | 10,903,000   |    | 3,388,000 |   |
| Valuation allowance                           |   | (10,903,000  | )       | (3,388,000 | ) |
| Net deferred tax assets                       |   | $            | —  |   | $ | — |   |

 

The increase (decrease) in the valuation allowance for 2001 and 2000was $7,515,000 and ($10,714,000), respectively.  Realization of the deferred tax asset will depend on theCompany’s ability to generate sufficient taxable income.  Based on the Company’s recent operatinglosses, lack of any continuing operations, and the uncertain future of itscurrent strategy, management is not certain that the Company will be able togenerate sufficient future taxable income to fully utilize its deferred taxassets.  In addition, realization of netoperating loss carryforwards may be limited under certain provisions of theInternal Revenue Code regardless of the Company’s ability to generate taxableincome.  As a result, the Companyrecorded a valuation allowance for the entire deferred tax asset.

 

 

F-15

----

 

At June 30, 2001,the Company has net a operating loss carryforward for federal income taxpurposes of approximately $20,885,000, which is available to offset futuretaxable income, if any, through 2021. The Company also has alternative minimumtax credit carryforwards of approximately $225,000 available to reduce futurefederal income taxes, if any, over an indefinite period and research anddevelopment credit carryforwards of approximately $872,000 available to reducefuture federal income tax, if any, through 2005.

 

The Company recognized income tax benefits of $84,000 in 2000 pertainingto the exercise of stock options, which are reflected in additional paid-incapital.

 

                                   State taxes aredeemed insignificant and not separately disclosed.

 

 

 8.                       Stockholders’ Equity -

 

                                   Preferred Stock

 

In December 1998, the Board of Directors approved the plan to purchaseK&R by issuing Series A convertible preferred stock (preferred stock), withcertain powers, preferences, rights, qualifications, limitations andrestrictions.  On December 18, 1998, theCompany issued 1,499,998 shares of preferred stock to the shareholders ofK&R (Note 2).  Holders of thepreferred stock had the same voting rights as the Company’s common stockholdersand had a liquidation preference of $5 per share.  The preferred stock was convertible at the option of the holderinto common stock, initially at the rate of one share of common stock for eachshare of preferred stock, and had a guaranteed value of $5 per share on thematurity date of December 17, 2000.  ThePlan provided for automatic conversion to common stock if the common stocktraded at or above $5 per share for 30 consecutive calendar days and if theCompany’s Board of Directors waived a two-year restriction on transferabilityof the shares of common stock issuable upon such conversion.  The automatic conversion was triggered onFebruary 17, 2000.  As part of anoncompete agreement, which is in litigation, 100,000 shares of convertedpreferred stock were repurchased and cancelled.  Total net common shares issued in the conversion were 1,399,998.

 

                                   Common Stock

 

In June 2000, theCompany authorized the repurchase of up to 2,000,000 shares of the Company’scommon stock.  In October 2000, theCompany authorized the repurchase of an additional 2,000,000 shares of theCompany’s common stock.  During fiscalyear 2001, the Company repurchased an aggregate of 2,416,400 of common stock.

 

F-16

----

                                   Stock Options and Warrants

 

The Company reserved 5,000,000 shares of common stock under theVirtualFund.com, Inc. 1996 Stock Incentive Plan, (Plan).  Under the Plan, incentive stock options andnon-statutory stock options may be granted to key employees, directors, andconsultants of the Company at exercise prices not less than 100% of the fairmarket value of the common stock at the date of grant and 110% for incentivestock options granted to individuals owning 10% or more of the Company’s commonstock. The Plan is administered by a stock option committee appointed by theBoard of Directors. The committee establishes all terms and conditions of eachgrant, except that, in the case of incentive options, the term may not exceed10 years.  The Company also has a 1990Restated Stock Option Plan.  Noadditional options may be granted under this Plan.  All previously granted options will remain outstanding for 10years from the grant date.

 

Stock options and warrantactivity is as follows:

 
|                   |   |        |   | **Weighted** |   |         |      | **Weighted** |   |
|------------------------|--------|-------------|--------|--------------|--------|--------------|-----------|--------------|--------|
|                   |   |        |   | **Average**  |   |         |      | **Average**  |   |
|                   |   |        |   | **Exercise** |   |         |      | **Exercise** |   |
|                   |   | **Options** |   | **Price**    |   | **Warrants** |      | **Price**    |   |
|                   |   |        |   |         |   |         |      |         |   |
| Balance, June 30, 1998 |   | 3,629,039   |   | $            | 3.11   |         | 3,034,953 |         | $      | 6.91 |   |
|                   |   |        |   |         |   |         |      |         |   |
| Granted                |   | 1,736,500   |   | 2.00         |   | —       |      | —       |   |
| Exercised              |   | (25,000     | )      | 1.00         |   | —       |      | —       |   |
| Forfeited              |   | (603,650    | )      | 3.08         |   | —       |      | —       |   |
|                   |   |        |   |         |   |         |      |         |   |
| Balance, June 30, 1999 |   | 4,736,889   |   | 2.71         |   | 3,034,953    |      | 6.91         |   |
|                   |   |        |   |         |   |         |      |         |   |
| Granted                |   | 1,986,250   |   | 2.28         |   | 1,370,000    |      | 1.98         |   |
| Exercised              |   | (373,138    | )      | 2.52         |   | —       |      | —       |   |
| Forfeited              |   | (2,269,200  | )      | 2.74         |   | —       |      | —       |   |
|                   |   |        |   |         |   |         |      |         |   |
| Balance, June 30, 2000 |   | 4,080,801   |   | 2.54         |   | 4,404,953    |      | 5.37         |   |
|                   |   |        |   |         |   |         |      |         |   |
| Granted                |   | 710,000     |   | 0.26         |   | —       |      | —       |   |
| Exercised(a)           |   | —      |   | —       |   | (50,000      | )         | 1.59         |   |
| Forfeited              |   | (2,260,368  | )      | 2.70         |   | (300,000     | )         | 2.00         |   |
| Repriced — Old    |   | (100,000    | )      | 4.00         |   | —       |      | —       |   |
| Repriced — New    |   | 100,000     |   | 0.25         |   | —       |      | —       |   |
|                   |   |        |   |         |   |         |      |         |   |
| Balance, June 30, 2001 |   | 2,530,433   |   | 1.60         |   | 4,054,953    |      | 5.67         |   |
|                        |        |             |        |              |        |              |           |              |        |  |  |

 

(a)           In January 2001, a warrant for 50,000 shares wasredeemed in a cashless exercise for 8,302 shares of the Company’s common stock.

 

In May 2001, the Company’sBoard of Directors approved the repricing of 100,000 nonstatutory stock optionsfrom the original exercise price of $4.00 per share to $.25 per share,resulting in an insignificant change to the original option intrinsic valueassigned.

 

The per shareweighted average fair value of stock options granted during 2001, 2000, and1999 is $0.26, $0.99, and $1.14, respectively.

 

F-17

----

 

Optionsoutstanding and exercisable at June 30, 2001, are as follows:

 
|               | **Outstanding** |        | **Exercisable** |                  |
|--------------------|-----------------|-------------|-----------------|-----------------------|
|               |            |        |            | **Weighted  Average** |   |   |   | **Weighted** |   |
| **Range of**       |            |        |            |                  |   | **Remaining** |   |   |   | **Average** |   |
| **Exercise**       |            |        |            | **Exercise**          |   | **Contractual** |   |   |   | **Exercise** |   |
| **Prices**         |            | **Options** |            | **Price**             |   | **Life —  Years** |   | **Options** |   | **Price** |   |
|               |            |        |            |                  |   |   |   |   |   |   |   |
| $                  | .15 to 1.00     |        | 810,117         |                  | $ | 0.26 |   | 5.2 |   | 735,117 |   | $ | 0.26 |   |
|  1.01 to 2.00 |            | 1,106,250   |            | 1.72                  |   | 2.0 |   | 549,875 |   | 1.68 |   |
|  2.01 to 3.00 |            | 358,816     |            | 2.70                  |   | 2.4 |   | 358,816 |   | 2.70 |   |
|  3.01 to 5.00 |            | 255,250     |            | 3.83                  |   | 2.3 |   | 252,750 |   | 3.84 |   |
| .15 to 5.00        |            | 2,530,433   |            | 1.60                  |   | 3.1 |   | 1,896,558 |   | 1.61 |   |
|                    |                 |             |                 |                       |  |  |  |  |  |  |  |  |  |  |  |

* *

                                    Warrants outstanding and exercisable atJune 30, 2001, are as follows:

 
| **Range of** |         |         |      | **Weighted  Average**      |   |                      |   |
|--------------|--------------|--------------|-----------|----------------------------|--------|---------------------------|--------|
| **Exercise** |         |         |      | **Remaining  Contractual** |   | **Weighted Average** |   |
| **Prices**   |         | **Warrants** |      | **Life-Years**             |   | **Exercise Price**   |   |
|         |         |         |      |                       |   |                      |   |
| $            | 1.50 to 2.00 |         | 1,020,000 |                       | 8.3    |                      | $      | 1.99 |   |
| 6.35 to 7.00 |         | 3,034,953    |      | 3.0                        |   | 6.91                      |   |
| 1.50 to 7.00 |         | 4,054,953    |      | 4.3                        |   | 5.67                      |   |
|              |              |              |           |                            |        |                           |        |  |  |

 

                                    Had the Companyrecognized stock option compensation expense based on grant-date fair value,consistent with the provisions of SFAS No. 123, the net income (loss)would be approximately as follows:

 
|                                 |   | **Year Ended  June 30,** |        |
|--------------------------------------|--------|--------------------------|-------------|
|                                 |   | **2001**                 |        | **2000** |   | **1999** |   |
|                                 |   |                     |        |   |   |   |   |
| Net income (loss):                   |   |                     |        |   |   |   |   |
| As reported                          |   | $                        | (24,006,464 | ) | $ | 19,081,423 |   | $ | (7,823,113 | ) |
| Pro forma                            |   | (24,291,939              | )           | 18,713,959 |   | (8,305,228 | ) |
| Net income (loss) per diluted share: |   |                     |        |   |   |   |   |
| As reported                          |   | $                        | (1.50       | ) | $ | 1.16 |   | $ | (.50 | ) |
| Pro forma                            |   | (1.51                    | )           | 1.14 |   | (.53 | ) |

 

The fair value ofstock options and warrants is the estimated present value at grant-date usingthe Black-Scholes option pricing model with the following weighted averageassumptions:

 
|                                  |   | **Year Ended  June 30,** |   |
|---------------------------------------|--------|--------------------------|--------|
|                                  |   | **2001**                 |   | **2000** |   | **1999** |   |
|                                  |   |                     |   |   |   |   |   |
| Expected volatility                   |   | 216                      | %      | 85 | % | 65 | % |
| Risk-free interest rate               |   | 4.9                      | %      | 6.2 | % | 5.9 | % |
| Expected life of options — years |   | 5.0                      |   | 4.5 |   | 4.5 |   |
| Expected dividend yield               |   | —                   |   | — |   | — |   |

 

F-18

----

 

9.                          Commitments -

 

                                   Operating Leases

 

The Company leasescertain equipment and facilities under operating leases.  The facilities leases require payments ofproperty taxes, insurance, and maintenance costs in addition to basic rent andsome contain renewal options for periods ranging from one to three years.

 

Certain of thefacilities were leased from Grandchildren’s Realty Alternative ManagementProgram I (GRAMPI), a Minnesota limited partnership controlled by the Company’sformer CEO (Masters), and from TEAM Property Management Company (TEAM), acompany controlled by three stockholders of the Company. The GRAMPI leaseoriginally expired in 2010.  The Company vacated the space,discontinued rent payments and, in March of 2002, reached a settlementreleasing the Company from any further obligation under the lease.  The lease with TEAM was cancelled in July2001 by mutual consent with the RSPNetwork sale.

 

Rent expense wasallocated to discontinued operations based on space occupied.  Rent expense under all operating leases forboth continuing and discontinued operations (including property taxes,insurance, and maintenance costs) was as follows:

 
|   |   | **Year Ended June 30,** |      |
|--------|--------|-------------------------|-----------|
|   |   | **2001**                |      | **2000** |   | **1999** |   |
|   |   |                    |      |   |   |   |   |
| GRAMPI |   | $                       | 955,051   |   | $ | 1,844,000 |   | $ | 1,682,000 |   |
| TEAM   |   | 207,342                 |      | 201,000 |   | 113,000 |   |
| Other  |   | 169,140                 |      | 1,327,000 |   | 1,390,000 |   |
|   |   | $                       | 1,331,533 |   | $ | 3,372,000 |   | $ | 3,185,000 |   |

 

                                   Future minimum operating lease paymentsare as follows:

 
| **Year Ending** |   |             |       |         |   |    |   |
|-----------------|--------|------------------|------------|--------------|--------|---------|--------|
| **June 30,**    |   | **Gross  Rents** |       | **Sublease** |   | **Net** |   |
|            |   |             |       |         |   |    |   |
| 2002            |   | $                | 172,093    |         | $      | 10,784  |   | $ | 161,309 |   |
| 2003            |   | 35,221           | ** ** | **—**   |   | 35,221  |   |
|            |   | $                | 207,314    |         | $      | 10,784  |   | $ | 196,530 |   |

 

 

                                    Employee Benefit Plans

 

The Company hadtwo qualified defined contribution 401(k) plans covering substantially allemployees. One plan covered RSPNetwork employees and the other plan covered allother employees.  The plans offeredemployees a savings feature and Company matching contributions werediscretionary.  The plans were combinedin 2001, and no employer contributions were made in 2001, 2000, or 1999.  The Company intends to terminate thecombined plan in 2002.

 

 

F-19

----

 

10.                   Related Party Transactions -

 

In December 2000,the Board of Directors engaged an independent consultant to review transactionsbetween the Company and its former CEO and TimeMasters, Inc. (TMI), acorporation controlled by the former CEO. Based on the findings, the Companyterminated these relationships and commenced legal action against the formerCEO.  (Note 13 - Global SettlementAgreement - Masters)

 

In 2001, theCompany deposited $1.5 million with a law firm to represent certain present andformer directors and officers.  At June30, 2001, the Company has $1.4 million remaining, which is included in prepaidexpenses.

 

Transactions withrelated parties are as follows:

 
|                                            |   | **Year Ended  June 30,** |       |
|-------------------------------------------------|--------|--------------------------|------------|
|                                            |   | **2001**                 |       | **2000** |   | **1999** |   |
|                                            |   |                     |       |   |   |   |   |
| Rent expense (GRAMPI)(a)                        |   | $                        | 955,051    |   | $ | 1,844,000 |   | $ | 1,682,000 |   |
| Rent expense (TEAM)                             |   | 207,342                  |       | 201,000 |   | 113,000 |   |
| Interest income(b)(c)                           |   | 110,349                  |       | 66,279 |   | 71,094 |   |
| Interest income(d)                              |   | —                   |       | 41,793 |   | 22,999 |   |
| Interest expense(e)                             |   | —                   |       | 796,347 |   | 497,574 |   |
| Operating expenses:                             |   |                     |       |   |   |   |   |
| Airplanes(f)                                    |   | 103,581                  |       | 219,193 |   | 181,640 |   |
| Clubhouse expenses(g)                           |   | 3,846                    |       | 20,277 |   | 22,260 |   |
| Travel(h)                                       |   | —                   | ** ** | **—** |   | 199,006 |   |
| Consulting(i)                                   |   | 25,000                   |       | 60,000 |   | 10,000 |   |
| California apartment rent                       |   | 16,000                   |       | 35,200 |   | 23,541 |   |
| California apartment utilities and other        |   | 4,633                    |       | 656 |   | 4,339 |   |
| Salary paid to former CEO’s second wife(j) |   | 77,116                   |       | 100,000 |   | 100,000 |   |
| Equipment purchases(k)                          |   | —                   |       | 5,505 |   | 31,903 |   |
| Inventory purchases(l)                          |   | —                   |       | 660,653 |   | 2,327,631 |   |
|                                                 |        |                          |            |  |  |  |  |  |  |  |

 

Balancesoutstanding with parties controlled by the former CEO are as follows:

 
|                                   |   | **June 30,** |       |
|----------------------------------------|--------|--------------|------------|
|                                   |   | **2001**     |       | **2000** |   | **1999** |   |
|                                   |   |         |       |   |   |   |   |
| Receivables and accrued interest(b)(g) |   | $            | 1,925,369  |   | $ | 1,405,285 |   | $ | 1,048,767 |   |
| Allowance for doubtful accounts(b)     |   | (1,925,369   | )          | **—** | ** ** | **—** | ** ** |
| Net receivable                         |   | $            | **—** |   | $ | 1,405,285 |   | $ | 1,048,767 |   |

----

(a)          Pursuant to a lease dated December 31,1995 and until January 10, 2001, the Company leased and occupied space inEden Prairie, Minnesota from GRAMPI. The general partner of GRAMPI is TMI. Oneof the limited partners of GRAMPI is a trust (TRUST), of which a formerdirector of the Company was trustee at the time of the lease negotiations andthe minor children of the former CEO are the beneficiaries. Other limitedpartners appear to include the former CEO, his second and third wives (as jointtenants), as well as his brother and his brother’s spouse and children. In1995, the Company retained the services of a law firm as well as an independentcommercial real estate brokerage firm in negotiating the lease.

 

F-20

----

 

                        The Company leased 178,774 square feet ofspace under the above lease for a term of fifteen years (expiringDecember 31, 2010) with no renewal option.  The base rent escalated periodically over the lease term andobligated the Company to pay various operating expenses.  The current Board of Directors determinedvarious potential fairness problems with the lease, which resulted inlitigation (Note 13 - Global Settlement Agreements - Masters).

 

(b)         The Company performed services for andpaid various amounts on behalf of TMI. The receivable from TMI of $206,711 atJune 30, 1999, was combined with additional indebtedness into the $472,977 notedescribed in (c).

 

(c)          Prior to 1999, GRAMPI borrowed $250,000from the Company under a note guaranteed by the former CEO, collateralized bythe Company’s common stock owned by GRAMPI and bearing interest at the primerate plus 2.0%. In September 1999, the balance of the note was combined withadditional borrowings during 1999 into a new $500,000 noninterest bearing notedue September 1, 2000.  During 1999, theformer CEO and TMI borrowed an additional $375,472, which was combined with$97,505 that was owed to the Company by TMI into a second note from the formerCEO totaling $472,977, due September 1, 2000, with interest at 9.75%.  In 1999, the former CEO borrowed an additional$200,000 due September 1, 2000, with interest at 9.75%. These notes remainoutstanding.  All three notes werecollateralized by a deed of trust encumbering certain Montana real propertyowned by GRAMPI.  The Company determinedin November 2000 that the deed of trust was defective as it was never recordedand the land was not owned by GRAMPI, but rather another entity controlled bythe former CEO.  In October 2000, theCompany loaned $430,000 to GRAMPI, due in calendar 2001 or as approved by theBoard of Directors, with interest at the IRS effective tax rate and guaranteedby the former CEO.  Nonrecurring chargesinclude allowances for the receivables from the former CEO and entities hecontrols, which includes principal and accrued interest due totaling approximately$1,925,000.  This amount was forgivenunder the terms of the Global Settlement Agreement between the Company andMasters (Note 13)

 

(d)         K&R loaned funds to TEAM prior to theCompany’s acquisition of K&R, which was among the assets acquired by theCompany in the K&R acquisition.

 

(e)          Interest expense on revolving line ofcredit and capital leases with primary DGBU lender (a stockholder), which wereretired with DGBU disposal.

 

(f)            The Company regularly used an airplaneowned by a company owned or controlled 100% by the former CEO. The Company wascharged $430 per hour for flight time. The Company also paid a company, that may or may not be related to theformer CEO, for pilot services at a daily rate of $376 for flight days and adaily rate of $330 for nonflight days.

 

(g)         The Clubhouse is a guesthouse located inEden Prairie, MN, owned by either all or any of the following:  the former CEO, TRUST, the former CEO’sspouse, TMI, and/or GRAMPI.

 

(h)         The Company used the services of a travelagency that was controlled by the former CEO.

 

 

F-21

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(i)             The former CEO’s current spouse was paidconsulting services through a company she owns beginning in May 1999, at amonthly rate of $5,000.  Current managementwas unable to locate a contract specifying the work performed or defining thelength of service, nor was management able to find tangible evidence of anywork product produced by this Company and/or the former CEO’s current spouse inthis consulting role. Current management and the Board of Directors were notinformed that the former CEO’s current spouse owned this company or thatpayments were being made to it.

 

(j)             The former CEO’ssecond wife was a Company employee. Under the divorce decree, the former CEO was not required to pay anyalimony to his second wife as long as she was employed by the Company.  Subsequent to their separation, but beforethe divorce was final, the second wife’s base salary was increased by theformer CEO from $58,000 to $100,000.  Atthe time of this salary increase, the second wife was the Company Secretary andAssistant Treasurer, a position she subsequently resigned. The Companyinvestigated this, as well as allegations that the second wife went for longperiods of time performing minimal or no Company business while drawing thissalary.  The former CEO is alsoobligated to pay health club and educational expenses for his second wife undertheir divorce decree.  Those expenseswere paid by the Company and are not included in the previous table.

 

(k)          The Companypurchased hardware and software from TMI in 2000 and 1999 related to a wirelessvoice system.

 

(l)             Purchased from agreater than 5% shareholder.

 

In June 2001, the Board of Directors authorized bonus payments and optiongrants to certain directors for services rendered during 2001.

 
|                               |   | **Amount** |    | **Options** |    |
|------------------------------------|--------|------------|---------|-------------|---------|
|                               |   |       |    |        |    |
| Current Chairman of the Board      |   | $          | 100,000 |        | 250,000 |   |
| Current Vice-Chairman of the Board |   | 100,000    |    | 250,000     |    |
| Director                           |   | 30,000     |    | 50,000      |    |
|                                    |        |            |         |             |         |  |

 

The options, granted outside the Company’s Stock Option Plan, are fullyvested, nonqualified with a term of 5 years and a $0.16 per share exerciseprice.

 

In 2001, Messrs. Duoos and Adams, current Chairman and Vice-Chairmain of theBoard, were paid $69,000 and $66,000, respectively, for their services as Boardmembers dating back to 2000.

 

Transactions Subsequent to June 30, 2001

 

In the first and second quarter of 2001, for their services on the Boardof Directors and based on letters from the Company dated August 23, 1999 and September10, 1999, Messrs. Duoos and Adams, respectively, were granted each options topurchased 100,000 shares of the Company’s common stock at $2.00 and $1.65 pershare, respectively.  These options vestat a rate of 25,000 over four years.  InJuly 2001, the Board repriced the options to $.15 per share.

 

F-22

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In July 2001, the Special Compensation Committee of the Board ofDirectors authorized an agreement with the Company’s current 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, payment of the compensation is generally continueduntil the end of the term of the agreement. The Company also authorized payment of his relocation expenses, whichtotaled $202,527.  In addition, theChairman receives a monthly directors fee of $3,000 as well as reimbursement ofout of pocket expenses of approximately $9,000 in 2001.

 

In July 2001, the Special Compensation Committee of the Board ofDirectors authorized an agreement with the Company’s current Vice-Chairman ofthe Board (Vice-Chair).  The agreementprovides for the Vice-Chair to be paid a monthly consulting services fee of$12,500 for 3 years plus 100,000 options exercisable at $0.15 per share, to begranted on each anniversary date.  Ifterminated by the Company, without cause, payment of the compensation isgenerally continued until the end of the term of the agreement.  In August 2001, the Company also authorizeda special consulting fee in the amount of $30,000 for services provided to the Companyoutside of the agreement for his monthly consulting services.  In addition, the Vice-Chair receives amonthly directors fee of $3,000 as well as reimbursement of out pocket expensesof approximately $33,000 in 2001.

 

In connection with the June and July 2001 agreements with the Chairman andVice-Chair, the Company consulted with an independent specialist in this area.

 

In July 2001, the Board of Directors approved a loan program whereby theCompany will loan up to $500,000 in total to outside Directors to buy stockfrom stockholders.  In August 2002, theChairman and Vice-Chair each acquired Company stock and borrowed $73,314 underthis program.

 

 

11.                    SupplementalDisclosures of Cash Flow Information -

 
|                                                           |   | **Year Ended  June 30,** |    |
|----------------------------------------------------------------|--------|--------------------------|---------|
|                                                           |   | **2001**                 |    | **2000** |   | **1999** |   |
| The Company paid (received) cash for:                          |   |                     |    |   |   |   |   |
| Interest                                                       |   | $                        | 188,548 |   | $ | 193,641 |   | $ | 183,353 |   |
| Income taxes, net                                              |   | —                   |    | (73,496 | ) | (118,827 | ) |
|                                                           |   |                     |    |   |   |   |   |
| Noncash investing and financing activities:                    |   |                     |    |   |   |   |   |
| Common stock issued for acquisition of Rymatics                |   | 1,031,250                |    | — |   | — |   |
| Nonrecurring and restructuring charges                         |   | 4,138,318                |    | — |   | — |   |
| Convertible preferred stock  issued for acquisition of K&R |   | —                   |    | — |   | 7,500,000 |   |
| Capital leases                                                 |   | —                   |    | — |   | 115,318 |   |
|                                                                |        |                          |         |  |  |  |  |  |  |  |

 

F-23

----

 

12.                     Legal Proceedings -

 

Kittrell

In August 2000, the Company commenced litigation against JaffrayCommunications, Inc., doing business as Vitesse Networks, Inc. (Vitesse) andits former President and COO Mark Kittrell in Hennepin County DistrictCourt.  The lawsuit alleges that Mr.Kittrell violated his agreement not to compete against the Company and that he,contrary to his contractual promises, recruited RSPNetwork employees to Vitesseand its subsidiaries.  The suit alsoalleges that Vitesse interfered with the contractual rights of RSPNetwork thatprevented Mr. Kittrell from competing against it and the Company and fromrecruiting employees of RSPNetwork and the Company.  Finally, thesuit alleges certain securities law violations and misrepresentations byMr. Kittrell in connection with the conversion and sale of Companystock.  In connection with this lawsuit,Mr. Kittrell made a demand for arbitration, alleging breach of contractand breach of implied covenants of good faith and fair dealing.  Kittrell and the Company filed cross motionsin the trial court regarding an arbitration clause in one of the contracts atissue in the case.  Prior to the Courthearing these motions, Kittrell and the Company agreed to arbitrate thedisputes between them.  The suit againstVitesse was settled with Vitesse agreeing to pay $10,000, and both partiesagreeing to drop all further claims. The lawsuit against Kittrell went to arbitration in January 2002, withKittrell prevailing.  The arbitratorawarded Kittrell, net of certain offsets, $2,708,073. Under terms of the finalsettlement, the Company paid Kittrell $2,137,547, transferred to him 400,000shares of Muller Media, Inc. stock being held by the Company for investmentpurposes (book value of $60,188), and also transferred to him the rights tofuture earnout payments (having no book value) due the Company under terms ofthe agreement selling the assets of RSPNetwork to RSP Acquisitions.

 

Wiskus

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

 

Metiom

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

 

Feltl

In November 2000, Masters and GRAMPI attempted to convey real estate toJohn E. Feltl, which subsequently became subject to the Montana litigation (seebelow).  The Company joined Feltl asdefendant in the Montana litigation, claiming that the conveyances werefraudulent.  The Company’s claimsagainst Feltl were relinquished under terms of the March 11, 2002 GlobalSettlement Agreement (Note 13).

 

F-24

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Masters

On December 1, 2000, the former CEO (Masters), purporting to act bothindividually and derivatively on behalf of the Company, filed an action inMinnesota state court against the Company and three of its directors, Edward S.Adams, Timothy R. Duoos and Roger Wikner. Masters’ complaint alleged breach offiduciary duty, corporate waste and violations of the Minnesota BusinessCorporation Act and requested that the Court act to temporarily restrain thedefendants from (i) selling shares of the Company or its subsidiaries, (ii)terminating or changing the job description of any employee of the Company,(iii) selling assets of the Company or its subsidiaries except in the ordinarycourse of business, (iv) materially changing any business relationship of theCompany, (v) interfering with the scheduling of a shareholders’ meeting byMasters to elect new directors or remove all directors with the exception ofMasters and Steve Fisher, (vi) diminishing the global operating performance ofthe Company’s web site, and (vii) preventing employees or directors fromcommunicating with Masters. Moreover, Masters wanted to be allowed to removehis personal property from the Company’s premises.  On December 5, 2000, the Court denied Masters’ motion for atemporary restraining order in its entirety. The Company thereafter assertedcounterclaims against Masters seeking to recover damages arising from breach offiduciary duty, wrongful use of corporate assets and failure to repay personalloans Masters had received from the Company. At a second injunction hearingheld on January 5, 2001, the Court denied Masters’ renewed motion for atemporary injunction. After the Company and the director defendants filedmotions to dismiss Masters’ complaint, Masters stipulated to the dismissal ofhis claims. His derivative claims were dismissed with prejudice by the Court onFebruary 12, 2001, and any personal claims dismissed without prejudice.  The Court entered a judgment against Mastersregarding the repayment of personal loans.  The Company agreed to release Masters from this judgment underterms of the Global Settlement Agreement, dated March 11, 2002 (Note 13).

 

Montana

On December 18, 2000, the Company filed an action in Montana state courtagainst Masters, and two other entities affiliated with Masters. The Companyasserted that Masters and/or GRAMPI purported to grant a security interest tothe Company in Montana properties actually owned by another Master’s affiliate,Masters Trust I. The Deed of Trust necessary to create the security interestwas never recorded. The complaint sought a declaration that the Company has asecurity interest in three parcels of real property owned by the Masters’affiliate. In addition to filing the complaint, the Company filed the necessarydocuments to restrict Masters’ or GRAMPI’s ability to convey any of theaffected parcels of real property while the lawsuit was pending.  This action was dropped under terms of theGlobal Settlement Agreement between Masters and the Company, dated March 11, 2002(Note 13).

 

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 his self-dealingregarding the purchase of the business complex, the lease, and other realestate transactions with the Company. In March 2001, GRAMPI asserted a counterclaim against the Company forbreach 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 andMasters’ actions were withdrawn under terms of the Global Settlement Agreement datedMarch 11, 2002 (Note 13).

 

F-25

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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.  The Company requested that the Court imposea constructive trust over the $2.5 million Manugistics received.  The Claim alleged that Manugistics wasguilty of conversion and was unjustly enriched.  The Claim also sought a declaratory judgment that the contractwas null and void, or that the Court rescind the contract.  The parties settled the litigation onJuly 6, 2001.  Manugistics paid $1.3million to the Company in July 2001, which is included in receivables at June30, 2001.  The parties agreed tomutually and completely release each other from any further claims.

 

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 breaches of theiremployment agreements and/or their fiduciary duties. Moreover, the Companysought to have the Court declare that the defendants breached their respectiveemployment agreements and were therefore not entitled to any furthercompensation or benefits under those agreements and that these agreements arerescinded. The Company claimed that Thurn violated his contractual and/orfiduciary duties as Chief Financial Officer and/or Treasurer of the Company,one of the violations being the transfer of $2.5 million to Manugistics, eventhough he was aware or should have been aware that the Company’s Board ofDirectors had restricted Masters’ authority to enter into the transaction withManugistics.  The Company claimedMasters Sawyer breached her duties as former Secretary/Assistant Treasurer andmost recently as Vice-President of Operations, amongst others, by receivingexcessive unapproved compensation, failing to disclose contracts andtransactions that were contrary to the Company’s interest, and failing toperform the tasks and duties of her position due to excessive, unexplainedabsenteeism.  The Company claimed thatVatland as Vice President of Advanced Technology  Development and/or Chief Technology Officer breached his dutiesbecause he failed to disclose and furthered contracts and transactions bycorporate officers and/or directors that were contrary to the Company’sinterest, and because he furthered the use of Company funds and/or assets,which were not in furtherance of the Company’s interest and were not authorizedor were in contravention of directives issued or restrictions placed by theCompany’s Board of Directors.  Alldefendants denied the Company’s claims and raised various counterclaims,including counterclaims for severance payments, breach of contract andviolation of the Workers Adjustment Retraining Notification Act.  Vatland and Thurn claimed to be entitled to12 months of severance pay and Masters Sawyer claimed to be entitled to 36months of severance pay.  Vatlandfurther contended that he was entitled to pay of $75,000 per year, covering aperiod of time after he voluntarily had his base compensation reduced from$250,000 to $175,000.  The Companysettled all claims in June 2001.  Inconsideration for payments from the Company in the amounts of $157,500,$45,000, and $55,000, respectively, 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.

 

 

F-26

----

 

Ryan

In September 2000, former Executive Vice President Thomas Ryan brought alawsuit in Hennepin County District Court against the Company and its formersubsidiary, Colorspan Corporation, alleging that he is entitled to severancepayments and performance options based upon an employment agreement withColorspan.  Mr. Ryan sought damages of$175,000 in addition to performance options and attorney fees.  The matter was tried before a jury and onOctober 2, 2001, the jury entered a verdict in favor of the Company.  Mr. Ryan is seeking to appeal the verdict.

 

                                   Other

 

During fiscal 1999, the Company recorded other income, which is includedin discontinued operations, of $1,500,000 as a result of the settlement of alawsuit filed by ColorSpan Corporation against Sentinel Business Systems,Inc.  The Company received $1,150,000 incash in May 1999, as was required by the agreement.  The $350,000 balance owed to the Company was paid in fiscal 2000.

 

13.                     SubsequentEvents -

 

Global Settlement Agreement — Masters

 

On March 11, 2002, the Company entered into a Global SettlementAgreement with Masters, TMI, GRAMPI, David Norlander — individually and as Trusteeof and on behalf of Masters Trust I, Realty Settlement, LLC, and JessicaTran-Masters.  The parties gave eachother mutual and complete releases for any claims and judgments, thereby endingthe legal proceedings summarized in Note 12 (“Feltl,” “Masters,” “Montana,” and“GRAMPI”).  The Company agreed to conveyto Masters or his designee all of the Company’s assets pertaining specificallyand solely to B2BXchange, and pay to Masters or his designee the amount of $600,000,which included payment of Masters’ attorneys’ fees.  Masters, in turn, agreed to transfer to the Company all shares ofCompany stock and all warrants owned or controlled by Masters, GRAMPI, MastersTrust I, TimeMasters, any parent, sibling, spouse (whether current or future),child, or grandchild.

 

Investment — Common Stock

 

At various timesduring October and November 2001, the Company made an aggregate investment of$1,007,000 for 601,400 shares of Cone Mills Corporation common stock, apublicly traded company, a producer of denim and decorative fabrics.Commissions of approximately $36,000 were paid on the purchase of these sharesto Equity Securities Investments, Inc. (Equity), a company whose president isthe Vice-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. Underterms of such agreement, the Company agreed to pay a 20% advisory fee on thegain from the sale of securities purchased through Equity.  The agreement also requires 20% of theappreciation on certain securities and reflected at December 31 to be paid toEquity. In May and June 2002, 235,100 of these shares were sold for a net gainof $446,874.  Commissions of $121,086were paid to Equity on the sale of these shares.

 

Investment —Temporary Subordinated Loan Agreement

 

On October 30, 2001, the Company entered into a Temporary SubordinatedLoan Agreement with Equity.  Under termsof the loan, the Company loaned Equity $1,350,000 at 10% interest.  The loan was repaid with interest on December28, 2001.

 

F-27

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Investment - ConvertibleNotes

 

On November 8, 2001, the Company entered into an arrangement with CashSystems, Inc. (Borrower), a national provider of cash access services to thegaming and retail industries, to loan them up to $500,000 in the form ofconvertible notes.  On November 8, 2001,the Company loaned the Borrower $200,000 and an additional $200,000 was loanedon March 1, 2002.  The notes mature onNovember 8, 2003, pay interest at 12.5%, pay principal and interest on amonthly basis, and require the Borrower to grant the Company a securityinterest in a cash account which is required to maintain a minimum of $300,000during the term of the loan. Additionally, the agreement contains personal guarantees of thePresident and CEO of the Borrower and a pledge of certain shares of hisstock.  The notes are convertible intocommon stock of the Borrower at an exercise price of $2 per share.  The agreement also indicates that theCompany will receive warrants to purchase up to 125,000 shares of common stockof the Borrower, dependent upon the level of borrowings.  The exercise price of the warrants is $2 pershare.  Commissions of $65,000 and warrantsto purchase 50,000 shares of common stock were paid and issued, respectively,by the Borrower to Equity.

 

Investment -Common Stock/Convertible Notes

 

On October 24, 2001, the Company invested $305,000 for an 80% ownershipposition in Business Translation Services, Inc. (BTSV).  On November 12, 2001, the Company loaned$300,000 to BTSV under the terms of a 10% convertible promissory note, payablein three installments over 12 months. The note is convertible into the common stock of BTSV at $.50 per share.  On November 12, 2001, BTSV merged withMuller Media, Inc. under a plan of reorganization within the meaning of Sectionl68 of the Internal Revenue Code, and BTSV’s name was changed to Muller Media,Inc (Muller).  Muller guaranteed theconvertible promissory note, issued a warrant to the Company to purchase1,200,000 shares of Muller common stock at an exercise price of $.125 pershare, and agreed to issue to the Company 2,000,000 shares of its common stockin the event of default. Before taking into account the effects of exercisingthe warrant, the Company’s ownership in Muller is approximately 16%.  Under terms of the Kittrell Settlement (Note12), 400,000 shares of Muller were transferred to Kittrell in May 2002,reducing the Company’s ownership to approximately 13%.

 

Commissions of $107,550 were paid to Equity who represented the Companyin this transaction, along with 700,000 shares of Muller common stock, andwarrants for 1,000,000 shares of common stock.

 

In July 2002,Muller, claiming unspecified damages, defaulted on payment of a $300,000 notepayable to the Company.  The Companyintends to actively pursue collection of this note, and in 2002 established areserve equal to the full amount of the note.

 

Options Awarded to Board of Directors

 

In July 2002, the Board of Directors awarded options to purchase 100,000shares of the Company’s common stock to its Chairman, Vice-Chair, and eachdirector.  The options vest immediately,have a term of five years, and have an exercise price of $.05 per share — 120%of the closing price of the Company’s common stock on the day closest to theoption issue date.

 

Other 

 

All marketablesecurities are held in an account with Equity who represented the Company.  All transactions between the Company andEquity are in accordance with agreements approved by the Company’s Board ofDirectors.

 

F-28

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Investment — PrivatePlacement

 

In May 2002, the Company paid $200,000 for 208,333 private placementcommon units of a non-public Illinois company that provides billing,collections and reimbursement services for healthcare industry clients.  If all the private placement units weresold, the Company would hold a 3.4% ownership position.

 

 

14.                     Uncertainties-

 

Ongoing legal proceedingsinvolving the Company are significant to the Company’s financial position.  The consolidated financial statementsinclude estimated accrued amounts that, in management’s opinion, are sufficientto adequately reflect payments required under the terms of the varioussettlements and related legal expenses incurred subsequent to June 30,2001.  The Company is unaware of anymaterial existing or potential future legal proceedings for which additionalamounts need to be accrued.

 

 

15.                    Quarterly Results ofOperations (Unaudited) -

 

                                   In thousands, except per share data

                                   (Quarters restatedfor discontinued operations)

 
|                                                     |   | **Quarter** |       |       |       |
|----------------------------------------------------------|--------|-------------|------------|------------|------------|
| **Year Ended June 30, 2001**                             |   | **First**   |       | **Second** |       | **Third** |   | **Fourth** |   | **Total** |   |
|                                                     |   |        |       |       |       |   |   |   |   |   |   |
| Net sales:                                               |   |        |       |       |       |   |   |   |   |   |   |
| Continuing                                               |   | $           | —     |       | $          | — |   | $ | — |   | $ | — |   | $ | — |   |
| Discontinued                                             |   | 1,490       |       | 1,590      |       | 1,483 |   | 1,249 |   | 5,812 |   |
|                                                     |   | $           | 1,490      |       | $          | 1,590 |   | $ | 1,483 |   | $ | 1,249 |   | $ | 5,812 |   |
|                                                     |   |        |       |       |       |   |   |   |   |   |   |
| Gross profit:                                            |   |        |       |       |       |   |   |   |   |   |   |
| Continuing                                               |   | $           | —     |       | $          | — |   | $ | — |   | $ | — |   | $ | — |   |
| Discontinued                                             |   | 272         |       | 423        |       | 413 |   | 413 |   | 1,521 |   |
|                                                     |   | $           | 272        |       | $          | 423 |   | $ | 413 |   | $ | 413 |   | $ | 1,521 |   |
|                                                     |   |        |       |       |       |   |   |   |   |   |   |
| Net income (loss):                                       |   |        |       |       |       |   |   |   |   |   |   |
| Continuing                                               |   | $           | (1,288     | )          | $          | (6,668 | ) | $ | (2,331 | ) | $ | (1,940 | ) | $ | (12,227 | ) |
| Discontinued                                             |   | (2,700      | )          | (9,395     | )          | (325 | ) | 1,229 |   | (11,191 | ) |
| Sale of discontinued operations                          |   | **—**  | ** ** | **—** | ** ** | **—** |   | (588 | ) | (588 | ) |
|                                                     |   | $           | (3,988     | )          | $          | (16,063 | ) | $ | (2,656 | ) | $ | (1,299 | ) | $ | (24,006 | ) |
|                                                     |   |        |       |       |       |   |   |   |   |   |   |
| Income (loss)per  common share — basic and diluted: |   |        |       |       |       |   |   |   |   |   |   |
| Continuing                                               |   | $           | (0.07      | )          | $          | (0.42 | ) | $ | (0.15 | ) | $ | (0.12 | ) | $ | (0.76 | ) |
| Discontinued                                             |   | (0.16       | )          | (0.60      | )          | (0.02 | ) | 0.08 |   | (0.70 | ) |
| Sale of discontinued operations                          |   | **—**  | ** ** | **—** | ** ** | **—** |   | (0.04 | ) | (0.04 | ) |
|                                                     |   | $           | (0.23      | )          | $          | (1.02 | ) | $ | (0.17 | ) | $ | (0.08 | ) | $ | (1.50 | ) |

 

F-29

----

 

 
|                                        |   | **Quarter** |    |       |       |
|---------------------------------------------|--------|-------------|---------|------------|------------|
| **Year Ended June 30, 2000**                |   | **First**   |    | **Second** |       | **Third** |   | **Fourth** |   | **Total** |   |
|                                        |   |        |    |       |       |   |   |   |   |   |   |
| Net sales:                                  |   |        |    |       |       |   |   |   |   |   |   |
| Continuing                                  |   | $           | —  |       | $          | — |   | $ | — |   | $ | — |   | $ | — |   |
| Discontinued                                |   | 19,656      |    | 19,166     |       | 18,423 |   | 12,514 |   | 69,759 |   |
|                                        |   | $           | 19,656  |       | $          | 19,166 |   | $ | 18,423 |   | $ | 12,514 |   | $ | 69,759 |   |
|                                        |   |        |    |       |       |   |   |   |   |   |   |
| Gross profit:                               |   |        |    |       |       |   |   |   |   |   |   |
| Continuing                                  |   | $           | —  |       | $          | — |   | $ | — |   | $ | — |   | $ | — |   |
| Discontinued                                |   | 7,594       |    | 7,685      |       | 7,848 |   | 5,161 |   | 28,288 |   |
|                                        |   | $           | 7,594   |       | $          | 7,685 |   | $ | 7,848 |   | $ | 5,161 |   | $ | 28,288 |   |
|                                        |   |        |    |       |       |   |   |   |   |   |   |
| Net income (loss):                          |   |        |    |       |       |   |   |   |   |   |   |
| Continuing                                  |   | $           | (1,193  | )          | $          | (1,321 | )(a) | $ | (1,279 | ) | $ | (984 | ) | $ | (4,777 | ) |
| Discontinued                                |   | (230        | )       | (1,359     | )          | (656 | ) | (9,675 | ) | (11,920 | ) |
| Sale of discontinued operations             |   | **—**  |    | 14,555     | ** ** | **—** |   | 21,223 | (a) | 35,778 |   |
|                                        |   | $           | (1,423) |       | $          | 11,875 |   | $ | (1,935 | ) | $ | 10,564 | (a) | $ | 19,081 |   |
|                                        |   |        |    |       |       |   |   |   |   |   |   |
| Net income (loss)                           |   |        |    |       |       |   |   |   |   |   |   |
| per common share — basic and  diluted: |   |        |    |       |       |   |   |   |   |   |   |
| Continuing                                  |   | $           | (0.08   | )          | $          | (0.08 | )(a) | $ | (0.07 | ) | $ | (0.06 | )(a) | $ | (0.29 | ) |
| Discontinued                                |   | (0.01       | )       | (0.09      | )          | (0.04 | ) | (0.55 | ) | (0.72 | ) |
| Sale of discontinued operations             |   | **—**  |    | .92        | (a)   | — |   | 1.21 | (a)  | 2.17 |   |
|                                        |   | $           | (0.09   | )          | $          | .75 |   | $ | (0.11 | ) | $ | 0.60 |   | $ | 1.16 |   |
|                                        |   |        |    |       |       |   |   |   |   |   |   |

----

(a)          The income tax benefit of $14,555recorded in the second quarter 2000 was originally attributed to continuingoperations.  That amount wasreclassified to sale of discontinued operations to match the fiscal yearpresentation.

 

 

F-30

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**ScheduleII**

** **

VirtualFund.com, Inc. andSubsidiariesValuation and Qualifying AccountsYear Ended June 30, 2001, 2000, and 1999

 

 
|                                                    |   | **Balance at  Beginning  of Year** |   | **Charged  to Costs and  Expenses** |   | **Accounts  Written Off** |   | **Balance at  End of  Year** |   |
|---------------------------------------------------------|--------|------------------------------------|--------|-------------------------------------|--------|---------------------------|--------|------------------------------|--------|
|                                                    |   |                               |   |                                |   |                      |   |                         |   |
| Allowance for doubtful                                  |   |                               |   |                                |   |                      |   |                         |   |
| accounts and sales returns                              |   |                               |   |                                |   |                      |   |                         |   |
|                                                    |   |                               |   |                                |   |                      |   |                         |   |
| 2001                                                    |   | $                                  | — |                                | $      | 1,600                     |   | $                            | — |   | $ | 1,600 |   |
| 2000                                                    |   | —                             |   | —                              |   | —                    |   | —                       |   |
| 1999                                                    |   | —                             |   | —                              |   | —                    |   | —                       |   |
|                                                    |   |                               |   |                                |   |                      |   |                         |   |
| Allowance for doubtful  receivable from former CEO |   |                               |   |                                |   |                      |   |                         |   |
|                                                    |   |                               |   |                                |   |                      |   |                         |   |
| 2001                                                    |   | $                                  | — |                                | $      | 1,925,400                 |   | $                            | — |   | $ | 1,925,400 |   |
| 2000                                                    |   | —                             |   | —                              |   | —                    |   | —                       |   |
| 1999                                                    |   | —                             |   | —                              |   | —                    |   | —                       |   |

 

 

F-31

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the Registrant has duly caused this Report tobe signed on its behalf by the undersigned, thereunto duly authorized onDecember 19, 2002.

 
|   | VirtualFund.com, Inc. |
|--------|-----------------------|
|   |                  |
|   |                  |   |
|   | By:                   | /s/ Timothy R. Duoos |
|   |                  | Chairman of the Board |

 

**POWER OFATTORNEY**

 

KNOW ALL MEN BY THESEPRESENTS, that each person whose signature appears below constitutes andappoints Timothy R. Duoos and Edward S. Adams and each of them, jointly andseverally, his attorneys-in-fact, each with full power of substitution, for himin any and all capacities, to sign any and all amendments to this Report onForm 10-K, and to file the same, with exhibits thereto and other documentsin connection therewith, with the Securities and Exchange Commission, herebyratifying and confirming all that each of said attorneys-in-fact, or hissubstitute or substitutes, may do or cause to be done by virtue hereof.

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this Report on Form 10-Khas been signed below by the following persons on behalf of the Registrant andin the capacities and on the dates indicated:

 
| **Signature**        |   | **Title**                                                                                       |   | **Date**          |   |
|----------------------|--------|-------------------------------------------------------------------------------------------------|--------|-------------------|--------|
|                 |   |                                                                                            |   |              |   |
|                 |   |                                                                                            |   |              |   |
| /s/ Timothy R. Duoos |   | Director, Chairman of  the Board                                                                |   | December 19, 2002 |   |
| Timothy R. Duoos     |   |
|                 |   |                                                                                            |   |              |   |
| /s/ Edward S. Adams  |   | Director, Vice Chairman  of the Board                                                           |   | December 19, 2002 |   |
| Edward  S. Adams     |   |
|                 |   |                                                                                            |   |              |   |
| /s/ Joseph D. Pupel  |   | Interim Chief Executive  Officer (principal executive officer and principal accounting officer) |   | December 19, 2002 |   |
| Joseph D. Pupel      |   |
|                 |   |                                                                                            |   |              |   |
| /s/ John Cavanaugh   |   | Director                                                                                        |   | December 19, 2002 |   |
| John Cavanaugh       |   |
|                 |   |                                                                                            |   |              |   |
| /s/ Edward M. Graca  |   | Director                                                                                        |   | December 19, 2002 |   |
| Edward  M. Graca     |   |
|                 |   |                                                                                            |   |              |   |
| /s/ Stephen Fisher   |   | Director                                                                                        |   | December 19, 2002 |   |
| Stephen  Fisher      |   |

 

----

 

**CERTIFICATION**

 

I,Joseph D. Pupel, certify that:

 

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

 

2.               Based on my knowledge, this annual reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading with respectto the period covered by this annual report; and

 

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

 

Date:December 19, 2002

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

 

 

EXPLANATORYNOTE REGARDING CERTIFICATION: Representations 4, 5 and 6 of the Certificationas set forth in Form 10-K have been omitted, consistent with the TransitionProvisions of SEC Exchange Act Release No. 34-46427, because this Annual Reporton Form 10-K covers a period ending before the Effective Date of Rules 13a-14and 15d-14.

 

 

 

----

 

**INDEX TO EXHIBITS**

 

 
| **Exhibit Number** |   | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                           |
|--------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                                                                                                                                                                                                                                                                 |
| 2.1                |   | Agreement and Plan of  Merger, dated as of December 18, 1998, by and among  VirtualFund.com, Inc., Virtual Acquisition Corp. I, K&R  Technical Services, Inc., and the shareholders of K&R Technical Services,  Inc. Incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed  on December 31, 1998.                                               |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                 |
| 2.2                |   | Asset Purchase  Agreement, dated as of June 7, 2000, by and between VirtualFund.com, Inc. and  MacDermid Incorporated. Incorporated by reference to Exhibit 10.7 to the  Company’s Form 8-K filed June 27, 2000.                                                                                                                                                                |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                 |
| 2.3                |   | Asset  Purchase Agreement effective as of July 23, 2001, by and between RSPNetwork,  Inc., VirtualFund.com, Inc. and RSP Acquisitions, LLC.  Incorporated by reference to Exhibit 2 to  the Company’s Form 8-K filed August 7, 2001.                                                                                                                                       |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.1                |   | Articles of  Incorporation of the Company as amended March 24, 1994.  Incorporated by reference to Exhibit 3.1  to the Company’s Form 10-K for the year ended June 30, 1994.                                                                                                                                                                                               |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.2                |   | LaserMaster  Technologies, Inc. Minutes of Shareholder Meeting dated April 3, 1998 which  amends Article I of the Articles of Incorporation to change the Company name  to VirtualFund.com, Inc. Incorporated by reference to Exhibit 10.6 to the  Company’s Report on Form 10-K for the fiscal year ended June 30, 1998.                                                       |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.3                |   | Restated Bylaws of the  Company as amended March 24, 1994.   Incorporated by reference to Exhibit 3.2 to the Company’s report on  Form 10-K for the fiscal year ended June 30, 1994.                                                                                                                                                                                       |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.4                |   | Amended Article III of  the Articles of Incorporation of the Company, as amended September 5,  2000.  Incorporated by reference to  Exhibit 3.5 to the Company’s 10-K for the fiscal year ended June 30, 2000.                                                                                                                                                             |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.1                |   | Rights Agreement, dated  as of October 9, 1998, between VirtualFund.com, Inc. and Norwest Bank  Minnesota, N.A., which includes Exhibit A thereto [the form of Certificate of  Designation of Series A Junior Participating Preferred Stock], and Exhibit B  thereto [the form of Rights Certificate]. Incorporated by reference to the  Company Form 8-A12G filed October 29, 1998. |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.2                |   | Certificate of  Designation of the Powers, Preference and Rights, and Qualifications,  Limitations and Restrictions, of Series A Convertible Preferred Stock of  VirtualFund.com, Inc.  Incorporated by  reference to Exhibit 4.1 to the Company’s Form 10-Q filed February 17, 1999.                                                                                      |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.1               |   | LaserMaster  Technologies, Inc. 1990 Restated Stock Option Plan, as amended.  Incorporated by reference to Exhibit 10.1  to the Company’s report on Form 10-K for the fiscal year ended June 30, 1991.                                                                                                                                                                     |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.2               |   | Representative Form of  Incentive Stock Option.  Incorporated  by reference to Exhibit 10.1 to the Company’s report on Form 10-K for the  fiscal year ended June 30, 1991.                                                                                                                                                                                                 |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.3               |   | Representative Form of  Non-Qualified Stock Option.   Incorporated by reference to Exhibit 10.3 to the Company’s report on  Form 10-K for the fiscal year ended June 30, 1991.                                                                                                                                                                                             |

 

 

----

 
| 10.4   |   | LaserMaster  Technologies, Inc. 1996 Stock Incentive Plan.  Incorporated by reference to the Company’s Form S-8  Registration Statement filed August 30, 1996 (No. 333-11157.)                                                                               |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                   |
| 10.5   |   | Representative  Form of Director’s Non-Qualified Stock Option Agreement and Schedule of  Directors Non-Qualified Stock Options.                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                   |
| 10.6   |   | First Industrial, L.P.,  Industrial Building Lease.   Incorporated by reference to Exhibit 10.2 to the Company’s report on  Form 10-K for the fiscal year ended June 30, 1996.                                                                               |
|   |   |                                                                                                                                                                                                                                                                   |
| 10.7   |   | Employment Agreement  with Robert J. Wenzel.  Incorporated  by reference to Exhibit 10.4 to the Company’s report on Form 10-K for the  fiscal year ended June 30, 1995.                                                                                      |
|   |   |                                                                                                                                                                                                                                                                   |
| 10.8   |   | Use Indemnification  Agreement dated November 1, 1991 covering property located at 12790 Century  Lane, Eden Prairie, Minnesota.   Incorporated by reference to the Company’s report on Form 10-Q for the  period ended December 31, 1991.                   |
|   |   |                                                                                                                                                                                                                                                                   |
| 10.9   |   | Employment Agreement  with Nancy Sawyer Masters.   Incorporated by reference to Exhibit 10.3 of the Company’s Form 10  Registration.                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                   |
| 10.10  |   | Promissory Note with  Grandchildren’s Realty Alternative Program I, L.P., Pledge Agreement and  Guaranty.  Incorporated by reference  to Exhibit 10.7 to the Company’s report on Form 10-K for the fiscal year  ended June 30, 1998.                    |
|   |   |                                                                                                                                                                                                                                                                   |
| 10.11  |   | Promissory Note  receivable from Steve Fisher.   Incorporated by reference to Exhibit 2.1 to the Company’s report  on Form 8-K filed December 31, 1998.                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                   |
| 10.12  |   | Amended and Restated  Lease for property in Shady View I & II dated December 1995 between  LaserMaster Corporation and GRAMPI.   Incorporated by reference to Exhibit 10.3 to the Company’s report on  Form 10-Q for the period ended December 31, 1995. |
|   |   |                                                                                                                                                                                                                                                                   |
| 10.13  |   | Promissory Note dated  January 17, 1996 by LaserMaster Corporation to TimeMasters, Inc.  Incorporated by reference to the Company’s  report on Form 10-Q for the period ended December 31, 1995.                                                             |
|   |   |                                                                                                                                                                                                                                                                   |
| 10.14  |   | Warrants for the  purchase of common stock of LaserMaster Technologies, Inc. issued to  TimeMasters, Inc. dated January 17, 1996.   Incorporated by reference to the Company’s report on Form 10-Q for the  period ended December 31, 1995.                  |
|   |   |                                                                                                                                                                                                                                                                   |
| 10.15  |   | Promissory Note from  Team Property Management.   Incorporated by reference to Exhibit 2.1 to the Company’s report on  Form 8-K filed December 31, 1998.                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                   |
| 10.16  |   | Lease Agreement between  Creo Property B.V. c/o Jacobus Recourt Vastgoed B.V.  Incorporated by reference to the Company’s  report on Form 10-K/A-2 filed May 10, 2001.                                                                                       |
|   |   |                                                                                                                                                                                                                                                                   |
| 10.17  |   | Sublease Agreement  between Annex Medical, Inc. and LaserMaster Corporation dated March 19,  1993.  Incorporated by reference to  Exhibit 10.16 to the Company’s report on Form 10-K for the fiscal year ended  June 30, 1993.                               |
|   |   |                                                                                                                                                                                                                                                                   |
| 10.18  |   | Employment Agreement  with Tim Thurn dated February 9, 1996.   Incorporated by reference to the Company’s report on Form 10-K/A-2  filed May 10, 2001.                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                   |
| 10.19  |   | Findings of Fact,  Conclusions of Law, Order of Judgment and Decree In re the Marriage of Nancy  Lynn Sawyer and Melvin Leroy Masters, dated December 30, 1994.  Incorporated by reference to the Company’s  report on Form 10-K/A-2 filed May 10, 2001.     |

 

 

----

 
| 10.20* |   | Letters to Tim Duoos,  dated August 23, 1999 and November 30, 1999, relating to compensation for  services as director and consultant.             |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                               |
| 10.21* |   | Letters to Ed Adams,  dated September 10, 1999 and November 30, 1999, relating to compensation for  services as director and consultant.           |
|   |   |                                                                                                                                               |
| 10.22* |   | Consulting Agreement  with MSJ & Associates, LLC, controlled by Monte Johnson, effective as of  May 1, 2001.                                   |
|   |   |                                                                                                                                               |
| 10.23* |   | Special Committee Compensation  Agreement with Timothy R. Duoos, dated July 1, 2001.                                                               |
|   |   |                                                                                                                                               |
| 10.24* |   | Special Committee  Compensation Agreement with Edward S. Adams, dated July 1, 2001.                                                                |
|   |   |                                                                                                                                               |
| 23.1   |   | Consent of Deloitte  & Touche LLP.                                                                                                             |
|   |   |                                                                                                                                               |
| 23.2   |   | Consent of KPMG LLP.                                                                                                                               |
|   |   |                                                                                                                                               |
| 23.3   |   | Consent of Lurie Besikof Lapidus & Company, LLP.                                                                                               |
|   |   |                                                                                                                                               |
| 99.1   |   | Certification  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith |

 

----

*       Indicatesa management contract or compensatory plan or arrangement required to be filedas an exhibit to this Form 10-K.

 

 

 

----