** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

**FORM 10-KSB**

 

| **ý** | **ANNUAL REPORT UNDER SECTION 13 OR 15(d)****OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                          |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                           |
|       | **For the fiscal  year ended June 30, 2002**                                                                                                                                                                                   |
|       |                                                                                                                                                                                                                           |
|       | **OR**                                                                                                                                                                                                                         |
|       |                                                                                                                                                                                                                           |
| **o**      | **TRANSITION REPORT UNDER 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 small business issuer in itscharter)

 

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

 

 

**13911 Ridgedale Drive, Suite 477, Minnetonka, Minnesota  55305**

(Address of principal executive office, includingzip code)

 

Issuer’s telephone number, including area code**:  (952)345-0480**

 

Securities registeredpursuant to Section 12(b) of the Act:  **None**

 

Name of Each Exchange onWhich Registered:  **None**

 

Securities registeredpursuant 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 no disclosure of delinquent filers in response to Item 405 ofRegulation S-B is contained in this form, and no disclosure will be contained,to the best of Company’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-KSB or anyamendment to this Form 10-KSB.  ý

 

StateIssuer’s revenues for its most recent fiscal year:  June 30, 2002 - $-0-

 

Statethe aggregate market value of the voting and non-voting common equity held bynon-affiliates computed by reference to the price at which the common equitywas sold, or the average bid and asked prices of such common equity, as of a specifieddate within the past 60 days:  $995,687.

 

State the number of shares outstanding of each of theissuer’s classes of common equity, as of the latest practicable date:  15,203,617 shares of Common Stockoutstanding on November 14, 2002.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

None

 

 

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**PART I**

 

**ITEM1.  DESCRIPTION OF BUSINESS**

 

**BusinessDevelopment**

 

VirtualFund.com, Inc., referred to as “VirtualFund,” “VFND,” “theCompany,” “Management,” “us,” “our,” and “we” in this Form 10-KSB, wasincorporated under the laws of Minnesota as Acquerre Corporation in April1988.  After various name changes, theCompany changed its name to VirtualFund.com, Inc. on April 3, 1998.

 

The Company formerly operated two business segments: the DigitalGraphics Business Unit (“DGBU”) and the Internet Services Business Unit(“ISBU”):

 

•                    The DGBU -comprised of ColorSpan Corporation, its subsidiaries and Kilborn PhotoProducts, Inc. - designed, manufactured, marketed and sold wide-format digitalcolor printers, print servers, color management software, inks andspecialty-coated media for graphic arts professionals.

 

•                    The ISBU,started in fiscal 1999, designed and developed technology solutions for theInternet-based B2B economy.  ISBUproducts and technologies targeted Small businesses, Middle-market companiesand Enterprise workgroups (“SME companies”). The ISBU was divided into two operating groups, the Venture ResourceGroup and the Commerce Environment Operating System.  Venture Resource Group included two subsidiaries wholly owned byVFND: (i) B2BXchange, Inc. (“B2BXchange”) (this subsidiary was formed in fiscalyear 2001 after the initial product debut in October 1999) and (ii) RSPNetwork,Inc. (“RSPNetwork”).  The ISBU alsoincluded short-lived activities related to Rymatics Software, LLC.

 

In June 2000, the Company sold the DGBU, the principal source of itsrevenue, to MacDermid Graphic Arts (“MacDermid”), a wholly owned subsidiary ofMacDermid Incorporated, for $45.8 million. Following the sale, Melvin Masters(“Masters”), who was at that time the Company’s CEO, told the Board of hisintent to use the proceeds from that sale to change the Company’s businessstrategy and build a business-to-business exchange (“B2BXchange”) capabilityfor small and medium-sized companies. Over the next six months, Masters attempted to implement this plan.  In December 2000, as a result of anevaluation of Masters’ business plan by respected independent consultants, theBoard decided in December 2000 to abandon the B2BXchange strategy.

 

On July 23, 2001, the Company became a party to an Asset PurchaseAgreement between RSPNetwork, Inc. (“RSPN”), the Company (as sole shareholderof RSPN), and RSP Acquisitions, LLC. Pursuant to the Asset Purchase Agreement, RSPN sold substantially all ofits 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 earnout formula.

 

**Business**

 

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

 

Prior to and afterremoval of Masters as Chairman of the Board and Chief Executive Officer at theSpecial Shareholders Meeting held on May 18, 2001, the Board was winding downthe Company’s operations.  After sale ofthe Company’s last operation, RSPNetwork, on July 23, 2001, the Company nolonger had any employees.   The Boardbegan focusing efforts on settling remaining employment contracts, negotiatingvendor disputes, and litigating multiple lawsuits resulting from therestructuring and downsizing.  See Item3 — Legal Proceedings.

 

 

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**Employees**

 

The Company has no employees, but has engaged a consultant to serve asinterim CEO and handle the Company’s finance, reporting and administrativefunctions. The Company is actively pursuing potential business acquisitions andother opportunities, and these activities are conducted under the direction ofthe Board of Directors, principally through its Chairman and Vice-Chairman.

 

 

**ITEM2.  DESCRIPTION OF PROPERTY**

 

The Company currentlyleases 300 square feet of office space in Minnetonka, Minnesota for a monthlybase rent of $495.  The lease can beterminated with 90 days written notice. The Company also leases, on a month-to-month basis, approximately 1,000square feet of climate-controlled space for record storage.  The monthly rent for this space is$500.  Because of the limited exposurewith respect to both premises, the Company has elected to self-insure againstlosses.

 

Prior to moving into the space in Minnetonka, we leased 7,420 squarefeet of office space in Eden Prairie, Minnesota.  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.

 

Wealso leased 6,435 square feet of warehouse space located at 6815-25 Shady OakRoad, Eden Prairie, Minnesota.  Thisproperty was subleased to MacDermid through September 30, 2001.  This lease, which calls for a base monthlyrent of $3,590, expires on March 31, 2003. Beginning October 2001, we subleased the property to a third party, underthe same terms and conditions as contained in the original lease.

 

Duringfiscal 2001, the leases for property in Santa Clara, California, San Jose,California, and Chicago, Illinois were terminated with no remaining obligationsto the Company.

 

OnJuly 23, 2001, our lease commitment in Cedar Falls, Iowa was assigned to theacquirer of the RSPNetwork business.

 

InMarch 2002, we resolved legal proceedings regarding the office and warehousespace we occupied until January 2001 in Eden Prairie and regarding premisespreviously leased by us in Montana.  SeeItem 3, Legal Proceedings.

 

 

**ITEM 3.  LEGALPROCEEDINGS**

 

**KittrellLitigation**

 

In August 2000,the Company 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 

 

 

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offsets,$2,708,073.  Under terms of a negotiated settlement, the Company paid Kittrell$2,137,547, transferred to him 400,000 shares of Muller Media, Inc. stock heldby the Company and having a book value of $60,188, and also transferred to himthe rights to future earnout payments (having no book value) due the Companyunder terms of the agreement selling the assets of RSPNetwork to RSPAcquisitions.

 

**RyanLitigation**

 

In September 2000, former Executive Vice President Thomas Ryan broughta lawsuit 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.  Ryan is pursuing an appeal.

 

**ManugisticsLitigation**

 

In November 2000, contrary to explicit instructions received from themajority of the Board of Directors, Masters signed — on behalf of the Company -a software licensing agreement with Manugistics, and initiated the wiretransfer of an initial payment in the amount of $2.5 million toManugistics.  The Company refused tohonor the contract, alleging that Manugistics was aware of Masters actingoutside of his powers and authorities when signing the contract and wiring themoney.  Manugistics commenced an actionagainst the Company in federal court in Maryland on December 5, 2000, allegingbreach of contract. The Company filed in early February 2001 its Answer andCounterclaims for Rescission and Declaratory Judgment that the alleged contractwas not valid. The Company requested on November 22, 2000 that the Court imposea constructive trust over the $2.5 million paid to Manugistics. It alleged thatManugistics was guilty of conversion and was unjustly enriched. It also soughta declaratory judgment that the contract was null and void, or that the Courtrescind the contract, ab initio.  Theparties settled the litigation on July 6, 2001 with Manugistics paying$1,300,000 back to the Company.  Theparties agreed to mutually and completely release each other from any furtherclaims.

 

**FeltlLitigation**

 

In November 2000, Masters and Grandchildren’s Realty AlternativeProgram I, L.P. (“GRAMPI”) attempted to convey to John E. Feltl certain realestate that subsequently became subject to litigation (see Montana Litigationbelow).  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 Global Settlement Agreementreached with Masters on March 11, 2002 (see below).

 

**MastersLitigation**

 

On December 1, 2000, Masters, purporting to act both individually andderivatively on behalf of the Company, filed an action in Minnesota state courtagainst 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 and violations of the Minnesota Business Corporation Act andrequested that the Court act to temporarily restrain the defendants from (i)selling shares of the Company or its subsidiaries, (ii) terminating or changingthe job description of any employee of the Company, (iii) selling assets of theCompany or its subsidiaries except in the ordinary course of business, (iv)materially changing any business relationship of the Company, (v) interferingwith Masters’ scheduling of a shareholders’ meeting to elect new directors orremove all directors with the exception of Masters and Steve Fisher, (vi)diminishing the 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 theCompany’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. 

 

 

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After the Company and the director defendants filed motions to dismissMasters’ complaint, Masters stipulated to the dismissal of his claims. TheCourt dismissed his derivative claims with prejudice on February 12, 2001 andany personal claims were dismissed without prejudice.  The Court entered a judgment against Masters regarding therepayment of personal loans; the Company agreed to release Masters from thisjudgment under terms of the Global Settlement Agreement dated March 11, 2002(see below).

 

**MontanaLitigation**

 

On December 18, 2000, the Company filed an action in Montana statecourt against Melvin Masters and two other entities affiliated with MelvinMasters. The Company asserted that Masters and/or Grandchildren’s RealtyAlternative Management Program I Limited Partnership (“GRAMPI”), a Minnesotalimited partnership controlled by Masters, purported to grant a securityinterest to the Company in Montana properties actually owned by anotherMaster’s affiliate, Masters Trust I. The Deed of Trust necessary to create thesecurity interest was never recorded. The complaint sought a declaration thatthe Company has a security interest in 3 parcels of real property owned by theMasters’ affiliate. This action was dropped under terms of the GlobalSettlement Agreement dated March 11, 2002 between the Company and Masters (seebelow).

 

**GRAMPILitigation**

 

On January 10, 2001, the Company and a wholly owned subsidiarycommenced an action in Hennepin County District Court in Minnesota againstMasters and GRAMPI. The action sought, among other things, to void thesubsidiary’s lease of space in a business complex owned by GRAMPI, on thegrounds that the lease was unfair, unreasonable, and unduly benefited Masters,in violation of Masters’ fiduciary duties to the Company and itssubsidiary.  The action also sought thereturn of any 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 and its subsidiaries. In March 2001,GRAMPI asserted a counterclaim against the Company for breach of the leasecontract.  The GRAMPI claims against theCompany exceeded $9 million, and Masters asserted a personal counterclaim atthat time for breach of an alleged employment contract with the Company.  Both the Company’s and Master’s actions werewithdrawn under terms of the Global Settlement Agreement 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 ofMasters Trust 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 all sharesof VirtualFund stock and all warrants owned or controlled by Masters, GRAMPI,Masters Trust I, TimeMasters, any parent, sibling, spouse (whether current orfuture), child, or grandchild.

 

**WiskusLitigation**

 

In January 2001, Michael S. Wiskus brought an actionagainst the Company in Hennepin County District Court for breach of contractand promissory estoppel related to unpaid expenses incurred for therefurbishment of an aircraft, and early termination of a sponsorship agreement.This action was dropped by Wiskus on May 1, 2002, with the Company agreeing topay Wiskus $95,000 in exchange for his release of all present and future claimsagainst VirtualFund.com, Inc.

 

 

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**MetiomLitigation**

 

In  February 2001, the Companycommenced an action in the United States District Court for the District ofMinnesota against Metiom, Inc. (“Metiom”) seeking a declaratory judgment thatMetiom breached a September 29, 2000 Software Licensing Agreement by failing totimely deliver “ConnectTrade” software to it.  A few days later, Metiom filed a suit against VirtualFund in theUnited States Bankruptcy Court for the Southern District of New York, allegingthat VirtualFund breached the September 29, 2000 Software Licensing Agreementand seeking $1,250,000, plus interest at 1% per month. In April 2002, the NewYork bankruptcy court denied Metiom’s motion for summary judgment. Prior tothat, the Minnesota court denied Metiom’s claim of jurisdiction in NewYork.  The discovery period ended onApril 30, 2002 although a motion was pending on VirtualFund’s request for morediscovery.  In July 2002, VirtualFundand Metiom reached a negotiated settlement. Under terms of the confidential Settlement Agreement and GeneralRelease, the Company agreed to pay $365,000, and entered into a mutual releaseof all actions, causes of action, individual or class action claims or demandsof any kind.

 

**Thurn etal. Litigation**

 

In February 2001, the Company commenced an action in Hennepin CountyDistrict Court against Timothy N. Thurn, Nancy Masters Sawyer, and Danny J.Vatland. The Company sought money damages against the defendants for breachesof their employment agreements and/or their fiduciary duties. Moreover,VirtualFund sought to have the Court declare that the defendants breached theirrespective employment agreements and were therefore not entitled to any furthercompensation or benefits under those agreements and that these agreements arerescinded. The Company claimed that Defendant Thurn violated his contractualand/or fiduciary duties as Chief Financial Officer and/or Treasurer of theCompany, one of the violations being the transfer of $2.5 million toManugistics on November 21, 2000, even though he was aware or should have beenaware that the Company’s Board had restricted Masters’ authority to enter intothe transaction with Manugistics. Defendant Masters Sawyer was claimed to havebreached her duties as former Secretary/Assistant Treasurer and most recentlyas Vice-President of Operations, amongst others, by receiving excessiveunapproved compensation, failing to disclose contracts and transactions thatwere contrary to the Company’s interest, and failing to perform the tasks andduties of her position due to excessive, unexplained absenteeism. The Companyclaimed that Defendant Vatland as Vice President of Advanced TechnologyDevelopment and/or Chief Technology Officer breached his duties because hefailed to disclose and furthered contracts and transactions by corporateofficers and/or directors that were contrary to the Company’s interest, andbecause he furthered the use of corporate funds and/or assets which were not infurtherance of the Company’s interest and were not authorized or incontravention of directives issued or restrictions placed by VirtualFund’sBoard. All defendants denied the Company’s claims and raised variouscounterclaims, including counterclaims for severance payments, breach ofcontract and violation of the Workers Adjustment Retraining Notification Act.Messrs. Vatland and Thurn claimed to be entitled to 12 months severance pay andMs. Masters Sawyer claimed to be entitled to 36 months of severance pay. Mr.Vatland further contended that he was entitled to $75,000 per year of paycovering a period of time after he voluntarily had his base compensation reducedfrom $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 Messrs. Vatland, Thurn, and Ms. MastersSawyer, respectively, the parties mutually released each other from any furtherclaims and agreed to execute a stipulation for dismissal with prejudice.

 

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

 

Therewere no matters presented to the Company’s shareholders during the fourthquarter of the fiscal year ended June 30, 2002.

 

 

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**PART II**

 

**ITEM 5.  MARKET FOR COMMON EQUITY AND RELATEDSTOCKHOLDER MATTERS**

 

**Market Information**

 

The Company’s Common Stock was listed on the Nasdaq National Marketunder the symbol “VFND” until August 16, 2001, when the stock was delisted fromthe Nasdaq National Market for failure to maintain the minimum value of publicfloat and minimum bid price required by Nasdaq for continued listing.  Subsequently, VirtualFund’s Common Stock wastraded on the Over the Counter Bulletin Board (OTCBB) under the symbol“VFND.”  Effective with the opening ofbusiness on November 20, 2001, the stock was deleted from the OTCBB for failureto make filings with the SEC as required under the Securities Exchange Act of1934 within a thirty-day grace period. The Company’s stock is now traded on the local over the countermarket.  The following table providesthe high and low sales prices for the quarters indicated, as reported byCommodity Systems, Inc.® accessed through YaHooFinance,® and reflectinterdealer prices without retail mark-up, mark-down or commission and may notrepresent actual transactions.

 

| **Fiscal  Year Ended June 30,** |   | **2002** |   | **2001** |   |
|---------------------------------|--------|----------|--------|----------|--------|
|                            |   | **High** |   | **Low**  |   | **High** |   | **Low** |   |
| First quarter                   |   | $        | 0.20   |     | $      | 0.04 |   | $ | 2.91 |   | $ | 1.78 |   |
| Second quarter                  |   | 0.15     |   | 0.05     |   | 2.91 |   | 0.50 |   |
| Third quarter                   |   | 0.14     |   | 0.03     |   | 0.25 |   | 0.12 |   |
| Fourth quarter                  |   | 0.10     |   | 0.02     |   | 0.39 |   | 0.09 |   |
|                                 |        |          |        |          |        |  |  |  |  |  |  |  |  |

 

OnNovember 14, 2002 the highest bid price of the Common Stock was $0.07 pershare.

 

**Holders**

 

As of November 14, 2002 there were 262 shareholders of record of theCompany’s Common Stock (exclusive of owners of shares held in street name).

 

**Dividends**

 

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

 

**ITEM 6.  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLANOF OPERATION**

 

Foran understanding of significant factors that influenced the Company’sperformance during the past two years, the following discussion should be readin conjunction with the financial statements and the other informationappearing elsewhere in this report.

 

**OVERVIEW**

 

The Company received$45.8 million from the sale of the Digital Graphics Business Unit (“DGBU”) inJune 2000, and had $39.5 million in cash 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 Internet Services BusinessUnit (“ISBU”) a new operating division in the business-to-business electronic 

 

 

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commerce market.  The development of this market requiredsubstantial cash which was taken from the proceeds from the sale of DGBU.

 

While former managementbelieved the DGBU sale proceeds would be sufficient to meet working capitalrequirements for the foreseeable future, it became clear to the Board ofDirectors 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 initially suspendedfrom his officer duties and then terminated as an officer of the Company andremoved as a member of all Board committees by actions of the majority of themembers of the Board.  Masters wasremoved from the Board by vote of the Company’s shareholders at a specialmeeting in May 2001.

 

With the sale ofRSPNetwork in July 2001, the Company exited the ISBU segment and discontinuedISBU operations.  Under GenerallyAccepted Accounting Principles (GAAP), the Company financial statements for allperiods presented reflect ISBU activity in discontinued operations.

 

The Company is currentlynot operating any business, is in the process of resolving outstandingdisputes, and is actively pursuing options regarding the utilization ordistribution of its residual assets.

 

**YearEnded June 30, 2001 Compared to June 30, 2002**

 

*Effectof Discontinuing the Company’s Operations.*

 

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

 

*Generaland Administrative Expenses.*

 

The general and administrativeexpenses of the Company amounted to $2,543,000 and $5,702,000 in fiscal years2002 and 2001, respectively.  The lowergeneral and administrative expenses incurred in fiscal 2002 reflect the reducedactivity level after completion of the restructuring in fiscal year 2001, andsale of the last operating unit in July of 2001.  The general and administrative expenses for fiscal 2001 reflectthe continued expansion of the Company during the first six months of thefiscal year, just prior to the restructuring, in addition to legal and othercosts related to the (i) litigation commenced by and against the Company, (ii)Special Meeting held in May 2001, and (iii) sale of the Company’s operatingbusiness.

 

*Non-Recurringand Restructuring Charges.*

 

For fiscal 2002,restructuring charges reflect a credit of $101,000 primarily from the reversalof an accrual for previously expensed future lease payments on propertysubleased to a third party in the second quarter of fiscal 2002. For fiscal2001, the Company’s statement of operations includes non-recurring andrestructuring charges totaling $13.1 million of which $7.8 million relates tocontinuing operations.  The totalcharges 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.

 

*InterestIncome.*

 

Interest income amountedto $210,000 and $1,234,000 for fiscal 2002 and 2001, respectively.  The decrease in interest income results froma lower invested cash balance after using cash to fund operating losses andcosts related to restructuring in 2001.

 

 

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*OtherIncome.*

 

The $493,000 in OtherIncome during fiscal 2002 is the gain realized on the sale of securities heldfor investment of $447,000 plus miscellaneous other items of $46,000, resultingprimarily from adjustment to accrued expenses at June 30, 2002 to moreaccurately reflect expense levels.

 

*IncomeTax Provision (Benefit).*

 

On June 30, 2002, the netcarrying 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 $11.0 million. The Companyhad net operating loss carryforwards for federal tax purposes of approximately$23.5 million which were available to offset future taxable income. The Companyalso had alternative minimum tax credit carryforwards of approximately $225,000available to reduce future federal income taxes, if any, over an indefiniteperiod and research credit carryforwards of approximately $872,000 available toreduce future federal income tax, if any, through 2005.

 

On June 30, 2001, the netcarrying 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. The Companyhad net operating loss carryforwards for federal tax purposes of approximately$20.9 million, which were available to offset future taxable income and thegain from the sale of the DGBU. The Company also had alternative minimum taxcredit carryforwards of approximately $225,000 available to reduce futurefederal income taxes, if any, over an indefinite period and research creditcarryforwards of approximately $872,000 available to reduce future federalincome tax, if any, through 2005.

 

*Income (Loss) from Discontinued Operations.*

 

In fiscal 2002, there was income from discontinued operations of$1,419,000, resulting from adjustments made to sales tax liabilities, productwarranty, and contingent lawsuit payments that never materialized during theyear.  In fiscal 2001, the net loss fromdiscontinued operations was $11,191,000, caused by expenses related torestructuring combined with expenses for personnel, marketing and productdevelopment for RSPN and B2BXchange, the ISBU divisions.

 

*Loss on Sale of Subsidiary.*

 

There was no gain or loss on sale of discontinued operations in fiscal2002.  The sale of the RSPN division ofthe ISBU resulted in a loss of $588,000 in fiscal 2001.

 

**RecentAccounting Pronouncements.**

 

In June 2001, the Financial Accounting Standards Board (FASB) issuedStatement of Accounting Standards (SFAS) No. 141 “Business Combinations.”  SFAS No. 141 eliminates thepooling-of-interests method of accounting for business combinations except forqualifying business combinations that were initiated prior to July 1,2001.  In addition, SFAS No. 141 furtherclarifies the criteria to recognize intangible assets separately fromgoodwill.  The requirements of SFAS No. 141are effective 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 FASB adopted SFAS No. 142 “Goodwill and OtherIntangible Assets.”  SFAS No. 142discontinues the amortization of recorded goodwill for fiscal years beginningafter December 15, 2001.  The Companybelieves the adoption of SFAS No. 142 will not have a material effect on theCompany’s consolidated financial position or results of operations.

 

In June 2001, the FASB issued SFAS No. 143 “Accounting for AssetRetirement Obligations.”  SFAS No. 143addresses accounting for obligations associated with long-lived assetretirements and is effective for fiscal years 

 

 

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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 theImpairment or Disposal of Long-Lived Assets.” SFAS No. 144 supersedes SFAS No. 121. SFAS 144 primarily addresses significant issues relating to theimplementation of SFAS 121 and develops a single accounting model forlong-lived assets to be disposed of, whether primarily held, used or newlyacquired.  The provisions of SFAS 144will be effective for fiscal years beginning after December 15, 2001.  The provisions of SFAS No. 144 generally areto be applied prospectively.  TheCompany believes the adoption of SFAS No. 144 will not have a material effecton the Company’s consolidated financial position or results of operations.

 

**Liquidityand Capital Resources.**

 

As of June 30, 2002, the Company had cash and cash equivalents of$2,487,000 and $1,186,000 in short-term marketable securities.  Outstanding receivables and prepaid expensestotal $1,651,000.  Of this amount,approximately $1.2 million is a refundable legal retainer fee, and $198,000 isshort term notes receivable.  Afterresolving a legal dispute subsequent to its June 30, 2002 fiscal year end (seeabove, Item 3, Legal Proceedings), the Company believes it has settled allknown material legal claims against it. Current liabilities of the Company at June 30, 2002 amounted to$1,769,000, which includes liabilities from litigation costs and claimssubsequently settled and disbursed. Under agreements with two directors of the Company, Messrs. Adams andDuoos, which expire in July 2004, the Company is also obligated to make monthlypayments of $21,667 and $12,500, respectively, to them for consulting services.The remaining aggregate commitment under these agreements at June 30, 2002 isapproximately $820,000 (see below, Item 10, Executive Compensation,Compensation of Directors).  Currentmanagement of the Company is not aware of any additional future liabilities ofthe Company resulting from prior events. Management therefore expects that the Company’s cash and cashequivalents will be sufficient to meet its known actual and potentialliabilities.

 

**CAUTIONARYSTATEMENTS**

 

Certain statements contained in this Form 10-KSB and other writtenand oral statements made from time to time by us may not relate strictly tohistorical or current facts. As such, they are considered “forward-lookingstatements” 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 wordsor expressions. One must carefully consider forward-looking statements andunderstand 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 statementcan be guaranteed and actual results may vary materially. We undertake noobligation to update any forward-looking statement, but investors are advisedto consult any further disclosures by us on this subject in our filings withthe 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 importantfactors that could cause actual results to differ from expected or historicresults. We note these factors as permitted by the Private SecuritiesLitigation Reform Act of 1995. It is not possible to foresee or identify allsuch factors. As such, investors should not consider any list of such factorsto be an exhaustive statement of all risks, uncertainties or potentiallyinaccurate assumptions.

 

**LegalProceedings.**

 

Legal proceedings involving the Company are significant to theCompany’s financial position.  Thefinancial statements include accrued amounts sufficient to adequately reflectpayments required under terms of the various settlements and related legalexpenses incurred subsequent to June 30, 2002. The Company is unaware of any material existing or potential futurelegal proceedings for which additional amounts would need to be accrued.

 

 

10

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**BusinessAcquisition Opportunities.**

 

The Company is currently not operating any revenue-generatingbusiness.  However, the Companycontinues to incur general and administrative expenses, principally forcompensation of its directors, insurance, and accounting and 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 7.  CONSOLIDATED FINANCIAL STATEMENTS**

 

See Consolidated Financial Statements attached.

 

**ITEM 8.  CHANGES INAND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

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

 

KPMG LLP reported on the financial statements of theCompany for the fiscal year ended June 30, 2000.  Such report contained neither an adverse opinion nor a disclaimerof opinion, nor was qualified or modified as to uncertainty, audit scope, oraccounting principles.

 

EffectiveJuly 16, 2001, Lurie Besikof Lapidus & Company, LLP (LBLCO) was engaged asthe Company’s independent accounting firm. The decision to engage LBLCO as the Company’s accountants wasrecommended by the Company’s Audit Committee and approved by the Company’sBoard of Directors effective July 16, 2001.

 

During the Company’s 2000 fiscal year and the interimperiod through June 5, 2001, there were no disagreements with KPMG LLP, whetheror not resolved, on any matter of accounting principles or practices, financialstatement disclosure, or auditing scope or procedure, which, if not resolved tothe satisfaction of KPMG LLP, would have caused it to make reference to thesubject matter of the disagreement(s) in connection with its report.

 

Duringthe Company’s two  fiscal years endedJune 30, 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.

 

 

11

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**PART III**

 

**ITEM 9.  DIRECTORS,EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION16(A) OF THE EXCHANGE ACT.**

 

**Identificationof Directors and Executive Officers**

 

The following table sets forth the names of all currentdirectors and executive officers of the Company, and of any person who servedas Chief Executive Officer of the Company during the last fiscal year.

 
| **Name**                                                                 |   | **Age** |   | **Positions Held**                   |   | **Date of****Designation** |   | **Date of  Termination** |
|--------------------------------------------------------------------------|--------|---------|--------|--------------------------------------|--------|----------------------------|--------|--------------------------|
|                                                                     |   |    |   |                                 |   |                       |   |                     |
| Timothy  R. Duoos  PO Box 2181  Rancho Sante Fe, CA 92067                |   | 46      |   | Director  Chairman of the Board      |   | 1999  2000                 |   | *  *                     |
|                                                                     |   |    |   |                                 |   |                       |   |                     |
| Edward  S. Adams  701 Xenia Avenue  Golden Valley, MN  55416        |   | 39      |   | Director  Vice-Chairman of the Board |   | 1999  2000                 |   | *  *                     |
|                                                                     |   |    |   |                                 |   |                       |   |                     |
| John  Cavanaugh  5355 Avenida Encinas, Ste 110  Carlsbad, CA  92008 |   | 44      |   | Director                             |   | 1999                       |   | *                        |
|                                                                     |   |    |   |                                 |   |                       |   |                     |
| Stephen  J. Fisher  13911 Ridgedale Drive Ste 477  Minnetonka, MN 55305  |   | 45      |   | Director                             |   | 1999                       |   | *                        |
|                                                                     |   |    |   |                                 |   |                       |   |                     |
| Edward  M. Graca  3800 West 80th Street, Ste 190  Bloomington, MN 55431  |   | 55      |   | Director                             |   | 2002                       |   | *                        |
|                                                                     |   |    |   |                                 |   |                       |   |                     |
| Joseph  D. Pupel  13911 Ridgedale Drive Ste 477  Minnetonka, MN 55305    |   | 36      |   | Interim CEO                          |   | 2001                       |   | *                        |
|                                                                     |   |    |   |                                 |   |                       |   |                     |
| Monte  Johnson  13911 Ridgedale Drive Ste 477  Minnetonka, MN 55305      |   | 43      |   | Acting CEO                           |   | 2001                       |   | October 13,  2001        |

 

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*         Currently holding position indicated

 

**BusinessExperience.**

 

EdwardS. Adams has been a Professor of Law at the University of Minnesota School ofLaw since 1992 and is Co-Director for the Kommerstad Center for Business Lawand Entrepreneurship at the University of Minnesota School of Law.  Mr. Adams has also been a principal inEquity Securities Investments, Inc. in Golden Valley, Minnesota since 1995.

 

Timothy R. Duoos was President and Chief Executive Officer of LyndaleGarden Center, Inc. in Minneapolis from October 31, 1986 until 2000.  Mr. Duoos also held a part-time position asChairman 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 

 

 

12

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Sunbelt from May 1998 to December 1998.  Sunbelt filed a voluntary petition under the U.S. Bankruptcy Codein May 1998.  Mr. Duoos served as aDirector of Pinnacle Financial, Inc., a privately held company from June 1996through June 1997.  Mr. Duoos iscurrently self-employed.

 

John Cavanaugh served as Chief Executive Officer of GatewayTelecommunications Inc. from 1990 to 2000. Gateway was acquired by United Asset Coverage Inc. (“UAC”) in October2000.  Mr. Cavanaugh currently holds theposition of Senior Vice President Equipment Division with UAC, the nation’sleading maintenance provider for Avaya and Nortel Telecommunications with 50offices located throughout the United States.

 

Stephen Fisher is President of TEAMTechnologies, formerly a wholly owned subsidiary (RSPNetwork) of theCompany.  Mr. Fisher has heldthis position since July 2001 when RSPN was purchased from the Company.  TEAM Technologies is a systems integratorspecializing in Internet hosting, integration, and support services.  From 1992 to 1998, Mr. Fisher was Presidentand CEO of TEAM Technologies prior to its acquisition by VirtualFund.

 

Edward M. Graca has beenthe owner and President of Marquest Financial, Inc. since founding the companyin 1994.  Mr. Graca has been involved inthe mortgage banking business since 1971, serving as the Start-up Manager forTemple Inland Mortgage from 1993-1994 and as Regional Manager for CentrustMortgage from 1985-1992.  Mr. Gracaholds a Bachelor of Arts degree from the University of Minnesota.

 

Joseph D. Pupel is Interim CEO, assuming the position with theresignation of Monte Johnson in October of 2001.  Mr. Pupel was the CFO of Microgistics, Inc. from 1995 to 1999,after which he founded and became CEO of Financial Drivers, Ltd, a financialand marketing consulting company in Minnetonka, Minnesota.  Mr. Pupel is a CPA, and earned his BBA andMasters Degree from the University of Notre Dame.

 

Monte S. Johnson was named Chief Executive Officer and performed theduties of the Chief Financial Officer of the Company from May 2001 to October2001 when he resigned.  Mr. Johnson, anMBA and CPA, was the Chief Financial Officer and Senior Vice President of ProStaff Personnel Services prior to joining the Company. Previously he served asDirector of Business Development and Mergers & Acquisitions at Honeywell,Inc. Prior to that, Mr. Johnson was a Senior Manager at Deloitte & ToucheInternational.

 

**Family Relationships.**

 

There are no family relationships between anydirectors or executive officers of the Company either by blood or marriage.

 

**Section16(a) Beneficial Ownership Reporting Compliance**

 

Under federal securities laws, the Company’s directors and officers,and any beneficial owner of more than 10 percent of a class of equitysecurities of the Company, are required to reports on Forms 3, 4 and 5 withrespect to their ownership of the Company’s equity securities and any changesin such ownership to the Securities and Exchange Commission (the “Commission”)and the securities exchange on which the equity securities are registered.Specific due dates for these reports have been established by the Commission,and the Company is required to disclose in its Form 10-KSB any delinquentfiling of such reports and any failure to file such reports.

 

Based solely on its review of the copies of such forms received by it,or written representations from certain reporting persons, the Company believesthat, during the fiscal year ended June 30, 2002, all Section 16(a) filingrequirements applicable to its officers, directors and 10% stockholders were timelymet.

 

 

13

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**ITEM 10.  EXECUTIVE COMPENSATION**

 

**Summary Compensation Table**

 

The following table sets forth the aggregate compensation paid or to bepaid by the Company for services rendered during the periods indicated.  As of the end of fiscal year 2002, JosephPupel was the only executive officer of the Company, in the capacity of InterimChief Executive Officer. The table includes compensation paid to the Company’sChairman and Vice-Chairman of the Board in fiscal 2002, to whom payments weremade in their capacity as consultants.

 
|                                                    |   |             |    |                     |    |          |   |          |   | **Long Term  Compensation**        |    |                                     |   |
|---------------------------------------------------------|--------|------------------|---------|--------------------------|---------|---------------|--------|---------------|--------|------------------------------------|---------|------------------------------------------|--------|
|                                                    |   |             |    | **Annual  Compensation** |    | **Awards**    |   | **Payouts**   |   |                               |    |
| **Name and Principal Position**                         |   | **Fiscal  Year** |    | **Salary ($)**           |    | **Bonus ($)** |   | **Other ($)** |   | **Restricted  Stock  Awards  ($)** |    | **Securities  Underlying  Options  (#)** |   | **LTIP  Payouts  ($)** |   | **All Other  Compen-  sation ($)** |   |
| Monte S. Johnson  Former Acting CEO                     |   | 2002             |    | $                        | 71,202  | (1)           | $      | —        |   | $                                  | —  |                                     | $      | — |   | — |   | $ | — |   | $ | — |   |
|                                                    | 2001   |             | 70,562  |                     | —  |          | — |          | — |                               | —  |                                     | — |   | — |   |
|                                                    | 2000   |             | —  |                     | —  |          | — |          | — |                               | —  |                                     | — |   | — |   |
|                                                    |   |             |    |                     |    |          |   |          |   |                               |    |                                     |   |   |   |   |   |
| Joseph D. Pupel  Interim CEO                            |   | 2002             |    | $                        | 106,926 | (2)           | $      | —        |   | $                                  | —  |                                     | $      | — |   | — |   | $ | — |   | $ | 16,158 | (3) |
|                                                    | 2001   |             | —  |                     | —  |          | — |          | — |                               | —  |                                     | — |   | — |   |
|                                                    | 2000   |             | —  |                     | —  |          | — |          | — |                               | —  |                                     | — |   | — |   |
|                                                    |   |             |    |                     |    |          |   |          |   |                               |    |                                     |   |   |   |   |   |
| Edward S. Adams  Vice-Chairman of the Board, Consultant |   | 2002             |    | $                        | 216,000 | (4)           | $      | —        |   | $                                  | —  |                                     | $      | — |   | — |   | $ | — |   | $ | — |   |
|                                                    | 2001   |             | 136,000 |                     | —  |          | — |          | — |                               | 250,000 |                                     | — |   | — |   |
|                                                    | 2000   |             | 30,000  |                     | —  |          | — |          | — |                               | 100,000 |                                     | — |   | — |   |
|                                                    |   |             |    |                     |    |          |   |          |   |                               |    |                                     |   |   |   |   |   |
| Timothy Duoos,  Chairman of the Board, Consultant       |   | 2002             |    | $                        | 296,003 | (5)           | $      | —        |   | $                                  | —  |                                     | $      | — |   | — |   | $ | — |   | $ | 202,527 | (6) |
|                                                    | 2001   |             | 136,000 |                     | —  |          | — |          | — |                               | 250,000 |                                     | — |   | — |   |
|                                                    | 2000   |             | 33,000  |                     | —  |          | — |          | — |                               | 100,000 |                                     | — |   | — |   |

 

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(1)       Paid pursuantto Consulting Agreement between Company and Monte S. Johnson, effective as ofMay 1, 2001 (see below, EmploymentContracts and Termination of Employment and Change-in-Control Arrangements).

(2)       Payments madepursuant to a Consulting Agreement between Company and Financial Drivers, LTDeffective October 8, 2001, for the CEO services of Joseph Pupel.

(3)       Payments madepursuant to a Consulting Agreement between Company and Financial Drivers, LTDeffective August 15, 2001, for accounting services provided by Joseph Pupel.

(4)       Reflectspayments to Edward Adams pursuant to a consulting agreement dated July 1, 2001and approved by the Company’s Board of Directors.  Includes director’s fees of $36,000 (see below, Compensation ofDirectors).

(5)       Reflectspayments to Timothy Duoos pursuant to a consulting agreement dated July 1, 2001and approved by the Company’s Board of Directors.  Includes director’s fees of $36,000 (see below, Compensation ofDirectors).

(6)       Payments toDuoos during fiscal year 2002 for reimbursement of moving expenses.

 

**Options/SAR Grants in Last Fiscal Year.**

 

No options were granted or issued during the 2002 fiscal year.  The Company maintains two stock option planspursuant to which executive officers, other employees and certain non-employeesproviding services to the Company are able to receive options to purchase theCompany’s common stock.  These plans arethe 1990 Restated Stock Option Plan (as amended May 19, 1991) and the 1996Stock Incentive Plan.  Options can nolonger be granted under the 1990 Restated Stock Option Plan.

 

 

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**Report onRepricing of Options/SARs.**

 

On July 10, 2001 the Board repriced the following options previouslyissued to two directors who are also acting as consultants to the Company.  The new price was based on the currentmarket value of the Company’s stock on the date repriced:

 
| **Name**        |   | **Issue  Date**     |   | **Shares  Issued** |   | **“When  Issued”  Price** |   | **Reissue  Price** |   | **Reissue  Date** |   |
|-----------------|--------|---------------------|--------|--------------------|--------|-------------------------------------|--------|--------------------|--------|-------------------|--------|
| Edward S. Adams |   | September  10, 1999 |   | 100,000            |   | $                                   | 1.65   |               | $      | .15               |   | July  10, 2001 |   |
| Edward S. Adams |   | June  1, 2001       |   | 250,000            |   | $                                   | .16    |               | $      | .15               |   | July  10, 2001 |   |
| Timothy Duoos   |   | August  23, 1999    |   | 100,000            |   | $                                   | 2.00   |               | $      | .15               |   | July  10, 2001 |   |
| Timothy Duoos   |   | June  1, 2001       |   | 250,000            |   | $                                   | .16    |               | $      | .15               |   | July  10, 2001 |   |

 

**AggregatedOption Exercises and Fiscal Year-End Option Value Table.**

 

The following table provides information with respect to stock optionsexercised by the persons named in the Executive Compensation Table during thefiscal year ended June 30, 2002, and unexercised options or warrants held as ofJune 30, 2002.  No stock appreciationrights were exercised in the year ended June 30, 2002 or outstanding at June30, 2002.

 
| **Name**                        |   | **Shares  Acquired  On  Exercise  (#)** |            | **Value  Realized  ($)** |              | **Number of  Securities  Underlying Unexercised  Options at  Fiscal Year-End (#)** |            | **Value of  Unexercised  In-the-Money  Options at  Fiscal Year-End ($) (1)** |              |
|---------------------------------|--------|-----------------------------------------|-----------------|--------------------------|-------------------|------------------------------------------------------------------------------------|-----------------|------------------------------------------------------------------------------|-------------------|
|                            |   |                                    | **Exercisable** |                     | **Unexercisable** |                                                                               | **Exercisable** |                                                                         | **Unexercisable** |   |
| Edward S. Adams,  Vice-Chairman |   | —                                  |            | —                   |              | 300,000                                                                            |            | 50,000                                                                       |              | — |   | — |   |
| Timothy Duoos,  Chairman        |   | —                                  |            | —                   |              | 300,000                                                                            |            | 50,000                                                                       |              | — |   | — |   |

 

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(1)                    AtJune 30, 2002, all options held by the persons named above were out of themoney.

 

**Compensation ofDirectors**

 

*StandardArrangements*

 

Standard arrangements pursuant to which directors are compensatedinclude payment of a $3,000 per month fee plus reimbursement for travel andrelated expenses incurred while performing company business.  No additional standard payments are payableto the Company’s directors for committee participation.

 

*OtherArrangements*

 

In connection with their initial appointment to the Board of Directorsand pursuant to letters from the Company dated August 23, 1999 and September10, 1999, respectively, Messrs. Duoos and Adams were granted options topurchase 100,000 shares of Company’s common stock at $2.00 and $1.65 per share,respectively, which vest at a rate of 25,000 shares per year.  In July 2001, the Board of Directorsrepriced the options to $.15 per share.

 

 

15

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For services performed in connection with the reorganization of theCompany after the termination of the former Chief Executive Officer andPresident, Mr. Masters, Messrs. Adams and Duoos each received a payment of$100,000 in June 2001.  For servicesperformed in connection with the review of merger and acquisitionpossibilities, Mr. Cavanaugh received at the same time a payment of$30,000.  Simultaneously, the Companygranted to each of Messrs. Adams and Duoos immediately exercisable 5-yearoptions to purchase 250,000 shares of the Company’s common stock exercisable at$.16 per share. These options were repriced to $.15 per share in July2001.  In June 2001, Mr. Cavanaughreceived immediately exercisable 5-year options to purchase 50,000 shares ofthe Company’s common stock at $.16 per share.

 

The Board of Directors decided on July 10, 2001 to grant to each ofMessrs. Adams, Cavanaugh, Duoos and Johnson on each future anniversary date ofthe Board action non-qualified 5-year options to purchase 100,000 shares of theCompany’s common stock at a price of $.15 per share.  The options were granted in fiscal year 2003  together with a similar option for Mr.Fisher, at a price of $.05 per share. Such options were granted outside of the Company’s Stock Option Plan.

 

In connection with their service on the Special Acquisition/InvestmentCommittee, Messrs. Adams and Duoos each entered into agreements with theCompany dated July 1, 2001.  Under theterms of the agreements, they are obligated to find business opportunities,investments, and/or transactions to enhance shareholder value by performing thefollowing consulting services: contact investment bankers and brokers toidentify and effectuate transactions, conduct and oversee the due diligencerequired to analyze transaction options, review and analyze proposals fortransactions, present details to the Board of Directors for consideration,negotiate the structure, parameters and valuation with respect to anytransaction, coordinate all necessary legal, accounting or other necessaryprofessional assistance to successfully consummate transactions, and negotiatewith any lending or financial institutions, if necessary, to consummatetransactions.  Under their respectiveagreements, Messrs. Duoos and Adams receive monthly base compensation in theamount of $21,667 and $12,500, respectively. On each anniversary date of the agreements, the Company will grant toeach of them options under the Company’s Stock Option Plan to purchase 100,000shares of the Company’s common stock at $.15 per share.  Moreover, Messrs. Duoos and Adams areeligible to participate in any bonus or performance based incentivecompensation plans which may be established by or provided for the Board ofDirectors.  Any reasonable and necessaryout-of-pocket expenses incurred by Messrs. Duoos and Adams in connection withtheir services under the agreements will be reimbursed by the Company.  The agreements shall expire on July 1, 2004,unless terminated earlier upon death or disability or with or without cause.  If an agreement is terminated by reason ofdeath or disability, payments under the agreements are made through the date oftermination.  If an agreement isterminated by the Company without cause or with cause by Messrs. Duoos orAdams, respectively, payment of the base compensation is continued as severancepayment until the end of the term of the agreement.  Upon termination of an agreement for cause by the Company orwithout cause by Messrs. Duoos or Adams, respectively, payments will only bemade through the date of termination.

 

In August 2001, the Board of Directors approved the reimbursement ofrelocation expenses to Mr. Duoos.  TheCompany reimbursed Mr. Duoos expenses in the amount of $202,527.

 

In August 2001 Mr. Adams received a one-time special consulting fee inthe amount of $30,000 for services provided to the Company outside of theagreement for his work on the Special Acquisition/Investment Committee.

 

In August 2001 the Company entered into a Consulting Agreement withFinancial Drivers, LTD, controlled by Joseph D. Pupel.  Under terms of the agreement, Mr. Pupel isto provide financial services to the Company. In October of 2001, Mr. Pupel was designated Interim Chief ExecutiveOfficer, replacing Monte Johnson, and is paid $100 per hour for his services.  For the fiscal year ended June 30, 2002, theCompany paid Financial Drivers, LTD $123,084 for Mr. Pupel's services and$75,634 for financial services provided by other employees of FinancialDrivers, LTD. The agreement may be terminated by Financial Drivers, LTD upon 10days written notice and by the Company upon 10 days written notice if allamounts due Financial Drivers, LTD have been paid in full.

 

 

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**Employment Contracts and Termination of Employment andChange-in-Control Arrangements**

 

On July 1, 2001 the Company entered into Consulting Agreements withMessrs Adams and Duoos for their services related to locating businessopportunities.  See “Compensation ofDirectors.”  If terminated by theCompany without cause or with cause by Messrs. Duoos or Adams, respectively,payment of the base compensation is continued as severance payment until theend of the term of the agreement.

 

The Company entered into a Consulting Agreement with MSJ &Associates, LLC (“Consultant”), which is controlled by its principal, MonteJohnson, effective May 1, 2001.  Underthe Consulting Agreement, Mr. Johnson was designated as Acting Chief ExecutiveOfficer of the Company and had the powers and authorities, as well as theduties and obligations, inherent in such office.  The Company paid Mr. Johnson $175 per hour for services providedunder the Consulting Agreement.  Uponexecution of the Agreement, the Company deposited with Consultant the amount of$15,000 to be held as deposit by Consultant until the termination of theAgreement.  The Agreement was enteredinto for an indefinite term and could be terminated by either party upon fivedays written notice.  Consultantterminated the Agreement in October 2001.

 

 

**ITEM 11.  SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS**

 

**SecuritiesAuthorized for Issuance under Equity Compensation Plans**

 

The following table sets forth information as of June 30, 2002, withrespect to common stock issuable under the Company’s compensation plans andarrangements.

 
| **Plan  Category**                                              |   | **Number of  securities to be issued upon exercise of outstanding options, warrants and  rights** |   | **Weighted-average  exercise price of outstanding options, warrants and rights** |   | **Number of  securities remaining available for future issuance under equity compensation  plans (excluding securities reflected in column (a))** |      |
|-----------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|-----------|
|                                                            |   | **(a)**                                                                                           |   | **(b)**                                                                          |   | **(c)**                                                                                                                                           |      |
| Equity compensation plans approved by security  holders:        |   | 460,000                                                                                           |   | $                                                                                | .33    |                                                                                                                                              | 4,540,000 |   |
|                                                            |   |                                                                                              |   |                                                                             |   |                                                                                                                                              |      |
| Equity compensation plans not approved by security  holders(1): |   | 550,000                                                                                           |   | $                                                                                | .15    |                                                                                                                                              | 1,200,000 |   |
|                                                            |   |                                                                                              |   |                                                                             |   |                                                                                                                                              |      |
| Total                                                           |   | 1,010,000                                                                                         |   | $                                                                                | .23    |                                                                                                                                              | 5,740,000 |   |

 

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(1)       SeeItem 10: “Executive Compensation — Compensation of Directors — OtherArrangements.”

 

**Security Ownership Of Certain BeneficialOwners And Management**

 

The following table sets forth the beneficial ownership of theCompany’s Common Stock as of November 14, 2002 (the “Record Date”), by (i) eachdirector of the Company, (ii) each executive officer named in the SummaryCompensation Table, (iii) the persons known by the Company to own more than 5%of the Company’s outstanding Common Stock, and (iv) all directors and executiveofficers as a group.  Except asotherwise indicated, the persons named in the table have sole voting and investmentpower with respect to all shares of Common Stock owned by them.

 

 

17

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| **Name or Identity of Group**        | ** ** | **Number of  Shares  Beneficially Owned(1)** | ** ** | **Percent of  Common  Stock Outstanding** | ** ** |
|--------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------|------------|
|                                 |       |                                         |       |                                      |       |
| Edward S. Adams                      |       | 913,758                                      | (2)        | 5.85                                      | %          |
| 701 Xenia Ave. So.                   |       |                                         |       |                                      |       |
| Golden Valley, MN 55416              |       |                                         |       |                                      |       |
|                                 |       |                                         |       |                                      |       |
| Timothy R. Duoos                     |       | 915,759                                      | (3)        | 5.86                                      | %          |
| P.O. Box 2181                        |       |                                         |       |                                      |       |
| Rancho Santa Fe, CA 92067            |       |                                         |       |                                      |       |
|                                 |       |                                         |       |                                      |       |
| John Cavanaugh                       |       | 150,000                                      | (4)        | *                                         |       |
| 5355 Avenida Encinas, Ste 110        |       |                                         |       |                                      |       |
| Carlsbad, CA  92008             |       |                                         |       |                                      |       |
|                                 |       |                                         |       |                                      |       |
| Steven Fisher                        |       | 100,000                                      | (5)        | *                                         |       |
| 1025 Technology Parkway              |       |                                         |       |                                      |       |
| Cedar Falls, IA 50613                |       |                                         |       |                                      |       |
|                                 |       |                                         |       |                                      |       |
| Edward M. Graca                      |       | 100                                          |       | *                                         |       |
| 3800 West 80th Street, Ste 190       |       |                                         |       |                                      |       |
| Bloomington, MN 55431                |       |                                         |       |                                      |       |
|                                 |       |                                         |       |                                      |       |
| Monte Johnson                        |       | 0                                            |       | *                                         |       |
| 13911 Ridgedale Drive Ste 477        |       |                                         |       |                                      |       |
| Minnetonka, MN 55305                 |       |                                         |       |                                      |       |
|                                 |       |                                         |       |                                      |       |
| Joseph D. Pupel                      |       | 0                                            |       | *                                         |       |
| 13911 Ridgedale  Drive, Suite 477    |       |                                         |       |                                      |       |
| Minnetonka, MN  55305                |       |                                         |       |                                      |       |
|                                 |       |                                         |       |                                      |       |
| All directors and executive officers |       |                                         |       |                                      |       |
| As a group (6 persons)               |       | 2,079,617                                    | (6)        | 12.76                                     | %          |
|                                 |       |                                         |       |                                      |       |
| John E. and Mary Joanne Feltl        |       | 1,044,420                                    |       | 6.87                                      | %          |
| 920 Second  Avenue South, 14th Floor |       |                                         |       |                                      |       |
| Minneapolis, MN  55402               |       |                                         |       |                                      |       |
|                                 |       |                                         |       |                                      |       |
| Sihl-Zurich Paper Mill on Sihl AG    |       | 2,742,858                                    | (7)        | 16.55                                     | %          |
| Giesshubelstrasse  15,               |       |                                         |       |                                      |       |
| CH-8045 Zurich,  Switzerland         |       |                                         |       |                                      |       |

 

----

*         Less than 1%.

 

(1)       For each person or group, includes any securitiesthat the person or group has the right to acquire within 60 days after October15, 2002 (the “Record Date”) pursuant to options, warrants, conversionprivileges or other rights, have been added to the total amount of outstandingshares when determining the percent owned by such person or group.

(2)       Includes425,000 shares of common stock subject to options exercisable within 60 daysafter the Record Date.

(3)       Includes 425,000shares of common stock subject to options exercisable within 60 days after theRecord Date.

(4)       Includes 150,000 shares ofcommon stock subject to options exercisable within 60 days after the RecordDate.

 

18

----

 

(5)       Includes 100,000 shares ofcommon stock subject to options exercisable within 60 days after the RecordDate.

(6)       Includes 1,100,000 shares of common stock subject tooptions exercisable within 60 days after the Record Date.

(7)       Includes 1,371,429 shares of common stock subject towarrants exercisable within 60 days after the Record Date.

 

**ITEM 12.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

On July 23, 2001, VirtualFund.com, Inc. (the “Company”) entered into anAsset Purchase Agreement with its wholly owned subsidiary, RSPNetwork, Inc. andRSP Acquisitions, LLC.  Pursuant to theAsset Purchase Agreement, RSPNetwork, Inc. sold substantially all of its assetsand business to RSP Acquisitions, LLC for a purchase price consisting of theassumption of certain liabilities, up to $1,000,000 based on an earnout formulaand other terms, conditions and provisions detailed in the Asset PurchaseAgreement.  Mr. Steven Fisher, Presidentof RSP Acquisitions, LLC, is a director of the Company.  The Company received a fairness opinionrelating to the sale.  The assetsinvolved in the transaction related to RSPNetwork, Inc.’s business ofinformation systems integration providing IT solutions for businesses, andincluded accounts receivables, inventory, prepaid expenses, contracts,proprietary rights, equipment, records and customer deposits.

 

Effective July 1, 2001, the Board established a loan program wherebythe Company will loan up to $500,000 to the outside directors based on theirseniority to buy stock from shareholders at a mutually agreed upon price.  In connection with the sale of RSPNetwork,Messrs. Adams and Duoos each received a loan in the amount of $73,313.75 topurchase 488,758 and 488,759 shares of common stock, respectively, from twoshareholders at a purchase price of $.15 per share.  The Sarbanes-Oxley Act of 2002 restricts future loans todirectors.

 

On November 8, 2001, Cash Systems, Inc. and a wholly owned subsidiaryof Cash Systems, Inc. issued a convertible promissory note to VirtualFund inthe amount of up to $500,000.  Advancestotaling $400,000 were made under such note. Equity Securities Investments, Inc. received as agent of Cash Systems,Inc. a commission of $65,000 and warrants to purchase 50,000 shares of commonstock of Cash Systems, Inc.  Mr. EdwardAdams, a director of VirtualFund, is a principal of Equity SecuritiesInvestments, Inc.

 

Since October 2001, Equity Securities Investments, Inc. has providedvarious brokerage and investment banking services in transactions involving theCompany, earning commissions and fees from the Company or other parties to thetransaction totaling $355,000, plus warrants of unspecified value.  Mr. Edward Adams, Vice-Chairman of the Boardof VirtualFund, is President and a principal of Equity Securities Investments,Inc.

 

For other agreements involving directors and/or officers of theCompany, see Item 10:  “Compensation ofDirectors” and “Employment Contracts and Termination of Employment andChange-in-Control Arrangements.”

 

 

**ITEM 13**.  **EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)       Exhibits — See Exhibit Index on pagefollowing signatures and certifications.

 

(b)      Reports on Form 8–K.

 

           No reports on Form 8-K were filedduring the quarter ended June 30, 2002:

 

 

19

----

 

 

 

 

VIRTUALFUND.COM, INC.

AND SUBSIDIARIES

 

CONSOLIDATED FINANCIAL STATEMENTS

 

June 30, 2002 and 2001

 

 

 

----

 

C O N T E N T S

 

 
|                                                  |   | **Page** |
|-------------------------------------------------------|--------|----------|
|                                                  |   |     |
| INDEPENDENT AUDITOR’S  REPORT                    |   | F-1      |
|                                                  |   |     |
| FINANCIAL  STATEMENTS                                 |   |     |
|                                                  |   |     |
| Consolidated balance sheets                           |   | F-2      |
|                                                  |   |     |
| Consolidated  statements of operations                |   | F-3      |
|                                                  |   |     |
| Consolidated  statements of stockholders’ equity |   | F-4      |
|                                                  |   |     |
| Consolidated  statements of cash flows                |   | F-5      |
|                                                  |   |     |
| Notes to  consolidated financial statements           |   | F-6      |

 

 

----

 

INDEPENDENTAUDITOR’S REPORT

 

Boardof Directors and StockholdersVirtualFund.com, Inc. and SubsidiariesMinnetonka, Minnesota

 

We have audited the accompanying consolidated balance sheets ofVirtualFund.com, Inc. and Subsidiaries (Company) as of June 30, 2002 and 2001,and the related consolidated statements of operations, stockholders’ equity,and cash flows for the years then ended. These consolidated financial statements are the responsibility of theCompany’s management.  Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the consolidated financial statements arefree of material misstatement.  An audit includes examining, on atest basis, 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 ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position ofVirtualFund.com, Inc. and Subsidiaries as of June 30, 2002 and 2001, andthe results of their operations and their cash flows for the years then endedin conformity with accounting principles generally accepted in the UnitedStates of America

 

The Company has significant related party transactions and legalproceedings as discussed in Notes 9 and 11, respectively.

 

/s/ Lurie Besikof Lapidus & Company, LLP

 

Minneapolis, MinnesotaAugust 30, 2002

 

F-1

----

 

VIRTUALFUND.COM, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEET

 

 
|                                                                                                                   |   | **June 30,** |      |
|------------------------------------------------------------------------------------------------------------------------|--------|--------------|-----------|
|                                                                                                                   |   | **2002**     |      | **2001** |   |
| ASSETS                                                                                                                 |   |         |      |   |   |
| CURRENT ASSETS                                                                                                         |   |         |      |   |   |
| Cash and cash  equivalents                                                                                             |   | $            | 2,486,908 |   | $ | 8,439,552 |   |
| Marketable  securities                                                                                                 |   | 1,186,011    |      | — |   |
| Receivables,  less allowance for doubtful accounts of $-0- and $1,600                                                  |   | 18,035       |      | 1,355,933 |   |
| Receivables —  related parties, less allowance of $1,925,400 in 2001                                              |   | —       |      | 135,671 |   |
| Note receivable,  less allowance of $300,000 in 2002                                                                   |   | 197,599      |      | — |   |
| Prepaid expenses                                                                                                       |   | 1,435,553    |      | 1,615,984 |   |
|                                                                                                                   |   | 5,324,106    |      | 11,547,140 |   |
|                                                                                                                   |   |         |      |   |   |
| PROPERTY AND  EQUIPMENT, NET                                                                                           |   | 2,500        |      | 58,022 |   |
|                                                                                                                   |   |         |      |   |   |
| NOTES RECEIVABLE                                                                                                       |   | 126,746      |      | — |   |
|                                                                                                                   |   |         |      |   |   |
| NOTES RECEIVABLE  — RELATED PARTIES                                                                               |   | 155,852      |      | — |   |
|                                                                                                                   |   |         |      |   |   |
| MARKETABLE  SECURITIES                                                                                                 |   | 153,440      |      | — |   |
|                                                                                                                   |   |         |      |   |   |
| OTHER INVESTMENT                                                                                                       |   | 200,000      |      | — |   |
|                                                                                                                   |   |         |      |   |   |
|                                                                                                                   |   | $            | 5,962,644 |   | $ | 11,605,162 |   |
|                                                                                                                   |   |         |      |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                              |   |         |      |   |   |
|                                                                                                                   |   |         |      |   |   |
| CURRENT  LIABILITIES                                                                                                   |   |         |      |   |   |
| Notes payable  and accrued interest — related parties, 9.25%, unsecured                                           |   | $            | —    |   | $ | 820,343 |   |
| Accounts payable                                                                                                       |   | 607,940      |      | 717,004 |   |
| Accrued  nonrecurring and restructuring charges                                                                        |   | 383,966      |      | 1,883,280 |   |
| Accrued expenses                                                                                                       |   | 72,296       |      | 138,745 |   |
| Other current  liabilities                                                                                             |   | —       |      | 1,856,780 |   |
| Net liabilities  of discontinued operations                                                                            |   | 705,155      |      | 2,061,221 |   |
| TOTAL CURRENT  LIABILITIES                                                                                             |   | 1,769,357    |      | 7,477,373 |   |
|                                                                                                                   |   |         |      |   |   |
| COMMITMENTS AND  CONTINGENCIES                                                                                         |   |         |      |   |   |
|                                                                                                                   |   |         |      |   |   |
| STOCKHOLDERS’  EQUITY                                                                                             |   |         |      |   |   |
| Series A  convertible preferred stock, $.01 par value (5,000,000 shares authorized; no  shares issued and outstanding) |   | —       |      | — |   |
| Common stock,  $.01 par value (50,000,000 authorized shares; 15,203,617 and 15,631,404  shares issued and outstanding) |   | 152,036      |      | 156,314 |   |
| Additional  paid-in capital                                                                                            |   | 36,142,472   |      | 36,150,694 |   |
| Accumulated  other comprehensive income                                                                                |   | 399,356      |      | — |   |
| Accumulated  deficit                                                                                                   |   | (32,500,577  | )         | (32,179,219 | ) |
|                                                                                                                   |   | 4,193,287    |      | 4,127,789 |   |
|                                                                                                                   |   | $            | 5,962,644 |   | $ | 11,605,162 |   |

 

See notes toconsolidated financial statements.

 

F-2

----

 

VIRTUALFUND.COM, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OFOPERATIONS

 
|                                                                 |   | **Year Ended  June 30,** |       |
|----------------------------------------------------------------------|--------|--------------------------|------------|
|                                                                 |   | **2002**                 |       | **2001** |   |
|                                                                 |   |                     |       |   |   |
| NET SALES                                                            |   | $                        | —     |   | $ | — |   |
|                                                                 |   |                     |       |   |   |
| COST OF SALES                                                        |   | **—**               | ** ** | **—** | ** ** |
|                                                                 |   |                     |       |   |   |
| GROSS PROFIT                                                         |   | **—**               | ** ** | **—** | ** ** |
|                                                                 |   |                     |       |   |   |
| OPERATING  EXPENSES                                                  |   |                     |       |   |   |
| General and  administrative                                          |   | 2,543,329                |       | 5,701,648 |   |
| Nonrecurring and  restructuring charges (recoveries)                 |   | (101,119                 | )          | 7,762,632 |   |
|                                                                 |   | 2,442,210                |       | 13,464,280 |   |
|                                                                 |   |                     |       |   |   |
| OPERATING LOSS                                                       |   | (2,442,210               | )          | (13,464,280 | ) |
|                                                                 |   |                     |       |   |   |
| OTHER INCOME  (EXPENSE)                                              |   |                     |       |   |   |
| Interest expense                                                     |   | (1,640                   | )          | (12,280 | ) |
| Interest income                                                      |   | 210,192                  |       | 1,234,006 |   |
| Other income                                                         |   | 493,355                  |       | 15,669 |   |
|                                                                 |   | 701,907                  |       | 1,237,395 |   |
|                                                                 |   |                     |       |   |   |
| LOSS FROM  CONTINUING OPERATIONS BEFORE INCOME TAXES                 |   | (1,740,303               | )          | (12,226,885 | ) |
|                                                                 |   |                     |       |   |   |
| INCOME TAX  PROVISION                                                |   | —                   | ** ** | **—** | ** ** |
|                                                                 |   |                     |       |   |   |
| LOSS FROM  CONTINUING OPERATIONS                                     |   | (1,740,303               | )          | (12,226,885 | ) |
|                                                                 |   |                     |       |   |   |
| INCOME (LOSS  FROM DISCONTINUED OPERATIONS                           |   |                     |       |   |   |
| Net of income  tax provision of $-0- and $-0-                        |   | 1,418,945                |       | (11,191,459 | ) |
|                                                                 |   |                     |       |   |   |
| LOSS ON SALE OF  DISCONTINUED OPERATIONS                             |   |                     |       |   |   |
| Net of income  tax provision of $-0- and $-0-                        |   | —                   |       | (588,120 | ) |
|                                                                 |   |                     |       |   |   |
| NET LOSS                                                             |   | $                        | (321,358   | ) | $ | (24,006,464 | ) |
|                                                                 |   |                     |       |   |   |
| INCOME (LOSS)  PER COMMON SHARE — BASIC AND DILUTED             |   |                     |       |   |   |
| Continuing  operations                                               |   | $                        | (0.11      | ) | $ | (0.76 | ) |
| Discontinued  operations                                             |   | 0.09                     |       | (0.70 | ) |
| Sale of  discontinued operations                                     |   | —                   |       | (0.04 | ) |
|                                                                 |   |                     |       |   |   |
|                                                                 |   | $                        | (0.02      | ) | $ | (1.50 | ) |
|                                                                 |   |                     |       |   |   |
| WEIGHTED AVERAGE  COMMON SHARES OUTSTANDING — BASIC AND DILUTED |   |                     | 15,454,185 |   |   | 16,036,791 |   |
|                                                                 |   |                     |       |   |   |

 

See notes toconsolidated financial statements.

 

F-3

----

 

VIRTUALFUND.COM, INC. AND SUBSIDIARIES

 

CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY

 

 
|                                     |   |              |   |          |    |              |   |            |   |         |    | **Receivable** |   |        |   |
|------------------------------------------|--------|-------------------|--------|---------------|---------|-------------------|--------|-----------------|--------|--------------|---------|----------------|--------|-------------|--------|
|                                     |   |              |   |          |    |              |   | **Accumulated** |   |         |    | **From**       |   |        |   |
|                                     |   |              |   |          |    | **Additional**    |   | **Other**       |   |         |    | **Exercise**   |   |        |   |
|                                     |   | **Common  Stock** |   | **Paid-in**   |    | **Comprehensive** |   | **Accumulated** |   | **of Stock** |    |           |   |
|                                     |   | **Shares**        |   | **Par Value** |    | **Capital**       |   | **Income**      |   | **Deficit**  |    | **Options**    |   | **Total**   |   |
|                                     |   |              |   |          |    |              |   |            |   |         |    |           |   |        |   |
| BALANCE, June 30, 2000                   |   | 17,577,002        |   | $             | 175,770 |              | $      | 41,171,851      |   | $            | —  |           | $      | (8,172,755  | )      | $ | (101,250 | ) | $ | 33,073,616 |   |
|                                     |   |              |   |          |    |              |   |            |   |         |    |           |   |        |   |
| Net loss                                 |   | —            |   | —        |    | —            |   | —          |   | (24,006,464  | )       | —         |   | (24,006,464 | )      |
|                                     |   |              |   |          |    |              |   |            |   |         |    |           |   |        |   |
| Exercise of warrant                      |   | 8,302             |   | 83            |    | (83               | )      | —          |   | —       |    | —         |   | —      |   |
|                                     |   |              |   |          |    |              |   |            |   |         |    |           |   |        |   |
| Cancellation of exercised stock options  |   | (37,500           | )      | (375          | )       | (100,875          | )      | —          |   | —       |    | 101,250        |   | —      |   |
|                                     |   |              |   |          |    |              |   |            |   |         |    |           |   |        |   |
| Repurchase of common stock               |   | (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   |   |
|                                     |   |              |   |          |    |              |   |            |   |         |    |           |   |        |   |
| BALANCE, June 30, 2001                   |   | 15,631,404        |   | 156,314       |    | 36,150,694        |   | —          |   | (32,179,219  | )       | —         |   | 4,127,789   |   |
|                                     |   |              |   |          |    |              |   |            |   |         |    |           |   |        |   |
| Net loss                                 |   | —            |   | —        |    | —            |   | —          |   | (321,358     | )       | —         |   | (321,358    | )      |
|                                     |   |              |   |          |    |              |   |            |   |         |    |           |   |        |   |
| Comprehensive income:                    |   |              |   |          |    |              |   |            |   |         |    |           |   |        |   |
| Unrealized gain on marketable securities |   | —            |   | —        |    | —            |   | 399,356         |   | —       |    | —         |   | 399,356     |   |
| Total comprehensive income               |   |              |   |          |    |              |   |            |   |         |    |           |   | 77,998      |   |
|                                     |   |              |   |          |    |              |   |            |   |         |    |           |   |        |   |
| Cancellations of shares                  |   | (427,787          | )      | (4,278        | )       | (8,222            | )      | —          |   | —       |    | —         |   | (12,500     | )      |
|                                     |   |              |   |          |    |              |   |            |   |         |    |           |   |        |   |
| BALANCE, June 30, 2002                   |   | 15,203,617        |   | $             | 152,036 |              | $      | 36,142,472      |   | $            | 399,356 |           | $      | (32,500,577 | )      | $ | — |   | $ | 4,193,287 |   |

 

See notes to consolidated financial statements.

 

F-4

----

 

VIRTUALFUND.COM,INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASHFLOWS

 

 

 
|                                                                         |   | **Year Ended  June 30,** |      |
|------------------------------------------------------------------------------|--------|--------------------------|-----------|
|                                                                         |   | **2002**                 |      | **2001** |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES                                        |   |                     |      |   |   |
| Net loss                                                                     |   | $                        | (321,358  | ) | $ | (24,006,464 | ) |
| Adjustments to  reconcile net loss to net cash used by operating activities: |   |                     |      |   |   |
| Discontinued  operations                                                     |   | (1,356,066               | )         | 822,728 |   |
| Gain on sale of  marketable securities                                       |   | (446,874                 | )         | — |   |
| Loss on sale or  disposal of property and equipment                          |   | 42,649                   |      | 823,239 |   |
| Depreciation and  amortization                                               |   | 6,598                    |      | 302,137 |   |
| Changes in  operating assets and liabilities:                                |   |                     |      |   |   |
| Accounts and  notes receivables                                              |   | 1,013,553                |      | (1,347,912 | ) |
| Receivables —  related parties                                          |   | 135,671                  |      | 1,396,746 |   |
| Other current  assets                                                        |   | 180,430                  |      | (1,428,084 | ) |
| Accounts payable                                                             |   | (109,063                 | )         | (2,395,432 | ) |
| Accrued  nonrecurring and restructuring charges                              |   | (1,499,314               | )         | 1,883,280 |   |
| Accrued expenses                                                             |   | (66,449                  | )         | (354,225 | ) |
| Income taxes  payable                                                        |   | —                   |      | (843,440 | ) |
| Other current  liabilities                                                   |   | (1,856,780               | )         | 1,850,334 |   |
| Net cash used by  operating activities                                       |   | (4,277,003               | )         | (23,297,093 | ) |
|                                                                         |   |                     |      |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                        |   |                     |      |   |   |
| Purchases of  marketable securities and investment                           |   | (1,512,184               | )         | — |   |
| Proceeds from  sales of marketable securities                                |   | 818,961                  |      | — |   |
| Loans to related  parties                                                    |   | (1,505,850               | )         | — |   |
| Collections from  related parties                                            |   | 1,350,000                |      | 382,988 |   |
| Purchases of  property and equipment                                         |   | —                   |      | (805,721 | ) |
| Proceeds from  sale of property and equipment                                |   | 6,275                    |      | 174,342 |   |
| Net cash used by  investing activities                                       |   | (842,798                 | )         | (248,391 | ) |
|                                                                         |   |                     |      |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                        |   |                     |      |   |   |
| Payments on  notes and accrued interest — related parties               |   | (820,343                 | )         | (1,578,039 | ) |
| Cancellation of  common shares                                               |   | (12,500                  | )         | — |   |
| Purchase of  common shares                                                   |   | —                   |      | (5,970,613 | ) |
| Net cash used by  financing activities                                       |   | (832,843                 | )         | (7,548,652 | ) |
|                                                                         |   |                     |      |   |   |
| DECREASE IN CASH  AND CASH EQUIVALENTS                                       |   | (5,952,644               | )         | (31,094,136 | ) |
|                                                                         |   |                     |      |   |   |
| CASH AND CASH  EQUIVALENTS                                                   |   |                     |      |   |   |
| Beginning of  year                                                           |   | 8,439,552                |      | 39,533,688 |   |
|                                                                         |   |                     |      |   |   |
| End of year                                                                  |   | $                        | 2,486,908 |   | $ | 8,439,552 |   |

 

See notes to consolidatedfinancial statements.

 

F-5

----

 

VIRTUALFUND.COM, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.         Business and SignificantAccounting Policies -

 

            Business

 

Currently,the Company is not operating as a revenue-generating business.  The Board of Directors is actively pursuing optionsregarding the future use of its residual assets by examining various potentialbusiness acquisitions and other opportunities.

 

Previously,the Company operated in two business segments: the Internet ServicesBusiness Unit (ISBU) and  the Digital GraphicsBusiness Unit (DGBU).

 

TheISBU provided information system design, implementation and support services,developed and sold Internet-based electronic commerce software, and providedInternet hosting services.  In thefourth quarter 2001, the Company discontinued the ISBU and in July 2001, soldthe remaining ISBU assets and operations.

 

TheDGBU designed, manufactured, marketed and sold wide-format digital colorprinters, aftermarket inks and specialty coated media for graphic artsprofessionals.  In June 2000, theCompany completed an asset sale of the DGBU operations.

 

TheDGBU and ISBU operations are disclosed in the consolidated financial statementsas discontinued operations.

 

            Principles ofConsolidation

 

Theconsolidated financial statements include the accounts of VirtualFund.com, Inc.and its wholly owned subsidiaries, RSPNetwork, Inc. (RSPNetwork), B2BXchange,Inc. (B2BXchange), Rymatics Software, LLC (Rymatics), Kilborn Photo Products,Inc. (Kilborn), and ColorSpan Corporation (CSC), and CSC’s subsidiaries,ColorSpan Europe, Ltd. (CSE), ColorSpan Asia/Pacific, Ltd. (CSA), and ColorSpanLatin America, Ltd. (CSLA).  RSPNetwork,B2BXchange, and Rymatics represented the ISBU. Kilborn, CSC, and its subsidiaries represented the DGBU.  All significant intercompany balances andtransaction were eliminated.

 

            Use of Estimates

 

Thepreparation of these consolidated financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that may affect thereported amounts and disclosures in the financial statements and accompanyingnotes.  Actual results could differ fromthese estimates.  Significant managementestimates relate to the valuation allowance of deferred income tax assets,nonrecurring and restructuring charges, and litigation related allowances andliabilities (estimated legal fees related to litigation liabilities have beenaccrued).

 

Revenue Recognition

 

Sales,included in income (loss) from discontinued operations, were recognized whenproducts or services were delivered to the Company’s customers.  The Company also provided design,implementation and support services under fixed price and time and materialscontracts.  For fixed price contracts,revenue was recorded based on the estimated percentage of completed servicesrendered.  Losses, if any, on fixedprice contracts were recognized when the loss was determined.  For time and materials contracts, revenuewas recognized at contractually agreed upon rates as the costs were incurred.

 

F-6

----

 

            Concentration ofRisk

 

Financialinstruments, which potentially subject the Company to concentration of creditrisk, are cash and cash equivalents, marketable securities and investment.  To reduce risk for cash and cashequivalents, the Company maintains cash and cash equivalents at reputablefinancial institutions in deposit and money market accounts which, at times,may exceed federally insured limits. The largest concentration of cash equivalents at June 30, 2002, isapproximately $1,700,000 in a certificate of deposit and approximately $900,000in a money market account.  The Companyhas not experienced any material losses in such accounts and does not believeit is exposed to any significant credit risk.

 

Toreduce investment risk, the Company only invests in Companies meeting certainpredefined criteria.

 

Cash Equivalents

 

Allhighly liquid cash investments with initial maturities of three months or lessare considered to be cash equivalents.

 

Marketable Securities

 

Marketable securities are classified as available-for-sale and recorded at fair value.  Net unrealized gains and losses are included in stockholders’ equity in accumulated other comprehensive income. The Company had no marketable securities in 2001. During 2002, the Company purchased $1,312,184 in marketable securities and sold marketable securities having a book value of $372,089 for $818,963, realizing a net gain of $446,874 after commissions and expenses, which is included in other income in the consolidated statements of operations. At June 30, 2002 the value of marketable securities held was $1,339,451, including a net unrealized gain of $399,356.  Fair values were determined by an independent qualified appraiser.  All marketable securities are equity securities. The unrealized gain or loss is reported as accumulated other comprehensive income in the consolidated statements of stockholders’ equity.

 

            Property and Equipment

 

Propertyand equipment are recorded at cost. Depreciation is computed using the straight-line method over theestimated useful lives of the assets of two to seven years.

 

Other Investment

 

In 2002, theCompany invested in common units of a private company.  At June 30, 2002, the value of theinvestment in the private company is valued at cost.

 

            Acquired Technologyand Other Intangible Assets

 

Acquired technology and other intangible assets wereamortized using the straight-line method over the estimated useful lives of theassets, generally from two to three years. The recoverability of these assets were continually evaluated bycomparing the remaining unamortized cost to the estimated future cash flows ofthe associated assets.  During fiscal2001, the balance of acquired technology and other intangible assets waswritten off as impaired.  In 2002, theCompany acquired no technology or intangible assets.

 

F-7

----

 

            Fair Value ofFinancial Instruments

 

            Cash and cash equivalents, marketablesecurities, accounts and notes receivable, investment, notes payable, accountspayable, and accrued liabilities are carried at amounts believed to approximatefair values.  It is not practicable todetermine the fair value of related party receivables and notes payable as therelationship of the parties to the Company may influence the terms.

 

            Accounting for Stock-BasedCompensation

 

            The Company accounts for employee stock optionsunder Accounting Principles Board Opinion (APB) No. 25, “Accounting for StockIssued to Employees,” and provides the pro forma disclosures required byStatement of Financial Accounting Standards (SFAS) No. 123, “Accounting forStock-Based Compensation.”

 

            Income (Loss) PerCommon Share

 

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

 

            Recent Accounting Pronouncements

 

            InJune 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141,“Business Combinations,” and SFAS No. 142, “Goodwill and Other IntangibleAssets,” which are effective for fiscal years beginning after December 15,2001.  These statements, in summary,eliminate the use of the pooling of interests method of accounting for futurebusiness combinations and discontinue the amortization of acquired goodwill,subject to periodic impairment testing. The adoption of this standard did not have a material impact on theCompany’s consolidated financial statements.

 

In August 2001, the FASB issued SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets,” which replaces SFAS No.121, “Accounting for the Impairment of Long-Lived and for Long-Lived Assets tobe Disposed of.”  SFAS No. 144 iseffective for the fiscal years beginning after December 15, 2001.  SFAS No. 144 requires long-lived assets tobe disposed of by sale, including those of discontinued operations, be measuredat the lower of carrying amount or fair value less cost to sell, whetherreported in continuing operations or in discontinued operations.  In addition, discontinued operations will nolonger be measured at net realizable value or include amounts for operationlosses that have not yet been incurred. SFAS No. 144 also broadens the reporting of discontinued operations toinclude all components of an entity with operations that can be distinguishedfrom the rest of the entity and that will be eliminated from the ongoingoperations of the entity in a disposal transaction.  The Company does not anticipate that adoption of this standardwill have a material impact on the Company’s consolidated financial statements.

 

F-8

----

 

2.         Discontinued Operations-

 

            ISBU

 

In October 2000, the Company acquired Rymatics for $254,070 in cash,the amount equal to the net book value of assets as of the closing date, and500,000 shares of common stock valued at $1,031,250.  Rymatics specialized in software engineering and relatedservices.  In January 2001, the Companyceased all operations of this acquisition, terminated all employees, returnedall property and equipment to the seller and provided Rymatics with $150,000 ofoperating funds.  To assist in thetransition, VirtualFund also lent Rymatics $150,000, collateralized with250,000 shares of VirtualFund stock.  A$1,031,250 write-off of goodwill relating to the acquisition was included inrestructuring charges in fiscal year 2001. No payment was received on the note, which was subsequently written off.

 

In 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.

 

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 were capped at $1,000,000 and were tobe recorded when received.  This earnout agreement was assigned to a former employee under terms of a negotiatedsettlement (Note 11 - Kittrell).  A losson sale of discontinued operations totaling $588,120 was recognized for theyear ended June 30, 2001.

 

The components ofnet assets (liabilities) of the ISBU’s discontinued operations as of June 30,2001, are as follows:

 

| Cash                                |   | $        | 41,570  |   |
|-------------------------------------|--------|----------|---------|--------|
| Accounts  receivable                |   | 201,506  |    |
| Property and  equipment, net        |   | 862,653  |    |
| Accounts payable                    |   | (160,012 | )       |
| Other current  liabilities and debt |   | (283,235 | )       |
| Deferred revenue                    |   | (241,548 | )       |
|                                |   |     |    |
|                                |   | $        | 420,934 |   |

 

In 2001, net sales of the ISBU were $5,811,758 and interest expense was$115,118 as related debt resided in the ISBU. All 2001 discontinued operations were attributable to the ISBU.

 

During 2002, the Company reduced certain liabilities relating todiscontinued operations, previously accrued in the ISBU for lawsuitsettlements, by $236,066.

 

F-9

----

 

            DGBU

 

            In June 2000, the Company sold theDGBU.  Estimated future costs, whichincluded an accrual for contractual responsibilities remaining from the sale ofthe DGBU and other miscellaneous anticipated expenses, were accrued at the timeof sale. The Company could receive an additional $1,000,000, which was notincluded in previously recorded cash proceeds, when consents to assign facilityleases to the purchaser are received from the lessor.

 

            The liabilities of the DGBU’s discontinuedoperations consist of accounts payable of $705,155 and $1,894,036 at June 30,2000 and 2001, respectively.

 

During 2002, the Company reduced the net loss by adjusting throughdiscontinued operations certain liabilities previously accrued in the DGBU by$1,188,879 to more accurately reflect amounts actually owed based on currentinformation as follows:

 

| **Adjustment**             |   | **Amount** |      |
|----------------------------|--------|------------|-----------|
|                       |   |       |      |
| Product  liability accrual |   | $          | 303,243   |   |
| Sales tax  liability       |   | 567,000    |      |
| Accrued legal  fees, net   |   | 68,636     |      |
| Lawsuit settlement         |   | 250,000    |      |
|                       |   |       |      |
|                       |   | $          | 1,188,879 |   |

 

 

3.         Nonrecurring andRestructuring Charges -

 

In December 2000, as a result of the discontinuedoperations and other actions, the Company adopted a restructuring plan andincurred certain nonrecurring and restructuring charges and adjustments in2001, which were included in operations as follows:

 
|                                |   |        |       |           |   |           |   |        |       | **Allowance**     |   |
|-------------------------------------|--------|-------------|------------|----------------|--------|----------------|--------|-------------|------------|-------------------|--------|
|                                |   |        |       |           |   |           |   |        |       | **And**           |   |
|                                |   | **Amount**  |       |           |   | **Asset**      |   | **Amounts** |       | **Accrual at**    |   |
|                                |   | **Charged** |       | **Recoveries** |   | **Write-offs** |   | **Paid**    |       | **June 30, 2001** |   |
| NONRECURRING                        |   |        |       |           |   |           |   |        |       |              |   |
| Allowance for doubtful accounts (a) |   | $           | 1,927,833  |           | $      | (2,464         | )      | $           | —     |              | $      | — |   | $ | 1,925,369 |   |
|                                |   |        |       |           |   |           |   |        |       |              |   |
| RESTRUCTURING                       |   |        |       |           |   |           |   |        |       |              |   |
| Product discontinuance (b)          |   | 5,981,794   |       | (1,300,000     | )      | (1,916,854     | )      | (1,909,864  | )          | 855,076           |   |
| Employee separating costs (c)       |   | 4,917,821   |       | (35,696        | )      | (206,884       | )      | (4,628,285  | )          | 46,956            |   |
| Facilities costs (d)                |   | 1,514,426   |       | —         |   | (89,211        | )      | (443,967    | )          | 981,248           |   |
|                                |   | 12,414,041  |       | (1,335,696     | )      | (2,212,949     | )      | (6,982,116  | )          | 1,883,280         |   |
|                                |   |        |       |           |   |           |   |        |       |              |   |
|                                |   | $           | 14,341,874 |           | $      | (1,338,160     | )      | $           | (2,212,949 | )                 | $      | (6,982,116 | ) | $ | 3,808,649 |   |

 

F-10

----

 

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

 

(b)   Costs associated with the discontinuance of theInternet business-to-business software platform, B2BXchange, and separatesupply chain investment.  Approximately$1,585,000 related to the Rymatics termination of operations (including$1,031,250 of goodwill write-off) and $1,200,000 to the Manugistics legalproceedings.

 

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

 

(d)   Payments to exit closed andidle facilities leases.

 

Nonrecurring and restructuring charges totaling $13,003,714 wereallocated $7,762,632 to continuing operations and $5,241,082 to discontinuedoperations.

 

During 2002, adjustments were made to therestructuring accrual as follows:

 

|                                |   | **Allowance**     |      |           |   |           |   |        |       |              |   |
|-------------------------------------|--------|-------------------|-----------|----------------|--------|----------------|--------|-------------|------------|-------------------|--------|
|                                |   | **and**           |      |           |   |           |   |        |       |              |   |
|                                |   | **Accrual at**    |      |           |   | **Asset**      |   | **Amounts** |       | **Accrual at**    |   |
|                                |   | **June 30, 2001** |      | **Recoveries** |   | **Write-offs** |   | **Paid**    |       | **June 30, 2002** |   |
| NONRECURRING                        |   |              |      |           |   |           |   |        |       |              |   |
| Allowance for doubtful accounts (a) |   | $                 | 1,925,369 |           | $      | —         |   | $           | (1,925,369 | )                 | $      | — |   | $ | — |   |
|                                |   |              |      |           |   |           |   |        |       |              |   |
| RESTRUCTURING                       |   |              |      |           |   |           |   |        |       |              |   |
| Product discontinuance (b)          |   | 855,076           |      | —         |   | (302,944       | )      | (168,166    | )          | 383,966           |   |
| Employee separating costs           |   | 46,956            |      | —         |   | —         |   | (46,956     | )          | —            |   |
| Facilities costs                    |   | 981,248           |      | (101,119       | )      | 16,559         |   | (896,688    | )          | —            |   |
|                                |   | 1,883,280         |      | (101,119       | )      | (286,385       | )      | (1,111,810  | )          | 383,966           |   |
|                                |   |              |      |           |   |           |   |        |       |              |   |
|                                |   | $                 | 3,808,649 |           | $      | (101,119       | )      | $           | (2,211,754 | )                 | $      | (1,111,810 | ) | $ | 383,966 |   |

 

(a)   The allowance forunncollectable receivables from Masters, the former CEO, was written off inMarch 2002, after a final settlement agreement with Masters (Note 11).

 

(b)   The balance due atJune 30, 2002 relates primarily to the balance due Metiom from asettlement agreement reached in July 2002 (Note 11).

 

F-11

----

 

4.         Property and Equipment -

 

            Property and equipment are asfollows:

|                           |   |        |   | **June 30,** |   |
|--------------------------------|--------|-------------|--------|--------------|--------|
|                           |   | **Life**    |   | **2002**     |   | **2001** |   |
|                           |   |        |   |         |   |   |   |
| Equipment                      |   | 2 - 5 years |   | $            | 5,000  |   | $ | 53,432 |   |
| Furniture and  fixtures        |   | 5 - 7 years |   | —       |   | 7,174 |   |
| Purchased  software            |   | 3 years     |   | —       |   | 11,872 |   |
| Vehicles                       |   | 5 years     |   | —       |   | 26,840 |   |
|                           |   |        |   | 5,000        |   | 99,318 |   |
| Less accumulated  depreciation |   |        |   | 2,500        |   | 41,296 |   |
|                           |   |        |   | $            | 2,500  |   | $ | 58,022 |   |

 

 

5.         Other FinancialStatement Data -

 

            Additional informationconcerning selected balance sheet accounts is as follows:

 

|                                                |   | **June 30,** |      |
|-----------------------------------------------------|--------|--------------|-----------|
|                                                |   | **2002**     |      | **2001** |   |
|                                                |   |         |      |   |   |
| Receivables,  less allowance for doubtful accounts: |   |         |      |   |   |
| Manugistics  receivable                             |   | $            | —    |   | $ | 1,300,000 |   |
| Other                                               |   | 18,035       |      | 55,933 |   |
|                                                |   |         |      |   |   |
|                                                |   | $            | 18,035    |   | $ | 1,355,933 |   |
| Prepaid  expenses:                                  |   |         |      |   |   |
| Legal fee  retainers                                |   | $            | 1,304,413 |   | $ | 1,392,000 |   |
| Other                                               |   | 131,140      |      | 223,984 |   |
|                                                |   |         |      |   |   |
|                                                |   | $            | 1,435,553 |   | $ | 1,615,984 |   |
| Other current  liabilities:                         |   |         |      |   |   |
| Litigation                                          |   | $            | —    |   | $ | 1,680,865 |   |
| Other                                               |   | —       |      | 175,915 |   |
|                                                |   |         |      |   |   |
|                                                |   | $            | —    |   | $ | 1,856,780 |   |

 

 

6.         Income Taxes -

 

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

|                                      |   | **Year Ended  June 30,** |     |
|-------------------------------------------|--------|--------------------------|----------|
|                                      |   | **2002**                 |     | **2001** |   |
|                                      |   |                     |     |   |   |
| Tax benefit  computed at statutory rate   |   | $                        | (112,000 | ) | $ | (8,402,000 | ) |
| State income  tax, net of federal benefit |   | (5,000                   | )        | (480,000 | ) |
| Graduated tax  brackets                   |   | 5,000                    |     | 229,000 |   |
| Change in  valuation allowance            |   | 112,000                  |     | 7,515,000 |   |
| Other                                     |   | —                   |     | 1,138,000 |   |
|                                      |   |                     |     |   |   |
|                                      |   | $                        | —   |   | $ | — |   |

 

F-12

----

 

Temporarydifferences comprising net deferred tax assets are as follows:

|                                           |   | **June 30,** |    |
|------------------------------------------------|--------|--------------|---------|
|                                           |   | **2002**     |    | **2001** |   |
| Current:                                       |   |         |    |   |   |
| Allowance for  doubtful accounts               |   | $            | 105,000 |   | $ | 717,000 |   |
| Lease holdback                                 |   | 372,000      |    | 372,000 |   |
| Accrued  restructuring                         |   | 247,000      |    | 527,000 |   |
| Other                                          |   | —       |    | 89,000 |   |
|                                           |   | 724,000      |    | 1,705,000 |   |
|                                           |   |         |    |   |   |
| Noncurrent:                                    |   |         |    |   |   |
| Property and  equipment                        |   | 200,000      |    | 200,000 |   |
| Net operating  loss carryforwards              |   | 8,237,000    |    | 7,515,000 |   |
| Research and  development credit carryforwards |   | 872,000      |    | 872,000 |   |
| Alternative  minimum tax credits               |   | 225,000      |    | 225,000 |   |
| Other                                          |   | 757,000      |    | 386,000 |   |
|                                           |   | 10,291,000   |    | 9,198,000 |   |
|                                           |   |         |    |   |   |
| Gross deferred  tax assets                     |   | 11,015,000   |    | 10,903,000 |   |
| Valuation  allowance                           |   | (11,015,000  | )       | (10,903,000 | ) |
|                                           |   |         |    |   |   |
| Net deferred tax  assets                       |   | $            | —  |   | $ | — |   |

 

The increase in thevaluation allowance for 2002 and 2001 was $112,000 and $7,515,000,respectively.  Realization of thedeferred tax asset will depend on the Company’s ability to generate sufficienttaxable income.  Based on the Company’srecent operating losses, lack of any continuing operations, and the uncertainfuture of its current strategy, management is not certain that the Company willbe able to generate sufficient future taxable income to fully utilize itsdeferred tax assets.  In addition,realization of net operating loss carryforwards may be limited under certainprovisions of the Internal Revenue Code regardless of the Company’s ability togenerate taxable income.  As a result,the Company recorded a valuation allowance for the entire deferred tax asset.

 

At June 30, 2002,the Company has a net operating loss carryforward for federal income taxpurposes of approximately $23,534,000 which is available to offset futuretaxable income, if any, through 2022. 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.

 

State taxes are deemed insignificant and not separately disclosed.

 

F-13

----

 

7.         Stockholders’ Equity -

 

            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, a total of 2,416,400 shares were repurchased.

 

In December 2001,Rymatics surrendered 250,000 shares of common stock after defaulting on a$150,000 note. In March 2002, 177,787 shares were surrendered in connectionwith the Settlement Agreement with Masters (Note 11).

 

            Stock Options and Warrants

 

The Companyreserved 5,000,000 shares of common stock under the VirtualFund.com, Inc. 1996Stock Incentive Plan, (Plan).  Under thePlan, incentive stock options and non-statutory stock options may be granted tokey employees, directors, and consultants of the Company at exercise prices notless than 100% of the fair market value of the common stock at the date ofgrant and 110% for incentive stock options granted to individuals owning 10% ormore of the Company’s common stock. The Plan is administered by a stock optioncommittee appointed by the Board of Directors. The committee establishes allterms and conditions of each grant, except that, in the case of incentiveoptions, the term may not exceed 10 years. The Company also has a 1990 Restated Stock Option Plan.  No additional options may be granted underthis Plan.  All previously grantedoptions remain outstanding for 10 years from the grant date or a specifiedperiod following termination of employment.

 

Stock options and warrantactivity is as follows:

|                    |   |        |   | **Weighted** |   |         |      | **Weighted** |   |
|-------------------------|--------|-------------|--------|--------------|--------|--------------|-----------|--------------|--------|
|                    |   |        |   | **Average**  |   |         |      | **Average**  |   |
|                    |   |        |   | **Exercise** |   |         |      | **Exercise** |   |
|                    |   | **Options** |   | **Price**    |   | **Warrants** |      | **Price**    |   |
| 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         |   |
| Cancelled (b)           |   | (1,520,433  | )      | 2.29         |   | (2,192,239   | )         | 4.64         |   |
| Repriced — Old     |   | (700,000    | )      | 0.64         |   | —       |      | —       |   |
| Repriced — New     |   | 700,000     |   | 0.15         |   | —       |      | —       |   |
|                    |   |        |   |         |   |         |      |         |   |
| Balance, June  30, 2002 |   | 1,010,000   |   | 0.23         |   | 1,862,714    |      | 6.89         |   |
|                         |        |             |        |              |        |              |           |              |        |  |  |

 

(a)   In January 2001, a warrant for 50,000 shareswas redeemed in a cashless exercise for 8,302 shares of the Company’s commonstock.

 

(b)   Under terms of a settlement agreement withMasters, warrants for 2,192,239 common shares were cancelled in March 2002(Note 11).

 

F-14

----

 

In May 2001, theCompany’s Board of Directors approved the repricing of 100,000 nonstatutorystock options from the original exercise price of $4.00 per share to $.25 pershare.  In July 2001, the Board approvedthe repricing of 500,000 nonstatutory stock options from $.16 per share to $.15per share, approved the repricing of 100,000 nonstatutory stock options from$2.00 to $.15 per share, and repriced 100,000 nonstatutory stock options from$1.65 per share to $.15 per share, resulting in an insignificant change to theoriginal option intrinsic value assigned.

 

The per share weighted average fair value of stock options grantedduring 2001 was $0.26.

 

*Options outstanding and exercisable at June30, 2002, 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     |        | 1,010,000       |                  | $ | 0.23 |   | 4.8 |   | 860,000 |   |   | $ | 0.24 |   |   |
|              |                 |             |                 |                       |  |  |  |  |  |  |  |  |  |  |  |  |

* *

*Warrants outstanding and exercisable at June30, 2002, are as follows:*

* *

| **Range of  Exercise Prices** |   | **Warrants** |   | **Weighted  Average Remaining  Contractual  Life — Years** |   | **Weighted  Average Exercise Price** |   |
|-------------------------------|--------|--------------|--------|-----------------------------------------------------------------|--------|--------------------------------------|--------|
| $                             | 1.50   |         | 20,000 |                                                            | 2.2    |                                 | $      | 1.50 |   |
| 6.79 to 7.00                  |   | 1,842,714    |   | 1.3                                                             |   | 6.89                                 |   |
|                          |   |         |   |                                                            |   |                                 |   |
| 1.50 to 7.00                  |   | 1,862,714    |   | 1.3                                                             |   | 6.89                                 |   |
|                               |        |              |        |                                                                 |        |                                      |        |  |  |

* *

* *

Had the Company recognized stock option compensation expense based ongrant-date fair value, consistent with the provisions of SFAS No. 123, thenet income (loss) would be approximately as follows:

 

|                                  |   | **Year Ended  June 30,** |     |
|---------------------------------------|--------|--------------------------|----------|
|                                  |   | **2002**                 |     | **2001** |   |
|                                  |   |                     |     |   |   |
| Net income  (loss):                   |   |                     |     |   |   |
| As reported                           |   | $                        | (321,358 | ) | $ | (24,006,464 | ) |
| Pro forma                             |   | 1,125,157                |     | (24,291,939 | ) |
| Net income  (loss) per diluted share: |   |                     |     |   |   |
| As reported                           |   | $                        | (0.02    | ) | $ | (1.50 | ) |
| Pro forma                             |   | 0.07                     |     | (1.51 | ) |

 

F-15

----

 

The fair value of stockoptions and warrants is the estimated present value at grant-date using theBlack-Scholes option pricing model with the following weighted averageassumptions:

 

|                                   |   | **Year Ended  June 30,** |   |
|----------------------------------------|--------|--------------------------|--------|
|                                   |   | **2002**                 |   | **2001** |   |
|                                   |   |                     |   |   |   |
| Expected  volatility                   |   | 19.0                     | %      | 216 | % |
| Risk-free  interest rate               |   | 4.7                      | %      | 4.9 | % |
| Expected life of  options — years |   | 5.0                      |   | 5.0 |   |
| Expected  dividend yield               |   | —                   |   | — |   |

 

 

 8.        Commitments-

 

            Operating Leases

 

During 2002, allequipment, office and warehouse leases held by the Company expired, terminated,or canceled.  In March 2002, the Companyentered a three-year lease for new office space, requiring a 90-day notice tovacate.  In February 2002, the Companyentered into a month-to-month lease for climate-controlled space to storehistorical books and records.

 

In 2001, theCompany leased certain facilities from Grandchildren’s Realty AlternativeManagement Program I (GRAMPI), a Minnesota limited partnership controlled bythe Company’s former CEO, and from TEAM Property Management Company (TEAM), acompany controlled by three stockholders of the Company.  The GRAMPI lease originally expired in 2010.  The Company vacated the space, discontinuedrent payments and, in March 2002, reached a settlement releasing the Companyfrom any further obligation under the lease. The lease with TEAM was cancelled in July 2001 by mutual consent withthe 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,** |    |
|--------|--------|--------------------------|---------|
|   |   | **2002**                 |    | **2001** |   |
|   |   |                     |    |   |   |
| GRAMPI |   | $                        | —  |   | $ | 955,051 |   |
| TEAM   |   | —                   |    | 207,342 |   |
| Other  |   | 107,248                  |    | 169,140 |   |
|   |   |                     |    |   |   |
|   |   | $                        | 107,248 |   | $ | 1,331,533 |   |

 

Future minimumoperating lease payments are less than $3,000 at June 30, 2002.

 

F-16

----

 

            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 2002 or 2001.  The Company is in the process of terminatingthe combined plan.

 

9.        Related Party Transactions -

 

Special Compensation toDirectors

 

In June 2001, the Boardof Directors authorized bonus payments and option grants to certain directorsfor services rendered during 2001.

 

|                                     |   | **Amount** |    | **Options** |    |
|------------------------------------------|--------|------------|---------|-------------|---------|
|                                     |   |       |    |        |    |
| Chairman of the  Board (Chairman)        |   | $          | 100,000 |        | 250,000 |   |
| Vice-Chairman of  the Board (Vice-Chair) |   | 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 andAdams, current Chairman and Vice-Chairman of the Board, were paid $69,000 and$66,000, respectively, for their services as Board members dating back to 2000.

 

DirectorsConsulting Compensation Agreements

 

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

 

In July 2001, the Special Compensation Committee of the Board ofDirectors authorized an agreement with the Company’s Vice-Chairman of the Board(Vice-Chair).  The agreement providesfor the Vice-Chair to be paid a monthly consulting services fee of $12,500 for3 years plus 100,000 options exercisable at $0.15 per share, to be granted oneach anniversary date.  If terminated bythe Company, without cause, payment of the compensation is generally continuedas severance payments until the end of the agreement.  In August 2001, the Company also authorized a one–timespecial consulting fee in the amount of $30,000 for services provided to theCompany outside of the agreement for his monthly consulting services.  In addition, the Vice-Chair receives amonthly directors fee of $3,000. Additionally the Vice-Chair was reimbursed expenses of $57,017.

 

F-17

----

 

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

 

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.

 

Directors Loan Program

 

In July 2001, the Board of Directors approved a loan program, wherebythe Company is authorized to loan to Directors up to $500,000, in total, to buystock in the Company.  The Chairman andVice-Chair each borrowed $73,314 in August 2001 to purchase 488,759 and 488,758shares of the Company’s common stock, respectively. As of June 30, 2002, theChairman and Vice-Chair each owe the Company approximately $77,900 under termsof their loan agreements, the amount originally borrowed plus $4,597 ininterest accrued at the annual rate of 8%. The Sarbanes-Oxley Act of 2002 restricts future loans to directors.

 

            ConsultingAgreement - Interim CEO

 

In August 2001, the Company entered into a consulting agreement with TheFinancial Drivers, Ltd., controlled by Joseph D. Pupel.  Under terms of the agreement, Mr. Pupel isto provide financial services to the Company. In October 2001, Mr. Pupel was designated Interim Chief ExecutiveOfficer and is paid $100 per hour for his services. For the fiscal year endedJune 30, 2002, the Company paid Financial Drivers, LTD $123,084 for Mr. Pupel'sservices and $75,634 for financial services provided by other employees ofFinancial Drivers, LTD.

 

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. Commissions of approximately $36,000 were paid on thepurchase of these shares to Equity Securities Investments, Inc. (Equity), acompany whose president is the Vice-Chair of the company.  The Company joined an existing investorgroup and in connection therewith executed an agreement with Equity on the sameterms as other members of the group. Under terms of such agreement, the Companyagreed to pay a 20% advisory fee on the gain from the sale of securitiespurchased through Equity.  The agreementalso requires 20% of the appreciation on certain securities and reflected atDecember 31 to be paid to Equity. In May and June 2002, 235,100 of these shareswere sold for a net gain of $446,874. Commissions of $121,086 were paid to Equity on the sale of these shares.

 

Investment - TemporarySubordinated Loan Agreement

 

On October 30, 2001, the Company entered into a Temporary SubordinatedLoan Agreement with Equity.  Under termsof the loan, which was personally guaranteed by a principal of Equity, theCompany agreed to lend Equity $1,350,000 at 10% interest.  The loan was repaid with interest onDecember 28, 2001.

 

F-18

----

 

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 up to $500,000 in convertible notes.  On November 8, 2001, the Company loaned theBorrower $200,000 and an additional $200,000 was loaned on March 1, 2002.  The notes mature on November 8, 2003, payinterest at 12.5%, require principal and interest payments on a monthly basis,and require the Borrower to grant the Company a security interest in a cashaccount which is required to maintain a minimum of $300,000 during the term ofthe loan.  Additionally, the agreementcontains personal guarantees of the president and CEO of Borrower and a pledgeof certain shares of his stock.  Thenotes are convertible into common stock at an exercise price of $2 pershare.  The agreement also provides thatthe Company will receive warrants to purchase up to 125,000 shares of commonstock of the Borrower, dependent upon the level of borrowings.  The exercise price of the warrants is $2 pershare.  Commissions of $65,000 and awarrant to purchase 50,000 shares of Borrower’s common stock were paid andissued by the Borrower to Equity.

 

Investment - Common Stock/ Convertible Note

 

On October 24, 2001, the Company invested $305,000 for an 80% ownershipposition in Business Translation Services, Inc. (BTSV), a NevadaCorporation.  On November 12, 2001 theCompany loaned $300,000 to BTSV under the terms of a 10% convertible promissorynote, payable in three installments over 12 months.  The note is convertible into shares of BTSV at $.50 pershare.  On November 12, 2001, BTSVmerged with Muller Media, Inc. under a plan of reorganization within themeaning of Section l68 of the Internal Revenue Code, and BTSV’s name waschanged to Muller Media, Inc. (Muller). Muller guaranteed the convertible promissory note, issued a warrant tothe Company to purchase 1,200,000 shares of Muller common stock at an exerciseprice of $.125 per share and agreed to issue to the Company 2,000,000 shares ofits common stock in the event of default. BTSV/Muller paid a commission of $107,550 and issued warrants for1,000,000 shares of Muller common stock to Equity for this transaction.

 

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

 

Other

 

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.

 

F-19

----

 

In 2001, theCompany deposited $1.5 million with a law firm to represent certain present andformer directors and officers.  At June30, 2002 and 2001, the Company had approximately $1.3 million remaining, whichis included in prepaid expenses.

 

Transactions with certainrelated parties for the year ended June 30, 2001, are as follows:

|                                              |    |
|---------------------------------------------------|---------|
|                                              |    |
| Rent expense  (GRAMPI) (a)                        | $       | 955,051 |
| Rent expense  (TEAM)                              | 207,342 |
| Interest income (b) (c)                           | 110,349 |
| Airplanes (d)                                     | 103,581 |
| Clubhouse  expenses (e)                           | 3,846   |
| Consulting (f)                                    | 25,000  |
| California  apartment rent                        | 16,000  |
| California  apartment utilities and other         | 4,633   |
| Salary paid to  former CEO’s second wife (g) | 77,116  |

 

Balances outstandingwith parties controlled by the former CEO were as follows:

 

|                                  |   | **June 30,** |       |
|---------------------------------------|--------|--------------|------------|
|                                  |   | **2002**     |       | **2001** |   |
|                                  |   |         |       |   |   |
| Receivables and  accrued interest (b) |   | $            | **—** |   | $ | 1,925,369 |   |
| Allowance for  doubtful accounts (b)  |   | **—**   |       | (1,925,369 | ) |
|                                  |   |         |       |   |   |
| Net receivable                        |   | $            | **—** |   | $ | — |   |

* *

(a)   Pursuant to a lease dated December 31, 1995and until January 10, 2001, the Company leased and occupied space in EdenPrairie, Minnesota from GRAMPI. The general partner of GRAMPI is TMI. One ofthe limited partners of GRAMPI is a trust (TRUST), of which a former directorof the Company was trustee at the time of the lease negotiations and the minorchildren of the former CEO are the beneficiaries. Other limited partners appearto include the former CEO, his second and third wives (as joint tenants), aswell as his brother and his brother’s spouse and children. In 1995, the Companyretained the services of a law firm as well as an independent commercial realestate brokerage firm in negotiating the lease.

 

The Company leased178,774 square feet of space under the above lease for a term of fifteen years(expiring December 31, 2010) with no renewal option.  The base rent escalated periodically overthe lease term and obligated the Company to pay various operatingexpenses.  The Board of Directors determinedvarious potential fairness problems with the lease, which resulted inlitigation (Note 11 - Global Settlement Agreement - Masters).

 

F-20

----

 

(b)   The Company performed services for and paidvarious amounts on behalf of TMI. The receivable from TMI of $206,711 at June30, 1999, was combined with additional indebtedness into the $472,977 notedescribed in (c).

 

(c)   Prior to 1999, GRAMPI borrowed $250,000 fromthe Company under a note guaranteed by the former CEO, collateralized by theCompany’s common stock owned by GRAMPI and bearing interest at the prime rateplus 2.0%. In September 1999, the balance of the note was combined withadditional borrowings during 1999 into a new $500,000 noninterest bearing note dueSeptember 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 anadditional $200,000 due September 1, 2000, with interest at 9.75%. Allthree notes were collateralized by a deed of trust encumbering certain Montanareal property owned by GRAMPI.  TheCompany determined in November 2000 that the deed of trust was defective as itwas never recorded and the land was not owned by GRAMPI, but rather anotherentity controlled by the former CEO.  InOctober 2000, the Company loaned $430,000 to GRAMPI, due in calendar 2001 or asapproved by the Board of Directors, with interest at the IRS effective tax rateand guaranteed by the former CEO. Nonrecurring charges include allowances for the receivables from theformer CEO and entities he controls, which includes principal and accrued interestdue totaling approximately $1,925,000. This amount was forgiven under terms ofthe Global Settlement Agreement between the Company and Masters  (Note 11).

 

(d)   The Company regularly used an airplane ownedby 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.

 

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

 

(f)    The former CEO’s spouse was paid consultingservices through a company she owned beginning in May 1999, at a monthly rateof $5,000.  Current management wasunable 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 spouse in thisconsulting role. Management at that time, and the Board of Directors, had notbeen informed that the former CEO’s spouse owned this company or that paymentswere being made to it.

 

(g)   The former CEO’s second wifewas a Company employee.  Under thedivorce decree, the former CEO was not required to pay any alimony to hissecond 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.

 

F-21

----

 

10.      SupplementalDisclosures of Cash Flow Information - 

 

|                                             |   | **Year Ended  June 30,** |    |
|--------------------------------------------------|--------|--------------------------|---------|
|                                             |   | **2002**                 |    | **2001** |   |
| The Company paid  (received) cash for:           |   |                     |    |   |   |
| Interest                                         |   | $                        | 210,192 |   | $ | 188,548 |   |
|                                             |   |                     |    |   |   |
| Noncash  investing and financing activities:     |   |                     |    |   |   |
| Unrealized gain  on marketable securities        |   | 399,356                  |    | — |   |
| Common stock  issued for acquisition of Rymatics |   | —                   |    | 1,031,250 |   |
| Nonrecurring and  restructuring charges          |   | —                   |    | 4,138,318 |   |
|                                                  |        |                          |         |  |  |  |  |

 

 

11.       Legal Proceedings -

 

Global Settlement Agreement - Masters

On March 11, 2002, the Company entered into a Global SettlementAgreement with Masters, TMI, GRAMPI, David Norlander — individually and asTrustee of and on behalf of Masters Trust I, Realty Settlement, LLC, andJessica Tran-Masters.  The parties gaveeach other mutual and complete releases for any claims and judgments, therebyending the legal proceedings summarized above (“Feltl,” “Masters,” “Montana,”and “GRAMPI”).  The Company agreed toconvey to Masters or his designee all of the Company’s assets pertainingspecifically and solely to B2BXchange, and pay to Masters or his designee theamount of $600,000, which included payment of Masters’ attorneys’ fees.  Masters, in turn, agreed to transfer to theCompany all shares of Company stock and all warrants owned or controlled byMasters, GRAMPI, Masters Trust I, TimeMasters, any parent, sibling, spouse(whether current or future), child, or grandchild.

 

            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 recruitingemployees of RSPNetwork and the Company.  Finally, the suit allegescertain securities law violations and misrepresentations by Mr. Kittrellin connection with the conversion and sale of Company stock.  In connection with this lawsuit,Mr. Kittrell made a demand for arbitration, alleging breach of contractand breach of implied covenants of good faith and fair dealing.  Kittrell and the Company filed cross motionsin the trial court regarding an arbitration clause in one of the contracts atissue in the case.  Prior to the Courthearing these motions, Kittrell and the Company agreed to arbitrate the disputesbetween them.  The suit against Vitessewas settled with Vitesse agreeing to pay $10,000, and both parties agreeing todrop all further claims.  The lawsuitagainst Kittrell went to arbitration in January 2002, with Kittrell prevailing.  The arbitrator awarded Kittrell, net ofcertain offsets, $2,708,073. Under terms of the final settlement, the Companypaid Kittrell $2,137,547, transferred to him 400,000 shares of Muller Media,Inc. stock being held by the Company for investment purposes (book value of$60,188), and also transferred to him the rights to future earnout payments(having no recorded value) due the Company under terms of the agreement sellingthe assets of RSPNetwork to RSP Acquisitions.

 

F-22

----

 

            Wiskus

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

 

Metiom

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

 

Feltl

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

 

            Masters

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

 

F-23

----

 

Montana

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

 

GRAMPI

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

 

Manugistics

Contrary to explicit instructions received from the majority of theBoard of Directors, Masters signed, on behalf of the Company, a softwarelicensing agreement with a company called Manugistics and initiated the wiretransfer of an initial payment of $2.5 million.  The Company refused to honor the contract alleging thatManugistics was aware of Masters acting outside of his powers and authoritieswhen signing the contract and wiring the money.  Manugistics commenced an action against the Company in federal courtin Maryland on December 5, 2000, alleging breach of contract.  The Company filed in earlyFebruary 2001 its Answer and Counterclaims for Rescission and DeclaratoryJudgment (Claim) that the alleged contract was not valid.  TheCompany requested the Court impose a constructive trust over the $2.5 millionManugistics received.  The Claim allegedthat Manugistics was guilty of conversion and was unjustly enriched.  It also sought a declaratory judgment thatthe contract was null and void, or that the Court rescind the contract.  The parties settled the litigation onJuly 6, 2001.  Manugistics paid theCompany $1.3 million in July 2001, and the parties agreed to mutually andcompletely release each other from any further claims.

 

Ryan

In September 2000, former Executive Vice President Thomas Ryan brought 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.

 

F-24

----

 

Thurn et al.

In February 2001, the Company commenced an action in Hennepin CountyDistrict Court against Timothy N. Thurn, Nancy Masters Sawyer, and Danny J.Vatland. The Company sought money damages against the defendants for breachesof their employment agreements and/or their fiduciary duties. Moreover, theCompany sought to have the Court declare that the defendants breached theirrespective employment agreements and were therefore not entitled to any furthercompensation or benefits under those agreements and that these agreements arerescinded. The Company claimed that Thurn violated his contractual and/orfiduciary duties as Chief Financial Officer and/or Treasurer of the Company,one of the violations being the transfer of $2.5 million to Manugistics, eventhough he was aware or should have been aware that the Company’s Board ofDirectors had restricted Masters’ authority to enter into the transaction withManugistics.  The Company claimedMasters Sawyer breached her duties as former Secretary/Assistant Treasurer andmost recently as Vice-President of Operations, amongst others, by receivingexcessive unapproved compensation, failing to disclose contracts andtransactions that were contrary to the Company’s interest, and failing toperform the tasks and duties of her position due to excessive, unexplainedabsenteeism.  The Company claimed thatVatland 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 Company funds and/or assets, which were not in furtherance of the Company’sinterest and were not authorized or were in contravention of directives issuedor restrictions placed by the Company’s Board of Directors.  All defendants denied the Company’s claimsand raised various counterclaims, including counterclaims for severancepayments, breach of contract and violation of the Workers Adjustment RetrainingNotification Act.  Vatland and Thurnclaimed to be entitled to 12 months of severance pay and Masters Sawyer claimedto be entitled to 36 months of severance pay. Vatland further contended that hewas entitled to $75,000 per year, covering a period of time after hevoluntarily had his base compensation reduced from $250,000to $175,000.  The Company settledall claims in June 2001.  In considerationfor payments from the Company in the amounts of $157,500, $45,000, and $55,000to Vatland, Thurn, and Masters Sawyer, respectively, the parties mutuallyreleased each other from any further claims and agreed to execute a stipulationfor dismissal with prejudice.

 

12.       Uncertainties -

 

Legal proceedingsinvolving the Company resulting from the restructuring that occurred during thefiscal year 2001 were significant to the Company’s financial position.  Management accrued during 2001 the results ofsettlements and other related expenses that, in management’s estimate, weresufficient to adequately reflect payments required under terms of the varioussettlements, including related legal expenses. As of June 30, 2002, the Company is unaware of any material remaining orpotential future legal proceedings for which additional amounts need to beaccrued.

 

In accordance with theterms of the DGBU sale, the Company retained certain liabilities related toclaims made by customers who purchased equipment from the DGBU prior to thesale. Also, the DGBU buyer withheld $1,000,000, pending the receipt of consentsfrom Masters related to the transferability of certain leases.  These consents were obtained under terms ofthe Global Settlement Agreement with Masters. When payment of the holdback was requested from the buyer, the Companywas notified of the buyer’s intent to deduct from the holdback $821,481 tosettle $322,000 in unsubstantiated product liability claims, and otherunsubstantiated claims unrelated to the initial purpose of the holdback.  Management intends to vigorously pursuecollection of the holdback.

 

F-25

----

 

**SIGNATURES**

 

                In accordance withSection 13 or 15(d) of the Exchange Act, the Registrant caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|   | VirtualFund.com, Inc. |                   |
|--------|-----------------------|------------------------|
|   |                  |                   |   |
|   | By:                   | /s/  Timothy R. Duoos  |   |
|   | Title:                | Chairman  of the Board |   |
|   | Date:                 | December  19, 2002     |   |
|        |                       |                        |  |  |  |

 

**POWER OF ATTORNEY**

 

           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-KSB, and to file the same, with exhibits thereto and otherdocuments in connection therewith, with the Securities and Exchange Commission,hereby ratifying and confirming all that each of said attorneys-in-fact, or hissubstitute or substitutes, may do or cause to be done by virtue hereof.

 

           In accordance with theExchange Act, this report has been signed below by the following persons onbehalf of the Registrant and in 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                                                                           |
|                                                                                          |        |                                                                                                 |        |                    |        |  |  |  |  |  |

 

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**CERTIFICATION**

 

I, Joseph D. Pupel, certify that:

 

1.     I have reviewed this annual report on Form 10-KSB ofVirtualFund.com, Inc.;

 

2.     Based on my knowledge, this annual report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this annualreport; and

 

3.     Based on my knowledge, the financial statements, and otherfinancial information included in this annual report, fairly present in allmaterial respects the financial condition, results of operations and cash flowsof the registrant as of, and for, the periods presented 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) |

 

 

EXPLANATORY NOTE REGARDING CERTIFICATION: Representations 4, 5 and 6 ofthe Certification as set forth in Form 10-KSB have been omitted, consistentwith the Transition Provisions of SEC Exchange Act Release No. 34-46427,because this Annual Report on Form 10-KSB covers a period ending before theEffective Date of Rules 13a-14 and 15d-14.

 

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**INDEX TO EXHIBITS**

 
| **Exhibit** |   | **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 Form  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  Agreement.  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  Agreement.  Incorporated by reference  to Exhibit 10.3 to the Company’s report on Form 10-K for the fiscal year  ended June 30, 1991.                                                                                                                                                                                   |

 

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|   |   |                                                                                                                                                                                                                                                                            |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.4   |   | LaserMaster Technologies, Inc. 1996 Stock Incentive  Plan, as amended.  Incorporated by  reference to Exhibit 4.1 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 Director’s Non-Qualified Stock  Options.  Incorporated by reference to  Exhibit 10.5 to the Company’s report on Form 10-K for the fiscal year ended  June 30, 2001. |
|   |   |                                                                                                                                                                                                                                                                            |
| 10.6   |   | Letters to Tim Duoos, dated August 23, 1999 and  November 30, 1999, relating to compensation for services as director and  consultant,.  Incorporated by  reference to Exhibit 10.20 to the Company’s report on Form 10-K for the  fiscal year ended June 30, 2001.   |
|   |   |                                                                                                                                                                                                                                                                            |
| 10.7   |   | Letters to Ed Adams, dated September 10, 1999 and  November 30, 1999, relating to compensation for services as director and  consultant.  Incorporated by reference  to Exhibit 10.21 to the Company’s report on Form 10-K for the fiscal year  ended June 30, 2001.  |
|   |   |                                                                                                                                                                                                                                                                            |
| 10.8*  |   | Consulting Agreement with MSJ & Associates, LLC,  controlled by Monte Johnson, effective as of May 1, 2001.  Incorporated by reference to Exhibit 10.22  to the Company’s report on Form 10-K for the fiscal year ended June 30, 2001.                            |
|   |   |                                                                                                                                                                                                                                                                            |
| 10.9*  |   | Consulting Agreement with Financial Drivers, LTD  dated October 8, 2001.                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                            |
| 10.10* |   | Special Committee Compensation Agreement with  Timothy R. Duoos, dated July 1, 2001.   Incorporated by reference to Exhibit 10.23 to the Company’s report on  Form 10-K for the fiscal year ended June 30, 2001.                                                      |
|   |   |                                                                                                                                                                                                                                                                            |
| 10.11* |   | Special Committee Compensation Agreement with Edward  S. Adams, dated July 1, 2001.   Incorporated by reference to Exhibit 10.24 to the Company’s report on  Form 10-K for the fiscal year ended June 30, 2001.                                                       |
|   |   |                                                                                                                                                                                                                                                                            |
| 23.1   |   | 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-KSB.

 

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