ITEM 1. BUSINESS
VirtualFund.com, Inc.,
referred to as “VirtualFund,” “VFND,” “the Company,” “Management,” “us,” “our,”
and “we” in this Form 10-K, was incorporated under the laws of Minnesota as
Acquerre Corporation in April 1988.
After various name changes, the Company changed its name to VirtualFund.com,
Inc. on April 3, 1998.
The Company formerly
operated two business segments: the Digital Graphics Business Unit (“DGBU”) and
the Internet Services Business Unit (“ISBU”):
• The DGBU-comprised of ColorSpan Corporation, its
subsidiaries and Kilborn Photo Products, Inc.-designed, manufactured, marketed
and sold wide-format digital color printers, print servers, color management
software, inks and specialty-coated media for graphic arts professionals.
• The ISBU, started in fiscal 1999, designed and
developed technology solutions for the Internet-based B2B economy. ISBU products and technologies targeted
Small businesses, Middle-market companies and Enterprise workgroups (“SME
companies”). The ISBU was divided into
two operating groups, the Venture Resource Group and the Commerce Environment
Operating System. Venture Resource
Group included two subsidiaries wholly owned by VFND: (i) B2BXchange, Inc.
(“B2BXchange”) (this subsidiary was formed in fiscal year 2001 after the
initial product debut in October 1999) and (ii) RSPNetwork, Inc.
(“RSPNetwork”). The ISBU also included
short-lived activities related to Rymatics Software, LLC and a company called
Manugistics.
In June 2000, the Company
sold the DGBU, the principal source of its revenue, to MacDermid Graphic Arts
(“MacDermid”), a wholly owned subsidiary of MacDermid Incorporated, for $45.8
million. Following the sale, Melvin Masters (“Masters”), who was at that time
the Company’s CEO, told the Board of his intent to use the proceeds from that
sale to change the Company’s business strategy and build a business-to-business
exchange (“B2BXchange”) capability for small and medium-sized companies. Over the next six months, Masters attempted
to implement this plan. In December
2000, as a result of an evaluation of Masters’ business plan by respected
independent consultants, the Board decided in December 2000 to abandon the
B2BXchange strategy.
On July 23, 2001, the Company became a party to
an Asset Purchase Agreement between RSPNetwork, Inc. (“RSPN”), the Company (as
sole shareholder of RSPN), and RSP Acquisitions, LLC. Pursuant to the Asset Purchase Agreement, RSPN sold substantially
all of its assets and business to RSP Acquisitions, LLC for a purchase price
consisting of the assumption of certain liabilities and payments of up to
$1,000,000 based on an earn out formula.
Currently, the Company is
not operating as a revenue-generating business, but is examining various
potential business acquisitions and other options for utilization or distribution
of its assets.
The Company currently has
no employees, and is being managed by a consultant who reports to the Chairman
and the Vice-Chairman.
ITEM 2.
ITEM 2. DESCRIPTION
OF PROPERTY
As of September 30, 2001
we leased an aggregate of 7,420 square feet of office space in Eden Prairie,
Minnesota, which was not from a related party.
The monthly base rent for this space was $11,748. This lease was for two years, and was not
renewed after it expired on April 30, 2002.
We also leased 6,435
square feet of warehouse space located at 6815-25 Shady Oak Road, Eden Prairie,
Minnesota, which is not from a related party.
This property was subleased to MacDermid through September 30,
2001. This lease, which calls for a
base monthly rent of $3,590, expires on March 31, 2003. Beginning October
2001, we subleased the
property to a third party, under the same terms and conditions as contained in
the original lease.
During fiscal 2001, the leases for property
in Santa Clara, California, San Jose, California, and Chicago, Illinois were
terminated with no remaining obligations to the Company.
In July 2001, our lease commitment in Cedar
Falls, Iowa was assigned to the acquirer of the RSPNetwork business.
As of September 30, 2001
we were involved in legal proceedings regarding the office and warehouse space
we occupied until January 2001 in Eden Prairie and regarding premises
previously leased by us in Montana.
These legal proceedings were
resolved in March 2002. See
Item 3, Legal Proceedings.
ITEM
3.
ITEM
3. LEGAL PROCEEDINGS
Kittrell Litigation
In August 2000, the
Company and a wholly owned subsidiary commenced suit against Jaffray
Communications, Inc., doing business as Vitesse Networks, Inc. (“Vitesse”), and
the Company’s former President and COO Mark Kittrell in Hennepin County
District Court in the State of Minnesota. The lawsuit alleged that Mr. Kittrell
violated his agreement not to compete against VirtualFund and its subsidiaries
and that he, contrary to his contractual promises, recruited RSPNetwork
employees to Vitesse and its subsidiaries. The suit also alleged that Vitesse
interfered with the contractual rights of RSPNetwork that prohibited Mr.
Kittrell from: (a) competing against it and VirtualFund; and (b) recruiting
employees of RSPNetwork and VirtualFund. Finally, the suit alleged certain
securities law violations and misrepresentations by Mr. Kittrell in connection
with the conversion and sale of VirtualFund stock. In connection with this lawsuit, Mr. Kittrell made a demand for
arbitration, alleging breach of contract and breach of implied covenants of
good faith and fair dealing. Kittrell and the Company had filed cross motions
in the trial court regarding an arbitration clause in one of the contracts at
issue in the case. Prior to the Court hearing these motions, Kittrell and the
Company agreed to arbitrate the disputes between them, and the Company placed
$2,000,000 with an escrow agent. The
suit against Vitesse was settled with Vitesse agreeing to pay $10,000 to
VirtualFund, and both parties to the suit agreeing to drop all further
claims. The suit against Kittrell went
to arbitration in January 2002, with Kittrell prevailing. The arbitrator awarded Kittrell, net of
certain offsets, $2,708,073. Under
terms of the final settlement, the Company paid Kittrell $2,137,547,
transferred to him the rights to future earn out payments due the Company under
terms of an Asset Purchase Agreement dated July 23, 2001 between
VirtualFund.com, Inc. and RSP Acquisitions, LLC (see Item 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS), and also transferred to Kittrell
400,000 shares of Muller Media common stock having a book value of $60,188.
Ryan Litigation
In September 2000, former
Executive Vice President Thomas Ryan brought a lawsuit in Hennepin County
District Court against the Company and its former subsidiary, Colorspan
Corporation, alleging that he is entitled to severance payments and performance
options based upon an employment agreement with Colorspan. Mr. Ryan sought damages of $175,000 in
addition to performance options and attorney fees. The matter was tried before a jury, and on October 2, 2001 the
jury entered a verdict in favor of the Company. Ryan is pursuing an appeal.
Manugistics
Litigation
In November, 2002,
contrary to explicit instructions received from the majority of the Board of
Directors, Masters signed-on behalf of the Company-a software licensing
agreement with Manugistics, and initiated the wire transfer of an initial
payment in the amount of $2.5 million to Manugistics. The Company refused to honor the contract, alleging that
Manugistics was aware of Masters acting outside of his powers and authorities
when
signing the contract and
wiring the money. Manugistics commenced
an action against the Company in federal court in Maryland on December 5, 2000,
alleging breach of contract. The Company filed in early February 2001 its
Answer and Counterclaims for Rescission and Declaratory Judgment that the
alleged contract was not valid. The Company requested on November 22, 2000 that
the Court impose a constructive trust over the $2.5 million paid to
Manugistics. It alleged that Manugistics was guilty of conversion and was
unjustly enriched. It also sought a declaratory judgment that the contract was
null and void, or that the Court rescind the contract, ab initio. The parties settled the litigation on July
6, 2001 with Manugistics paying $1,300,000 back to the Company. The parties agreed to mutually and
completely release each other from any further claims.
Feltl
Litigation
In November 2000, Masters
and Grandchildren’s Realty Alternative Program I, L.P. (“GRAMPI”) attempted to
convey to John E. Feltl certain real estate that subsequently became subject to
litigation (see Montana Litigation below).
The Company joined Feltl as defendant in the Montana Litigation,
claiming that the conveyances were fraudulent.
The Company’s claims against Feltl were relinquished under terms of the
Global Settlement Agreement reached with Masters on March 11, 2002 (see below).
Masters
Litigation
On December 1, 2000,
Masters, purporting to act both individually and derivatively on behalf of the
Company, filed an action in Minnesota state court against the Company and three
(3) of its directors, Edward S. Adams, Timothy R. Duoos and Roger Wikner.
Masters’ complaint alleged breach of fiduciary duty, corporate waste and
violations of the Minnesota Business Corporation Act and requested that the
Court act to temporarily restrain the defendants 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 ordinary course of business, (iv) materially
changing any business relationship of the Company, (v) interfering with
Masters’ scheduling of a shareholders’ meeting to elect new directors or remove
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 the Company’s
premises. On December 5, 2000, the Court denied Masters’ motion for a temporary
restraining order in its entirety. The Company thereafter asserted
counterclaims against Masters seeking to recover damages arising from breach of
fiduciary duty, wrongful use of corporate assets and failure to repay personal
loans Masters had received from the Company. At a second injunction hearing
held on January 5, 2001, the Court denied Masters’ renewed motion for a
temporary injunction. After the Company and the director defendants filed motions
to dismiss Masters’ complaint, Masters stipulated to the dismissal of his
claims. The Court dismissed his derivative claims with prejudice on February
12, 2001 and any personal claims were dismissed without prejudice. The Court entered a judgment against Masters
regarding the repayment of personal loans; the Company agreed to release
Masters from this judgment under terms of the Global Settlement Agreement dated
March 11, 2002 (see below).
Montana
Litigation
On December 18, 2000, the
Company filed an action in Montana state court against Melvin Masters and two
other entities affiliated with Melvin Masters. The Company asserted that
Masters and/or GRAMPI, a Minnesota limited partnership controlled by Masters,
purported to grant a security interest to the Company in Montana properties
actually owned by another Master’s affiliate, Masters Trust I. The Deed of
Trust necessary to create the security interest was never recorded. The
complaint sought a declaration that the Company has a security interest in 3
parcels of real property owned by the Masters’ affiliate. This action was
dropped under terms of the Global Settlement Agreement dated March 11, 2002
between the Company and Masters (see below).
GRAMPI
Litigation
On January 10, 2001, the
Company and a wholly owned subsidiary commenced an action in Hennepin County
District Court in Minnesota against Masters and GRAMPI. The action sought,
among other things, to void the subsidiary’s lease of space in a business
complex owned by GRAMPI, on the grounds that the lease was unfair,
unreasonable, and unduly benefited Masters, in violation of Masters’ fiduciary
duties to the Company and its subsidiary.
The action also sought the return of any profits realized by Masters as
a result of his self-dealing regarding the purchase of the business complex,
the lease, and other real estate transactions with the Company and its
subsidiaries. In March 2001, GRAMPI asserted a counterclaim against the Company
for breach of the lease contract. The
GRAMPI claims against the Company exceeded $9 million, and Masters asserted a
personal counterclaim at that time for breach of an alleged employment contract
with the Company. Both the Company’s
and Master’s actions were withdrawn 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 ColorSpan
Corporation) entered into a Global Settlement Agreement with Masters, TMI,
GRAMPI, David Norlander-individually and as Trustee of and on behalf of Masters
Trust I, Realty Settlement, LLC, and Jessica Tran-Masters. The parties executed mutual and complete
releases from any claims and judgments, thereby ending the legal proceedings
summarized above (“Feltl,” “Masters,” “Montana,” and “GRAMPI”). The Company agreed to convey to Masters or
his designee all of the Company’s assets pertaining specifically and solely to
B2BXchange, and pay to Masters or his designee $600,000, which included payment
of Masters’ attorneys’ fees. Masters,
in turn, agreed to transfer, or cause to be transferred, to the Company all
shares of VirtualFund stock and all warrants owned or controlled by Masters,
GRAMPI, Masters Trust I, TimeMasters, any parent, sibling, spouse (whether
current or future), child, or grandchild.
Wiskus
Litigation
In January 2001, Michael S. Wiskus brought an
action against the Company in Minnesota state court, Hennepin County, for
breach of contract and promissory estoppel related to unpaid expenses incurred
for the refurbishment of an aircraft, and early termination of a sponsorship
agreement. This action was dropped by Wiskus on May 1, 2002, with the Company
agreeing to pay Wiskus $95,000 in exchange for his release of all present and
future claims against VirtualFund.com, Inc.
Metiom
Litigation
In February 2001, the
Company commenced an action in the United States District Court for the
District of Minnesota against Metiom, Inc. (“Metiom”) seeking a declaratory
judgment that Metiom breached a September 29, 2000 Software Licensing Agreement
by failing to timely deliver “ConnectTrade” software to it. A few days later, Metiom filed a suit
against VirtualFund in the United States Bankruptcy Court for the Southern
District of New York, alleging that VirtualFund breached the September 29, 2000
Software Licensing Agreement and seeking $1,250,000, plus interest at 1% per
month. In April of 2002, the New York bankruptcy court denied Metiom’s motion
for summary judgment. Prior to that, the Minnesota court denied Metiom’s claim
of jurisdiction in New York. The
discovery period ended on April 30, 2002 although a motion was pending on
VirtualFund’s request for more discovery.
In July of 2002, VirtualFund and Metiom reached a negotiated
settlement. Under terms of the
confidential Settlement Agreement and General Release, the Company agreed to
pay $365,000, and entered into a mutual release of all actions, causes of
action, individual or class action claims or demands of any kind.
Thurn
et al. Litigation
In February 2001, the
Company commenced an action in Hennepin County District Court against Timothy
N. Thurn, Nancy Masters Sawyer, and Danny J. Vatland. The Company sought money
damages against the defendants for breaches of their employment agreements
and/or their fiduciary duties. Moreover, VirtualFund
sought to have the Court
declare that the defendants breached their respective employment agreements and
were therefore not entitled to any further compensation or benefits under those
agreements and that these agreements are rescinded. The Company claimed that
Defendant Thurn violated his contractual and/or fiduciary duties as Chief
Financial Officer and/or Treasurer of the Company, one of the violations being
the transfer of $2.5 million to Manugistics on November 21, 2000, even though
he was aware or should have been aware that the Company’s Board had restricted
Masters’ authority to enter into the transaction with Manugistics. Defendant
Masters Sawyer was claimed to have breached her duties as former
Secretary/Assistant Treasurer and most recently as Vice-President of
Operations, amongst others, by receiving excessive unapproved compensation,
failing to disclose contracts and transactions that were contrary to the
Company’s interest, and failing to perform the tasks and duties of her position
due to excessive, unexplained absenteeism. The Company claimed that Defendant
Vatland as Vice President of Advanced Technology Development and/or Chief
Technology Officer breached his duties because he failed to disclose and
furthered contracts and transactions by corporate officers and/or directors
that were contrary to the Company’s interest, and because he furthered the use
of corporate funds and/or assets which were not in furtherance of the Company’s
interest and were not authorized or in contravention of directives issued or
restrictions placed by VirtualFund’s Board. All defendants denied the Company’s
claims and raised various counterclaims, including counterclaims for severance
payments, breach of contract and violation of the Workers Adjustment Retraining
Notification Act. Messrs. Vatland and Thurn claimed to be entitled to 12 months
severance pay and Ms. 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 pay covering a period of time after he voluntarily had his base
compensation reduced from $250,000 to $175,000. The Company settled all claims in June 2001. In consideration for payments from the
Company in the amounts of $157,500, $45,000, and $55,000, respectively, to
Messrs. Vatland, Thurn, and Ms. Masters Sawyer, respectively, the parties
mutually released each other from any further claims and agreed to execute a
stipulation for dismissal with prejudice.
ITEM 4.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In November 2000, VirtualFund suspended its then Chief
Executive Officer, Melvin Masters, in connection with his actions regarding the
B2Bxchange and the software licensing agreement with Manugistics. Subsequently, the Board terminated Masters’
employment for cause and called a Special Meeting of the Company’s shareholders
to remove Masters as director of the Company.
At the special meeting on May 18, 2001
Masters was removed from the Board of Directors with 9,317,864 shares cast in
favor of Masters’ removal and 1,039,831 shares voted in favor of Masters’
retention. The holders of 354,885
shares abstained from voting, and 4,918,824 shares were not voted.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company’s Common Stock was listed on the Nasdaq
National Market under the symbol “VFND.”
Effective with the opening of business on August 16, 2001, the stock was
delisted from the Nasdaq National Market for failure to maintain the minimum
value of public float and minimum bid price required by Nasdaq for continued
listing. Subsequently, VirtualFund’s
Common Stock was traded on the Over the Counter Bulletin Board (OTCBB) under
the symbol “VFND.” Effective with the
opening of business on November 20, 2001, the stock was deleted from the OTCBB
for failure to make the filings with the SEC as required under the Securities
Exchange Act of 1934 within a thirty-day grace period. The following table provides the high and low sales
prices for the quarters indicated.
Quotations are based on information provided by IDD Information
Services, Tradeline® on Lexis®.
On November 14, 2002 the highest
bid price of the Common Stock was $0.07 per share.
As of November 14, 2002 there
were 262 shareholders of record of the Company’s Common Stock (not including
the owners of shares held in street name).
To date, the Company has paid no
cash dividends to its shareholders. The
Company has no plans to pay cash dividends in the near future.
ITEM 6.
ITEM 6. SELECTED
FINANCIAL DATA
The statement of
operations data set forth below for each of the years ended June 30, 2001, 2000
and 1999 and the balance sheet data as of June 30, 2001 and 2000 are derived
from audited financial statements included elsewhere in this Form 10-K.
The statement of operations data set forth below for the years ended June 30,
1998 and 1997 and the balance sheet data as of June 30, 1999, 1998 and
1997 are derived from audited financial statements which are not included in
this Form 10-K. All years prior to
fiscal 2001 have been reclassified to reflect discontinued operations. You should read the data set forth below in
conjunction with the audited financial statements and notes thereto and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” appearing elsewhere in this Form 10-K.
ITEM 7.
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For an understanding of the
significant factors that influenced the Company’s performance during the past
three years, the following discussion should be read in conjunction with the
financial statements and the other information appearing elsewhere in this
report.
When
used in this report, the words “expects,” “anticipates,” “estimates,” “intends”
and similar expressions are intended to identify forward-looking statements
within the meaning of Section 27A under the Securities Act of 1933 and Section
21E under the Securities Exchange Act of 1934.
Such statements include but are not limited to statements regarding the
ability to obtain favorable product allocations and the ability to increase
gross profit while controlling expenses.
These statements are subject to risks and uncertainties that could cause
actual results to differ materially, including those risks described in
CAUTIONARY STATEMENTS below.
Background
The
Company received $45.8 million from the sale of the DGBU in June 2000, and had
$39.5 million in cash and cash equivalents and $32.5 million in net current
assets after current liabilities at the end of its fiscal year on June 30,
2000. During the first two quarters of
fiscal 2001, the Company attempted to develop in the ISBU a new operating
division in the business-to-business electronic commerce market. The development of this market required substantial
cash which was taken from the proceeds from the sale of DGBU.
While former
management believed the DGBU sale proceeds would be sufficient to meet working
capital requirements for the foreseeable future, it became clear to the Board
of Directors during the second quarter of fiscal 2001 that product development,
market opportunities and additional financing alternatives were deficient,
diminished, and deteriorated, respectively, to the point where the continuing
of the Company’s operations and its survival were at significant risk. Additionally, at this time, it was
discovered that the Company’s then Chief Executive Officer, Melvin Masters, was
acting contrary to the directions of the Board and against the interests of the
Company. Masters was initially
suspended from his officer duties and then terminated as an officer of the
Company and removed as a member of all Board committees by actions of the
majority of the members of the Board.
Masters was removed from the Board by vote of the Company’s shareholders
at a special meeting in May 2001.
See Item 4, “Submission of Matters to a Vote of Security Holders.”
With the sale of
RSPNetwork in July 2001, the Company reported as if it exited the ISBU segment
in the fourth quarter of fiscal 2001 and discontinued ISBU operations. Under Generally Accepted Accounting
Principles (GAAP), the Company financial statements for all periods presented
reflect ISBU activity in discontinued operations.
The Company is
currently not operating any business, is in the process of resolving
outstanding disputes, and is actively pursuing options regarding the
utilization or distribution of its residual assets.
Liquidity and Capital Resources
As of June 30,
2001, the Company had cash and cash equivalents of $8.4 million that constitute
the remainder of the proceeds from the sale of the DGBU. Outstanding receivables and prepaid expenses
total approximately $3.1 million, $1.5 million of which has been collected and
$1.3 million of which is a refundable legal retainer fee. After resolving numerous disputes subsequent
to its June 30, 2001 fiscal year end (see above, Item 3, Legal Proceedings),
the Company believes it has settled all known material legal claims against
it. Current liabilities of the Company
at June 30, 2001 amounted to $7.5 million, which includes liabilities from
litigation costs and claims subsequently settled and disbursed. Under agreements entered into in July 2001
with two directors of the Company, Messrs. Adams and Duoos, which expire in
July 2004, the Company is also obligated to make monthly payments of $21,667
and $12,500, respectively, to them for consulting services for an aggregate
commitment of approximately $1.25 million (see below, Item 11, Executive
Compensation, Compensation of Directors).
Current
management of the
Company is not aware of any additional future liabilities of the Company
resulting from prior events. Management
therefore expects that the Company’s cash and cash equivalents will be
sufficient to meet its known actual and potential liabilities.
Results
of Operations
Effect of
Discontinuing the Company’s Operations
The DGBU and ISBU
operations are disclosed in the consolidated financial statements for all
periods presented as discontinued operations.
General and Administrative
Expenses
The general and
administrative expenses of the Company amounted to $5.7 million, $6.1 million
and $3.5 million in fiscal years 2001, 2000 and 1999, respectively. The general and administrative expenses of
the Company for fiscal 2001 reflect the continued expansion of the Company
during the first six months of the fiscal year as well as legal and other costs
related to the (i) litigation commenced by and against the Company, (ii)
Special Meeting in May 2001, and (iii) sale of the Company’s operating
business. The increase in general and
administrative expenses in fiscal 2000 compared to 1999 is attributable to
increases in personnel costs, professional and legal costs and other overhead
expenses in connection with the intended expansion of the Company.
Restructuring Charges
For fiscal 2001,
the Company’s statement of operations includes non-recurring and restructuring
charges totaling $7.8 million. The
charges include employee separation costs such as severance payments and
related legal costs of approximately $4.9 million, an allowance for
uncollectable receivables from a related party of approximately $1.9 million,
and facilities costs of approximately $1.5 million.
Interest Income
Interest income
amounted to $1.2 million, $187,000 and $62,000 in fiscal 2001, 2000 and 1999,
respectively. The increase in the
interest income results from the interest earned on the proceeds of the DGBU
sale.
Income Taxes
On June 30, 2001,
the net carrying value of the Company’s deferred tax assets was zero due to the
uncertainty of any realization of the benefits in the future. The valuation
allowance for deferred tax assets was approximately $10.9 million, an increase
of approximately $7.5 million from June 30, 2000. The Company had net federal operating
loss carryforwards of approximately $20.9 million which were available to
offset future taxable income and the gain from the sale of the DGBU. The
Company also had alternative minimum tax credit carryforwards of approximately
$225,000 available to reduce future federal income taxes, if any, over an
indefinite period and research credit carryforwards of approximately $872,000
available to reduce future federal income tax, if any, through 2005.
On June 30, 2000, the
valuation allowance for deferred taxes was approximately $3.4 million. The net
change in the total valuation allowance for the year ended June 30, 2000 was a
decrease of approximately $10.7 million.
Net Loss from Discontinued Operations
The net income (loss) of
the Company from discontinued operations was ($11.2 million), ($11.9 million)
and $263,000 in fiscal 2001, 2000 and 1999, respectively. The losses were caused by the lack of
sufficient revenues, combined with expenses for personnel, marketing and
product development for RSPN and B2BXchange, the ISBU divisions.
Gain/Loss on Sale of Discontinued Operations
On sale of the DGBU, the
Company recorded a $35.8 million gain in fiscal 2000. The sale of the RSPN division of the ISBU resulted in a loss of
$588,000 in fiscal 2001.
Recent Accounting Pronouncements
In June 2001, the
Financial Accounting Standards Board (FASB) issued Statement of Accounting
Standards (SFAS) No. 141 “Business Combinations.” SFAS No. 141 eliminates the pooling-of-interests method of
accounting for business combinations except for qualifying business
combinations that were initiated prior to July 1, 2001. In addition, SFAS No. 141 further clarifies
the criteria to recognize intangible assets separately from goodwill. The requirements of SFAS No. 141 are
effective for any business combination accounted for by the purchase method
that is completed after June 30, 2001.
The Company believes the adoption of SFAS No. 141 will not have a
material effect on the Company’s consolidated financial position or results of
operations.
In June 2001, the FASB
adopted SFAS No. 142 “Goodwill and Other Intangible Assets.” SFAS No. 142 discontinues the amortization
of recorded goodwill for fiscal years beginning after December 15, 2001. The Company believes the adoption of SFAS
No. 142 will not have a material effect on the Company’s consolidated financial
position or results of operations.
In June 2001, the FASB
issued SFAS No. 143 “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses accounting for
obligations associated with long-lived asset retirements and is effective for
fiscal years beginning after June 15, 2002.
The Company believes the adoption of SFAS No. 143 will not have a
material effect on the Company’s consolidated financial position or results of
operations.
In August 2001, the FASB issued SFAS No. 144
“Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 supersedes SFAS No. 121. SFAS 144 primarily addresses significant
issues relating to the implementation of SFAS 121 and develops a single
accounting model for long-lived assets to be disposed of, whether primarily
held, used or newly acquired. The
provisions of SFAS 144 will be effective for fiscal years beginning after
December 15, 2001. The provisions of
SFAS No. 144 generally are to be applied prospectively. The Company believes the adoption of SFAS
No. 144 will not have a material effect on the Company’s consolidated financial
position or results of operations.
CAUTIONARY STATEMENTS
Certain statements contained in this Form 10-K and other written and oral statements made from time to time by us do not relate strictly to historical or current facts. As such, they are considered “forward-looking statements” which provide current expectations or forecasts of future events. Such statements can be identified by the use of terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “could,” “possible,” “plan,” “project,” “should,” “will,” “forecast” and similar words or expressions. Our forward-looking statements generally relate to the legal proceedings the Company is involved in and the business acquisition opportunities the Company is investigating. One must carefully consider forward-looking statements and understand that such statements involve a variety of risks and uncertainties, known and unknown, and may be affected by inaccurate assumptions, including, among others, those discussed below. Consequently, no forward-looking statement can be guaranteed and actual results may vary materially. We undertake no obligation to update any forward-looking statement, but investors are advised to consult any further disclosures by us on this subject in our filings with the Securities and Exchange Commission, especially on Forms 10-K, 10-KSB, 10-Q, 10-QSB, and 8-K (if any), in which we discuss in more detail various important factors that could cause actual results to differ from expected or historic results. We note these factors as permitted by the Private Securities Litigation Reform Act of 1995. It is not possible to foresee or identify all such factors. As such, investors should not consider any list of such factors to be an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions.
Legal Proceedings
Legal proceedings
involving the Company are significant to the Company’s financial position. The financial statements include accrued
amounts sufficient to adequately reflect payments required under terms of the
various settlements and related legal expenses incurred subsequent to June 30,
2001. The Company is unaware of any
material existing or potential future legal proceedings for which additional
amounts would need to be accrued.
Business Acquisition Opportunities
The Company is currently
not operating any revenue-generating business.
However, the Company continues to incur general and administrative
expenses, especially for the compensation of its directors, consultant (interim
CEO), insurance, and for accounting and legal expenses. There is no guarantee that the Company will
be able to identify an adequate business acquisition opportunity and to
generate revenues before its financial resources are exhausted.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not
believe that there is any material exposure to market risk with respect to
derivative or other financial instruments that would require disclosure under
this item.
ITEM 8.
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements
and Supplementary Data attached.
ITEM 9.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective June 5,
2001, KPMG LLP resigned as the Company’s independent accounting firm.
KPMG LLP reported
on the financial statements of the Company for the fiscal year ending June 30,
2000. Such report neither contained an
adverse opinion or a disclaimer of opinion, nor was qualified or modified as to
uncertainty, audit scope, or accounting principles.
During the
Company’s 2000 fiscal year and the interim period through June 5, 2001, there
were no disagreements with KPMG LLP, whether or not resolved, on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which, if not resolved to the satisfaction of KPMG LLP,
would have caused it to make reference to the subject matter of the
disagreement(s) in connection with its report.
Effective July 16, 2001, Lurie Besikof Lapidus
& Company, LLP (LBLCO) was engaged as the Company’s independent accounting
firm. The decision to engage LBLCO as
the Company’s accountants was recommended by the Company’s Audit Committee and
approved by the Company’s Board of Directors effective July 16, 2001.
During the Company’s two fiscal years ended June
30, 2000, and the subsequent interim period prior to engaging LBLCO as the
Company’s accountant on July 16, 2001, the Company did not consult LBLCO on any
matter.
PART III
ITEM 10.
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS
Directors
Name, Age, Positions, Principal Occupations, Directorships
Year
Became Director
Timothy R. Duoos, age
46, was President and Chief Executive Officer of Lyndale Garden Center, Inc.
in Minneapolis from October 31, 1986 until 2000. Mr. Duoos also held a part-time position as Chairman of the
Board and Chief Executive Officer of Sunbelt Nursery Group, Inc. (“Sunbelt”)
based in Fort Worth, Texas, from November 1994 through May 1998, and
President from October 1997 through May 1998. He served as a part-time consultant to Sunbelt from May 1998 to
December 1998. Sunbelt filed a
voluntary petition under the U.S. Bankruptcy Code in May 1998. Mr. Duoos served as a Director of Pinnacle
Financial, Inc., a privately held company from June 1996 through June
1997. Mr. Duoos is currently
self-employed.
Edward S. Adams, age
39, has been a Professor of Law at the University of Minnesota School of Law
since 1992 and is Co-Director for the Kommerstad Center for Business Law and
Entrepreneurship at the University of Minnesota School of Law. Mr. Adams has also been a principal in
Equity Securities Investments, Inc. in Golden Valley, Minnesota since 1995.
John Cavanaugh, age 44,
served as Chief Executive Officer of Gateway Telecommunications Inc. from
1990 to 2000. Gateway was acquired by
United Asset Coverage Inc. (“UAC”) in October 2000. Mr. Cavanaugh currently holds the position of Senior Vice
President Equipment Division with UAC, the nation’s leading maintenance
provider for Avaya and Nortel Telecommunications with 50 offices located
throughout the United States.
Stephen Fisher, age 45,
is President of TEAM Technologies, formerly a wholly owned subsidiary
(RSPNetwork) of the Company. Mr.
Fisher has held this position since July, 2001 when RSPN was purchased from
the Company. TEAM Technologies is a
systems integrator specializing in Internet hosting, integration, and support
services. From 1992 to 1998, Mr.
Fisher was President and CEO of TEAM Technologies prior to its acquisition by
VirtualFund.
Kelly Johnson, age 42,
is the Managing Director of a Portland, Oregon office of a full service
investment banking and brokerage services firm. He has been involved in a variety of duties that include
strategic planning, personnel management, market analysis, sales and
marketing, and corporate/municipal underwriting. Mr. Johnson has served in numerous capacities related to the
investment and securities industry since 1986.
Executive Officers
Chief
Executive Officer
Melvin
L. Masters, age 46, founded the Company in February 1986 and was Chairman,
Chief Executive Officer and President of the Company from May 1989 until his
termination for cause in November 2000.
He was a director of the Company from 1989 until his removal from the
Company’s Board of Directors at the Special Meeting of Shareholders on May 18, 2001. Mr. Masters is also the sole shareholder,
director and CEO of TimeMasters, Inc., a company established in 1986 for the
purpose of property management, which has additional investments in the fields
of wireless voice/data communications, and various Internet services.
Robert E. Kelly, age 46,
was appointed the Company’s President on October 23, 2000 under terms of the
Rymatics acquisition agreement. He was
made acting chief executive officer, serving as CEO from November 20, 2000
until January 2001.
Douglass E. Coy, age 60,
acted as Chief Executive Officer of the Company from January 15, 2001 until
April 30, 2001. He is the principal of
Coy and Associates, Inc., a management consulting firm specialized in providing
consulting services in areas such as company reorganizations, litigation
support, asset management and liquidation.
Monte S. Johnson, age 43, was named Chief Executive
Officer and performed the duties of the Chief Financial Officer of the Company
from May 2001 to October 2001 when he resigned. Mr.
Johnson, an MBA and CPA, was the Chief Financial Officer and Senior Vice
President of Pro Staff Personnel Services prior to joining the Company.
Previously he served as Director of Business Development and Mergers &
Acquisitions at Honeywell, Inc. Prior to that, Mr. Johnson was a Senior Manager
at Deloitte & Touche International.
Chief
Operating Officer
Robert J. Wenzel, age 49,
was the Chief Operating Officer of the Company from October 1991 until his
termination in May 2001. Mr. Wenzel was
also the President of ColorSpan Corporation, the Company’s principal operating
subsidiary of its Digital Graphics Business Unit (“DGBU”), from October 1989
until May 2001.
Chief Financial Officer
Timothy N. Thurn, age 44,
assumed the duties of Chief Financial Officer from April 2000 until his
termination in November 2000. Mr. Thurn
was also the Treasurer of the Company from June 1989 until his termination. He
was Treasurer of ColorSpan Corporation from March 1987 until June 2000. Mr.
Thurn has experience as both a public and private accountant. Mr. Thurn is a Certified Public Accountant
(CPA) and Certified Management Accountant (CMA).
Michael P. Coughlin, age
41, assumed the duties of Acting Chief Financial Officer in November 2000 until
May 2001.
Senior Vice President
Joseph Beckman, age 37, assumed the duties of the
Company’s General Counsel in February 2000.
In December 2000, he accepted additional duties as Senior Vice President
and Secretary, and held all three positions until his resignation from the
Company in May 2001. Prior to joining
VirtualFund, Mr. Beckman worked as an attorney in private practice at the law
firm of Gough, Shanahan, Johnson & Waterman in Helena, Montana (1996 to
1999).
Legal Proceedings involving Directors and Executive Officers
See Item 3, Legal Proceedings,
concerning legal proceedings involving former directors and executive officers
of the Company.
Compliance
with Section 16(a) of the Securities Exchange Act
Under federal securities
laws, the Company’s directors and officers, and any beneficial owner of more
than 10 percent of a class of equity securities of the Company, are required to
report their ownership of the Company’s equity securities and any changes in
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-K any delinquent filing of such
reports and any failure to file such reports.
The
Company is aware that its former Chief Executive Officer, Melvin Masters, filed
a Form 5 for fiscal year 2000 belatedly, on October 31, 2000. None of the current directors of the
Company, the individuals who served as executive officers during fiscal year
2001, and/or the known beneficial owners of more than ten percent of the
Company’s common stock furnished to the Company any Forms 3, 4 or 5 and
amendments thereto.
ITEM 11.
ITEM 11. EXECUTIVE
COMPENSATION
Summary Compensation Table
The following table sets forth all cash
compensation paid or to be paid by the Company, as well as certain other
compensation, paid or accrued, during each of the Company’s last three fiscal
years to the (acting) Chief Executive Officer.
As of the end of fiscal year 2001, Monte Johnson was the only executive
officer of the Company. The table also
includes information on two individuals who were not serving as executive
officers of the Company at the end of its fiscal year 2001, but who would have
been the most highly compensated executive officers of the Company if they
still had worked for the Company. Their
total annual salary and bonus paid or accrued during fiscal year 2001 exceeded
$100,000.
(1) Forfeited pursuant to the Global Settlement Agreement
between Company and Mel Masters, dated March 11, 2002; see below, Employment
Contracts and Termination of Employment.
(2) Paid pursuant to Consulting Agreement between Company
and Coy & Associates Inc., dated as of January 15, 2001, and includes a
deposit in the amount of $30,000 (see below, Employment Contracts and
Termination of Employment and Change-in-Control Arrangements).
(3) Paid pursuant to Consulting Agreement between Company
and Monte S. Johnson, effective as of May 1, 2001, and includes a deposit in
the amount of $15,000 (see below, Employment Contracts and Termination of
Employment and Change-in-Control Arrangements).
(4) Forfeited pursuant to Settlement Agreement between
Company and Robert Wenzel, dated May 8, 2001; see below, Employment Contracts
and Termination of Employment.
(5) Reflects payments received from February 2000, when
Mr. Beckman started at the Company, until June 30, 2000, the end of fiscal
2000.
Option Grants During 2001 Fiscal Year
The Company maintains two stock option plans pursuant to
which executive officers, other employees and certain non-employees providing
services to the Company may receive options to purchase the Company’s common
stock. These plans are the 1990
Restated Stock Option Plan (as amended May 19, 1991) and the 1996 Stock
Incentive Plan. Options can no longer be
granted under the 1990 Restated Stock Option Plan.
The following table provides information regarding stock options granted
during fiscal 2001 to the named executive officers in the Summary Compensation
Table. The Company has not granted any
stock appreciation rights.
Option Exercises During 2001 Fiscal Year
and Fiscal Year-End Option Values
No options were exercised by the named executive officers during fiscal
2001. The following table provides
information related to the number and value of options held on June 30, 2001:
(1) Value
is calculated on the basis of the difference between the option exercise price
and $0.17, the average of the closing bid and ask price on June 30, 2001 as
quoted on the OTC Bulletin Board.
Compensation of Directors
Pursuant to letters from
the Company dated August 23, 1999 and September 10, 1999, Messrs. Duoos and
Adams, respectively, are entitled to receive a monthly fee of $3,000 each for
their services on the Board of Directors.
In fiscal 2001, Messrs. Duoos and Adams were paid $69,000 and $66,000,
respectively, for their services as board members dating back to 2000. The letters also granted each of Messrs.
Duoos and Adams options to purchase 100,000 shares of the Company’s common
stock at $2.00 and $1.65 per share respectively. Over a four-year period, on each anniversary date of the grant,
25,000 of these options will vest. In
July 2001, the Board repriced these options to $.15 per share.
For services performed in
connection with the reorganization of the Company after the termination of the
former Chief Executive Officer and President, Mr. Masters, Messrs. Adams and
Duoos each received a payment of $100,000 in June 2001. For services performed in connection with
the review of merger and acquisition possibilities, Mr. Cavanaugh received at
the same time a payment of $30,000.
Simultaneously, the Company granted to each of Messrs. Adams and Duoos
immediately exercisable 5-year options 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 July 2001. In June 2001, Mr. Cavanaugh received
immediately exercisable 5-year options to purchase 50,000 shares of the
Company’s common stock at $.16 per share.
The Board of Directors
decided on July 10, 2001 to grant to each of Messrs. Adams, Cavanaugh, Duoos
and Johnson on each anniversary date of the Board action non-qualified 5-year
options to purchase 100,000 shares of the Company’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/Investment Committee, Messrs. Adams and Duoos each
entered into agreements with the Company dated July 1, 2001. Under the terms of the agreements, they are
obligated to find business opportunities, investments, and/or transactions to
enhance shareholder value by performing the following consulting services:
contact investment bankers and brokers to identify and effectuate transactions,
conduct and oversee the due diligence required to analyze transaction options,
review and analyze proposals for transactions, present details to the Board of
Directors for consideration, negotiate the structure, parameters and valuation
with respect to any transaction, coordinate all necessary legal, accounting or
other necessary professional assistance to successfully consummate
transactions, negotiate with any lending or financial institutions, if
necessary, to consummate transactions.
Under their respective agreements, Messrs. Duoos and Adams receive
monthly base compensation in the amount of $21,667 and $12,500,
respectively. On each anniversary date
of the agreements, the Company will grant to each of them options under the
Company’s Stock Option Plan to purchase 100,000 shares of the Company’s common
stock at $.15 per share. Moreover,
Messrs. Duoos and Adams are eligible to participate in any bonus or performance
based incentive compensation plans which may be established by or provided for
the Board of Directors. Any reasonable
and necessary out-of-pocket expenses incurred by Messrs. Duoos and Adams in
connection with their 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 of death or disability, payments under the agreements are made through
the date of termination. If an
agreement is terminated by the Company without cause or with cause by Messrs.
Duoos or Adams, respectively, payment of the base compensation is continued as
severance payment until the end of the term of the agreement. Upon termination of an agreement for cause
by the Company or without cause by Messrs. Duoos or Adams, respectively,
payments will only be made through the date of termination.
In August 2001, the Board
of Directors approved the reimbursement of relocation expenses to Mr.
Duoos. The Company reimbursed Mr. Duoos
expenses in the amount of $202,527. At
the same time, Mr. Adams received a one-time special consulting fee in the amount
of $30,000 for services provided to the Company outside of the agreement for
his work on the Special Acquisition/Investment Committee.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
See Item 3, Legal
Proceedings, regarding the legal proceedings concerning the employment
relationships between the Company and its former officers, Messrs. Masters,
Vatland, Thurn, Ryan and Wenzel.
Under a Consulting
Agreement dated January 15, 2001, the Company paid Mr. Coy for his services at
an hourly rate of $195 and a minimum fee of $5,000 to be paid by the
Company. Upon execution of the
Agreement, the Company paid a deposit in the amount of $30,000. The Agreement could be terminated by either
party at any time without cause. The
Agreement was terminated as of April 30, 2001.
The Company entered into
a Consulting Agreement with MSJ & Associates, LLC (“Consultant”), which is
controlled by its principal, Monte Johnson, effective May 1, 2001. Under the Consulting Agreement, Mr. Johnson
was designated as acting Chief Executive Officer of the Company and had the
powers and authorities, as well as the duties and obligations, inherent in such
office. The Company paid $175 per hour
for services provided under the Consulting Agreement. Upon execution of the Agreement, the Company deposited with
Consultant the amount of $15,000 to be held as deposit by Consultant until the
termination of the Agreement. The
Agreement was entered into for an indefinite term and could be terminated by
either party upon five days written notice.
Consultant terminated the Agreement in October 2001.
In connection with the
termination of its employment relationship with Robert J. Wenzel, who had been
the Company’s Chief Operating Officer since 1991, the Company entered into a
Settlement Agreement and Mutual General Release dated May 8, 2001. Under the agreement, Wenzel received
payments in the total amount of $349,000 (including reimbursement of his attorney’s
fees). The parties agreed to release
each other from any and all claims, including non-compete obligations Wenzel
was subject to.
The Company and its
Senior Vice President and General Counsel, Joseph Beckman, entered into an
Agreement and Release effective as of May 21, 2001. The parties agreed that Beckman’s employment with the Company
terminated as of May 21, 2001 and that Beckman resigned from all offices he had
held with the Company as of such date.
Moreover, the parties agreed to mutually release each other from any
claims. Beckman agreed to keep any
confidential information of the Company confidential for an unlimited period,
except as may be required by law or legal process. In consideration for the promises made in the agreement and the
services he rendered to the Company through the end of his employment, Beckman
received, in addition to the salary due to him until the end of his employment
with the Company, a settlement payment of $65,000.
Compensation Committee Interlocks and Insider
Participation
Prior to his termination the former Chief Executive
Officer of the Company,
Melvin L. Masters, was a member of the Compensation Committee. Mr. Masters’
compensation was set by the Board of Directors as a whole with Mr. Masters
abstaining.
Board Compensation Committee Report on Executive
Compensation
One of the primary goals
in setting compensation policies is to maintain competitive, progressive
programs to attract, retain and motivate high caliber executives, and maximize
the financial success of the Company by appropriately rewarding such
individuals for their achievements.
Another goal is to provide an incentive to executives to focus efforts on
long-term strategic goals for the Company by closely aligning their financial
interests with stockholder interests.
To attain these goals the Company’s executive compensation program was
designed to include base salary, incentive bonuses and long-term incentives in
the form of stock options.
Base Salary. Salaries for executives are reviewed by the
Compensation Committee on a periodic basis and may be increased (or decreased)
at any time based on: (1) the Compensation
Committee’s evaluation of the individual’s performance; and (2) the Company’s
financial condition. Increases in
median competitive pay levels are a secondary factor.
During Mr. Masters tenure
as Chief Executive Officer, compensation for him as the Company’s Chief
Executive Officer was set by the Board of Directors as a whole, with Mr.
Masters abstaining. The compensation
for his successors was set by the Compensation Committee. The amounts earned by the various people
holding the office of the Company’s Chief Executive Officer in fiscal 2001 are
disclosed in the summary compensation table.
The Compensation Committee
consists of the following members:
John Cavanaugh
Steve Fisher
Kelly Johnson
Performance Graph
The following table
compares the cumulative total return on the common stock of the Company for the
last five years with the Nasdaq Composite Index and with an index of computer corporations listed on Nasdaq, in each case
assuming an investment of $100 on June 30, 1996 and the reinvestment of all
dividends:
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table
provides information as of November 14, 2002 (the “Record Date”) concerning the
beneficial ownership of the Company’s Common Stock by (i) each director of the
Company, (ii) each executive officer named in the Summary Compensation Table,
(iii) the persons known by the Company to own more than 5% of the Company’s
outstanding Common Stock, and (iv) all directors and executive officers as a
group. Except as otherwise indicated,
the persons named in the table have sole voting and investment power with respect
to all shares of Common Stock owned by them.
On the Record Date, 15,203,617 shares of Common Stock of the Company
were issued and outstanding.
* Less than 1%.
(1) For each person or group, any securities
that the person or group has the right to acquire within 60 days pursuant to
options, warrants, conversion privileges or other rights, have been added to
the total amount of outstanding shares when determining the percent owned by
such person or group.
(2) Includes 425,000 shares of common stock
subject to options exercisable within 60 days after the Record Date.
(3) Includes 425,000 shares of common stock
subject to options exercisable within 60 days after the Record Date.
(4) Includes 150,000 shares of common stock
subject to options exercisable within 60 days after the Record Date.
(5) Includes 100,000 shares of common stock
subject to options exercisable within 60 days after the Record Date.
(6) Under terms of the Global Settlement
Agreement dated March 22, 2002 all shares of the Company’s stock owned
beneficially or directly by Melvin Masters were surrendered, and all warrants
and options cancelled.
(7) Includes 160,000 shares of common stock
subject to options exercisable within 60 days after the Record Date.
(8) Includes 1,260,000 shares of common stock
subject to options exercisable within 60 days after the Record Date.
(9) Includes 1,371,429 shares of common stock
subject to warrants exercisable within 60 days after the Record Date.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 23, 2001,
VirtualFund.com, Inc. (the “Company”) entered into an Asset Purchase Agreement
with its wholly owned subsidiary, RSPNetwork, Inc. and RSP Acquisitions,
LLC. Pursuant to the Asset Purchase
Agreement, RSPNetwork, Inc. sold substantially all of its assets and business
to RSP Acquisitions, LLC for a purchase price consisting of the assumption of
certain liabilities, up to $1,000,000 based on an earnout formula and other
terms, conditions and provisions detailed in the Asset Purchase Agreement. Mr. Steven Fisher, President of RSP
Acquisitions, LLC, is a director of the Company. The Company has received a fairness opinion relating to the
sale. The assets involved in the
transaction related to RSPNetwork, Inc.’s business of information systems
integration providing IT solutions for businesses, and included accounts
receivables, inventory, prepaid expenses, contracts, proprietary rights,
equipment, records and customer deposits.
As of July 1, 2001, the
Board established a loan program whereby the Company will loan up to $500,000
to the outside directors based on their seniority 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 to purchase 488,758 and 488,759
shares of common stock, respectively, from two shareholders at a purchase price
of $.15 per share. The Sarbanes-Oxley
Act of 2002 restricts future loans to directors.
On November 8, 2001, Cash
Systems, Inc. and a wholly owned subsidiary of Cash Systems, Inc. issued a
convertible promissory note to VirtualFund in the amount of up to
$500,000. Advances totaling $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 common stock of
Cash Systems, Inc. Mr. Edward Adams,
Vice-Chairman of the Board of VirtualFund, is President and a principal of
Equity Securities Investments, Inc.
Since October 2001,
Equity Securities Investments, Inc. has provided various brokerage and
investment banking services in transactions involving the Company, earning
commissions and fees from the Company or other parties to the transaction
totaling $355,000, plus warrants of unspecified value. Mr. Edward Adams, Vice-Chairman of the
Board of VirtualFund, is President and a principal of Equity Securities
Investments, Inc.
For other agreements
involving directors and/or officers of the Company, see Item 11: “Compensation
of Directors” and “Employment Contracts and Termination of Employment and
Change-in-Control Arrangements.”
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a)
The following documents
are filed as part of this Form 10-K:
(1)
Consolidated Financial
Statements
The financial
statements (including the notes thereto) listed in the Index to Consolidated
Financial Statement Schedule (set forth in Item 8 of Part II of this form
10-K) are filed as part of this Annual Report on Form 10-K.
(2)
Consolidated Financial
Statement Schedule
Schedule II: Valuation and Qualifying Accounts
Schedules not listed
above have been omitted because they are not required or the information
required to be set forth therein is included in the Consolidated Financial
Statements or Notes to Consolidated Financial Statements.
(3)
Exhibits-See Exhibit
Index on page following signatures
(b)
Reports on Form 8-K.
The following reports
on Form 8-K were filed during the quarter ended June 30, 2001:
(1)
Form 8-K filed May 18,
2001, reporting under Item 5 about the special meeting of Company’s
shareholders.
(2)
Form 8-K filed June 6, 2001,
reporting under Item 4 the resignation of KPMG LLP as independent accountant
of VirtualFund effective June 5, 2000.
(c)
Exhibits.
See Item 14(a) above.
(d)
Financial Statements Schedules. See Item 14(a) above.
VIRTUALFUND.COM, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001, 2000 and 1999
C O N T E N T S
Page
INDEPENDENT AUDITORS’
REPORTS
FINANCIAL STATEMENTS
Consolidated balance
sheets
Consolidated
statements of operations
Consolidated
statements of stockholders’ equity
Consolidated
statements of cash flows
Notes to
consolidated financial statements
INDEPENDENT
AUDITOR’S REPORT
Board of Directors and Stockholders
VirtualFund.com, Inc. and Subsidiaries
Minnetonka, Minnesota
We have audited the accompanying
consolidated balance sheet of VirtualFund.com, Inc. and Subsidiaries (Company)
as of June 30, 2001, and the related consolidated statements of operations,
stockholders’ equity, and cash flows for the year then ended and the
consolidated financial statement schedule listed in the index at Item
14(a)(2). These consolidated financial
statements and financial statement schedule are the responsibility of the
Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audit.
We conducted our audit in
accordance with auditing standards generally accepted in the United States of
America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material
respects, the financial position of VirtualFund.com, Inc. and Subsidiaries as
of June 30, 2001, and the results of their operations and their cash flows
for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
Also, in our opinion, the consolidated financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken in a whole, presents fairly in all material respects the information set
forth therein.
The Company has significant
related party transactions and legal proceedings as discussed in Notes 10 and
12, respectively.
/s/ Lurie Besikof Lapidus & Company, LLP
Minneapolis, Minnesota
September 10, 2001,
except for Notes 4, 12 and 13 as to which the date is July 29, 2002.
INDEPENDENT AUDITORS’ REPORT
The Board of Directors and Stockholders
VirtualFund.com, Inc.
Eden Prairie, Minnesota
We have audited the accompanying consolidated balance sheet of VirtualFund.com, Inc. (the Company) and subsidiaries as of June 30, 2000, and the related statements of operations, stockholders’ equity and cash flows for the fiscal year ended June 30, 2000, and the financial statement schedule listed in the index at Item 14(a)(2). These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of VirtualFund.com, Inc. and subsidiaries as of June 30, 2000, and the results of their operations and their cash flows for the fiscal year ended June 30, 2000, in conformity with accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
Minneapolis, Minnesota
September 19, 2000
INDEPENDENT
AUDITORS’ REPORT
Board of Directors and Stockholders
VirtualFund.com, Inc. and Subsidiaries
Eden Prairie, Minnesota
We have audited the
consolidated statements of operations, stockholders’ equity, and cash flows of
VirtualFund.com, Inc. and Subsidiaries (the Company) for the year ended June
30, 1999 and the financial statement schedule listed in the index at Item
14(a)(2) for the year ended June 30, 1999.
These consolidated financial statements and financial statement schedule
are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated
financial statements and financial statement schedule based on our audit.
We conducted our audit in
accordance with auditing standards generally accepted in the United States of
America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, such
consolidated financial statements present fairly, in all material respects, the
results of operations and cash flows of the Company for the year ended
June 30, 1999 in conformity with accounting principles generally accepted
in the United States of America. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information therein set forth.
The accompanying
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. The
Company is experiencing difficulty in generating sufficient cash flow to meet
its obligations and sustain its operations, which raises substantial doubt
about its ability to continue as a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/Deloitte &
Touche LLP
Minneapolis, Minnesota
October 21, 1999
VIRTUALFUND.COM, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
See notes to consolidated financial statements.
VIRTUALFUND.COM, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
OPERATIONS
See notes to consolidated financial statements.
VIRTUALFUND.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
See notes to consolidated financial statements.
VIRTUALFUND.COM, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
VIRTUALFUND.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business and
Significant Accounting Policies -
Business
VirtualFund.com, Inc. and Subsidiaries (Company)
is an Internet venture resource company.
The Company historically operated in two business segments: the Internet
Services Business Unit (ISBU) and the Digital Graphics Business Unit (DGBU).
The ISBU provided information system design,
implementation and support services, developed and sold Internet-based
electronic commerce software, and provided Internet hosting services. In the fourth quarter 2001, the Company discontinued
the ISBU and in July 2001, sold the remaining ISBU assets and operations.
The DGBU designed, manufactured, marketed and sold
wide-format digital color printers, aftermarket inks and specialty coated media
for graphic arts professionals. In June
2000, the Company completed an asset sale of the DGBU operations.
The DGBU and ISBU operations are disclosed in the
consolidated financial statements as discontinued operations. The consolidated financial statements for
2000 and 1999, were restated to reflect the discontinued operations.
The Company currently has no operating business
units. Continuing operations consist
primarily of unallocable corporate general and administrative expenses.
Principles of
Consolidation
The consolidated 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 ColorSpan Latin America, Ltd.
(CSLA). RSPNetwork, B2BXchange, and
Rymatics represented the ISBU. Kilborn,
CSC, and its subsidiaries represented the DGBU. All significant intercompany balances and transaction were
eliminated.
Use of Estimates
The preparation of these consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that
may affect the reported amounts and disclosures in the financial statements and
accompanying notes. Actual results
could differ from these estimates.
Significant management estimates relate to the valuation allowance of
deferred income tax assets, nonrecurring and restructuring charges, and
litigation related allowances and liabilities (estimated legal fees related to
litigation liabilities have been accrued).
Revenue Recognition
Sales were recognized when products or services
were delivered to the Company’s customers.
The Company also provided design, implementation and support services
under fixed price and time and materials contracts. For fixed price contracts, revenue was recorded based on the
estimated percentage of completed services rendered. Losses, if any, on fixed price contracts were recognized when the
loss was determined. For time and
materials contracts, revenue was recognized at contractually agreed upon rates
as the costs were incurred.
Concentration of
Credit Risk
Financial instruments which potentially subject
the Company to concentration of credit risk are cash and cash equivalents and
accounts receivable. To reduce risk for
cash and cash equivalents, the Company maintains cash and cash equivalents at
reputable financial institutions in deposit and money market accounts which, at
times, may exceed federally insured limits.
The largest single concentration of cash equivalents at June 30, 2001,
was approximately $6,500,000 in a certificate of deposit. The Company has not experienced any material
losses in such accounts and does not believe it is exposed to any significant
credit risk. At June 30, 2001, the
Company’s customer base ranged from small local entities to Fortune 500
companies located primarily in the Midwest and in the agricultural
industry. Receivables from these
customers are included in net liabilities of discontinued operations. In 2001 and 2000, two Fortune 500 customers
contributed approximately 71% (48% and 23%) and 56%, respectively, of revenue
from discontinued operations.
Cash equivalents
All highly liquid cash investments with initial
maturities of three months or less are considered to be cash equivalents.
Property and
Equipment
Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets of two to
seven years.
Goodwill
Goodwill represents the excess of the purchase
price over the fair value of net assets acquired and was amortized on a
straight-line basis over five years or written off when impaired.
Research and
Development and Software Costs
Expenditures related
to the development of new products and processes, including significant
improvements and refinements to existing products, and the development of
software were expensed as incurred, unless required to be capitalized. No software development costs were
capitalized during 2001, 2000 and 1999.
Acquired Technology
and Other Intangible Assets
Acquired technology
and other intangible assets were amortized using the straight-line method over
the estimated useful lives of the assets, generally from two to three years. In
2000, the Company acquired domain names for B2BXchange, an e-commerce marketplace.
The recoverability of these assets were continually evaluated by comparing the
remaining unamortized cost to the estimated future cash flows of the associated
assets. During fiscal 2001, the balance
of acquired technology and other intangible assets was written off as impaired.
Fair Value of
Financial Instruments
Cash and cash equivalents, receivables,
notes receivable, accounts payable, and accrued liabilities are carried at
amounts believed to approximate fair values.
It is not practicable to determine the fair value of related party
receivables and notes payable as the relationship of the parties to the Company
may influence the terms.
Accounting for Stock-Based Compensation
The Company accounts
for employee stock options under Accounting Principles Board Opinion (APB) No.
25, “Accounting for Stock Issued to Employees,” and provides the pro forma
disclosures required by Statement of Financial Accounting Standards (SFAS) No.
123, “Accounting for Stock-Based Compensation.”
Income (Loss) Per
Common Share
Income (loss) per
common share - basic is determined by dividing the income (loss) by the
weighted average common shares outstanding.
Income (loss) per common share - diluted is computed by dividing the
income (loss) by the weighted average common shares outstanding and the common
share equivalents (stock options, stock warrants, convertible debentures and
shares issuable relating to the litigation settlement). Common share equivalents are not included in
the computations as their effects were antiduilutive.
Recent Accounting Pronouncements
In June 1998, the
Financial Accounting Standard Board issued SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” effective for years beginning
after June 15, 2000, as amended. The
statement establishes accounting and reporting standards for derivative
instruments and hedging activities.
This pronouncement did not effect the Company’s consolidated financial
statements.
In December 1999,
the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin
No. 101 - “Revenue Recognition” (SAB No. 101).
SAB No. 101 provides the SEC views in applying accounting principles generally
accepted in the United States of America to selected revenue recognition
issues. In June 2000, the SEC released
Staff Accounting Bulletin No. 101B - “Second Amendment” (SAB No. 101B) delaying
the implementation date of SAB No. 101 to no later than the fourth fiscal
quarter of registrants with fiscal years beginning after December 15,
1999. This pronouncement did not have a
material effect on the Company’s consolidated financial statements.
In June 2001, the
Financial Accounting Standards Board issued SFAS No. 141, “Business Combinations,”
and SFAS No. 142, “Goodwill and Other Intangible Assets,” 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 future business combinations and discontinue
the amortization of acquired goodwill, subject to periodic impairment
testing. The Company does not
anticipate the adoption of these standards will have a material impact on the
Company’s consolidated financial statements.
2. Business Combination
-
In December 1998, the Company,
through its wholly owned subsidiary RSPNetwork, issued 1,499,998 shares of
series A convertible preferred stock and notes payable of $3,678,258, in
exchange for all of the common stock of K&R Technical Services, Inc. d/b/a/
Team Technologies (K&R), a privately held information technology consulting
company. Each share of series A
convertible preferred stock was convertible into common stock of the Company, initially
at the rate of one share of common stock for each share of series A convertible
preferred stock. The series A
convertible preferred stock carried a $5.00 per share guaranteed value on the
maturity date in December 2000. The
preferred stock was valued at $5 per share for the purchase.
The aggregate
purchase price of approximately $11,278,000, including transaction costs, was
allocated to assets and liabilities acquired as follows:
The operating
results of K&R are included as discontinued operations in the consolidated
statements of operations from the date of acquisition. Pro forma results of operations for 1999,
assuming the acquisition occurred as of July 1, 1998, were as follows:
3. Discontinued
Operations -
ISBU
In October 2000, the
Company acquired Rymatics for $254,070 in cash, equal to the net book value as
of the closing date, and 500,000 shares of common stock valued at
$1,031,250. Rymatics specialized in
software engineering and related services.
In January 2001, the Company ceased all operations of this acquisition,
terminated all employees, returned all property and equipment to the seller and
provided Rymatics with $150,000 of operating funds. To assist in the transition, Company also lent Rymatics $150,000,
collateralized with 250,000 shares of Company stock. A $1,031,250 write-off of goodwill relating to the acquisition
was included in restructuring charges in fiscal year 2001. No payment was received on the note, which
was subsequently written off.
In early fiscal 2001,
the Company formed B2BXchange, which was to allow businesses to develop web
sites and set up stores in vertically integrated trading communities on the
Internet. The Company discontinued this
operation shortly after it was launched due to lack of product focus, potential
near term revenue, and adequate resources to complete and bring the product to
market. Costs related to closing this
operation are included in discontinued operations.
In July 2001, the
Company sold certain assets, liabilities and the operations of RSPNetwork to a
member of the Company’s Board of Directors and a stockholder for contingent
payments based on future RSPNetwork revenue.
Contingent payments from the sale are capped at $1,000,000 and will be
recognized when received. A loss on
sale of discontinued operations totaling $588,120 was recognized for the year
ended June 30, 2001.
The components of
net assets (liabilities) of the ISBU’s discontinued operations are as follows:
During fiscal 2000, the balance of goodwill associated with the K&R
acquisition was written off as impaired.
Net sales of the ISBU were $5,811,758, $6,900,557, and $4,160,916 in
2001, 2000, and 1999 respectively.
Interest expense was $115,118, $319,531, and $108,409 in 2001, 2000, and
1999, respectively, as related debt resided in the ISBU. Net loss of the ISBU was $11,191,459,
$16,943,635, and $2,291,692 in 2001, 2000, and 1999, respectively.
DGBU
In June 2000, the Company sold the DGBU. In determining the $35.8
million gain from this sale, cash proceeds of $45.8 million were reduced by net
assets sold of $5.1 million, related income taxes of $2.3 million, and other
costs and adjustments of $2.6 million. Included in the adjustments are
estimated future costs which included an accrual for contractual
responsibilities remaining from the sale of the DGBU and other miscellaneous
anticipated expenses. The Company could receive an additional $1,000,000, which
was not included in the cash proceeds above, when consents to assign facility
leases to the purchaser are received from the lessor.
Net sales of the
DGBU were $62,858,444 and $71,578,364, in 2000 and 1999, respectively. Interest
expense was $1,026,441 in 2000, as related debt resided in the DGBU. Net income of the DGBU was $5,023,720 and
$2,554,554 in 2000 and 1999, respectively.
The components of net assets
(liabilities) of the DGBU’s discontinued operations are as follows:
4. Nonrecurring and
Restructuring Charges -
In December 2000, as a
result of the discontinued operations and other actions, the Company adopted a
restructuring plan and incurred certain nonrecurring and restructuring charges
in 2001, including subsequent settlements through July 29, 2002, which are
included in operations as follows:
(a) Allowance for uncollectible
receivables from Melvin Masters (Masters), the Company’s former Chief Executive
Officer (former CEO).
(b) Costs associated
with the discontinuance of the Internet business-to-business software platform,
B2Bxchange, and separate supply chain investment. Approximately $1,585,000 related to the Rymatics termination of
operations (including $1,031,250 of goodwill write-off) and $1,200,000 to the
Manugistics legal proceedings.
(c) Severance and
associated legal and other fees related to the termination of approximately 100
management and administrative employees and many unfavorable long-term employee
contracts. Approximately $500,000
related to legal and other related fees.
(d) Payments to exit
closed and idle facilities leases.
Nonrecurring and restructuring charges totaling $13,067,190 were
allocated $7,762,632 to continuing operations and $5,304,558 to discontinued
operations.
5. Property and
Equipment -
Property and equipment are as follows:
6. Other Financial
Statement Data -
Additional
information concerning selected balance sheet accounts is as follows:
7. Income Taxes -
The provision (benefit) for income taxes
is as follows:
A reconciliation
of the expected federal income tax provision at the statutory 35% rate with the
provision (benefit) for income taxes is as follows:
Temporary
differences comprising net deferred tax assets are as follows:
The increase (decrease) in the valuation allowance for 2001 and 2000
was $7,515,000 and ($10,714,000), respectively. Realization of the deferred tax asset will depend on the
Company’s ability to generate sufficient taxable income. Based on the Company’s recent operating
losses, lack of any continuing operations, and the uncertain future of its
current strategy, management is not certain that the Company will be able to
generate sufficient future taxable income to fully utilize its deferred tax
assets. In addition, realization of net
operating loss carryforwards may be limited under certain provisions of the
Internal Revenue Code regardless of the Company’s ability to generate taxable
income. As a result, the Company
recorded a valuation allowance for the entire deferred tax asset.
At June 30, 2001,
the Company has net a operating loss carryforward for federal income tax
purposes of approximately $20,885,000, which is available to offset future
taxable income, if any, through 2021. The Company also has alternative minimum
tax credit carryforwards of approximately $225,000 available to reduce future
federal income taxes, if any, over an indefinite period and research and
development credit carryforwards of approximately $872,000 available to reduce
future federal income tax, if any, through 2005.
The Company recognized income tax benefits of $84,000 in 2000 pertaining
to the exercise of stock options, which are reflected in additional paid-in
capital.
State taxes are
deemed insignificant and not separately disclosed.
8. Stockholders’ Equity -
Preferred Stock
In December 1998, the Board of Directors approved the plan to purchase
K&R by issuing Series A convertible preferred stock (preferred stock), with
certain powers, preferences, rights, qualifications, limitations and
restrictions. On December 18, 1998, the
Company issued 1,499,998 shares of preferred stock to the shareholders of
K&R (Note 2). Holders of the
preferred stock had the same voting rights as the Company’s common stockholders
and had a liquidation preference of $5 per share. The preferred stock was convertible at the option of the holder
into common stock, initially at the rate of one share of common stock for each
share of preferred stock, and had a guaranteed value of $5 per share on the
maturity date of December 17, 2000. The
Plan provided for automatic conversion to common stock if the common stock
traded at or above $5 per share for 30 consecutive calendar days and if the
Company’s Board of Directors waived a two-year restriction on transferability
of the shares of common stock issuable upon such conversion. The automatic conversion was triggered on
February 17, 2000. As part of a
noncompete agreement, which is in litigation, 100,000 shares of converted
preferred stock were repurchased and cancelled. Total net common shares issued in the conversion were 1,399,998.
Common Stock
In June 2000, the
Company authorized the repurchase of up to 2,000,000 shares of the Company’s
common stock. In October 2000, the
Company authorized the repurchase of an additional 2,000,000 shares of the
Company’s common stock. During fiscal
year 2001, the Company repurchased an aggregate of 2,416,400 of common stock.
Stock Options and Warrants
The Company reserved 5,000,000 shares of common stock under the
VirtualFund.com, Inc. 1996 Stock Incentive Plan, (Plan). Under the Plan, incentive stock options and
non-statutory stock options may be granted to key employees, directors, and
consultants of the Company at exercise prices not less than 100% of the fair
market value of the common stock at the date of grant and 110% for incentive
stock options granted to individuals owning 10% or more of the Company’s common
stock. The Plan is administered by a stock option committee appointed by the
Board of Directors. The committee establishes all terms and conditions of each
grant, except that, in the case of incentive options, the term may not exceed
10 years. The Company also has a 1990
Restated Stock Option Plan. No
additional options may be granted under this Plan. All previously granted options will remain outstanding for 10
years from the grant date.
Stock options and warrant
activity is as follows:
(a) In January 2001, a warrant for 50,000 shares was
redeemed in a cashless exercise for 8,302 shares of the Company’s common stock.
In May 2001, the Company’s
Board of Directors approved the repricing of 100,000 nonstatutory stock options
from the original exercise price of $4.00 per share to $.25 per share,
resulting in an insignificant change to the original option intrinsic value
assigned.
The per share
weighted average fair value of stock options granted during 2001, 2000, and
1999 is $0.26, $0.99, and $1.14, respectively.
Options
outstanding and exercisable at June 30, 2001, are as follows:
Warrants outstanding and exercisable at
June 30, 2001, are as follows:
Had the Company
recognized stock option compensation expense based on grant-date fair value,
consistent with the provisions of SFAS No. 123, the net income (loss)
would be approximately as follows:
The fair value of
stock options and warrants is the estimated present value at grant-date using
the Black-Scholes option pricing model with the following weighted average
assumptions:
9. Commitments -
Operating Leases
The Company leases
certain equipment and facilities under operating leases. The facilities leases require payments of
property taxes, insurance, and maintenance costs in addition to basic rent and
some contain renewal options for periods ranging from one to three years.
Certain of the
facilities were leased from Grandchildren’s Realty Alternative Management
Program I (GRAMPI), a Minnesota limited partnership controlled by the Company’s
former CEO (Masters), and from TEAM Property Management Company (TEAM), a
company controlled by three stockholders of the Company. The GRAMPI lease
originally expired in 2010. The Company vacated the space,
discontinued rent payments and, in March of 2002, reached a settlement
releasing the Company from any further obligation under the lease. The lease with TEAM was cancelled in July
2001 by mutual consent with the RSPNetwork sale.
Rent expense was
allocated to discontinued operations based on space occupied. Rent expense under all operating leases for
both continuing and discontinued operations (including property taxes,
insurance, and maintenance costs) was as follows:
Future minimum operating lease payments
are as follows:
Employee Benefit Plans
The Company had
two qualified defined contribution 401(k) plans covering substantially all
employees. One plan covered RSPNetwork employees and the other plan covered all
other employees. The plans offered
employees a savings feature and Company matching contributions were
discretionary. The plans were combined
in 2001, and no employer contributions were made in 2001, 2000, or 1999. The Company intends to terminate the
combined plan in 2002.
10. Related Party Transactions -
In December 2000,
the Board of Directors engaged an independent consultant to review transactions
between the Company and its former CEO and TimeMasters, Inc. (TMI), a
corporation controlled by the former CEO. Based on the findings, the Company
terminated these relationships and commenced legal action against the former
CEO. (Note 13 - Global Settlement
Agreement - Masters)
In 2001, the
Company deposited $1.5 million with a law firm to represent certain present and
former directors and officers. At June
30, 2001, the Company has $1.4 million remaining, which is included in prepaid
expenses.
Transactions with
related parties are as follows:
Balances
outstanding with parties controlled by the former CEO are as follows:
(a) Pursuant to a lease dated December 31,
1995 and until January 10, 2001, the Company leased and occupied space in
Eden Prairie, Minnesota from GRAMPI. The general partner of GRAMPI is TMI. One
of the limited partners of GRAMPI is a trust (TRUST), of which a former
director of the Company was trustee at the time of the lease negotiations and
the minor children of the former CEO are the beneficiaries. Other limited
partners appear to include the former CEO, his second and third wives (as joint
tenants), as well as his brother and his brother’s spouse and children. In
1995, the Company retained the services of a law firm as well as an independent
commercial real estate brokerage firm in negotiating the lease.
The Company leased 178,774 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 over the lease term and
obligated the Company to pay various operating expenses. The current Board of Directors determined
various potential fairness problems with the lease, which resulted in
litigation (Note 13 - Global Settlement Agreements - Masters).
(b) The Company performed services for and
paid various amounts on behalf of TMI. The receivable from TMI of $206,711 at
June 30, 1999, was combined with additional indebtedness into the $472,977 note
described in (c).
(c) Prior to 1999, GRAMPI borrowed $250,000
from the Company under a note guaranteed by the former CEO, collateralized by
the Company’s common stock owned by GRAMPI and bearing interest at the prime
rate plus 2.0%. In September 1999, the balance of the note was combined with
additional borrowings during 1999 into a new $500,000 noninterest bearing note
due September 1, 2000. During 1999, the
former 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 former
CEO totaling $472,977, due September 1, 2000, with interest at 9.75%. In 1999, the former CEO borrowed an additional
$200,000 due September 1, 2000, with interest at 9.75%. These notes remain
outstanding. All three notes were
collateralized by a deed of trust encumbering certain Montana real property
owned by GRAMPI. The Company determined
in November 2000 that the deed of trust was defective as it was never recorded
and the land was not owned by GRAMPI, but rather another entity controlled by
the former CEO. In October 2000, the
Company loaned $430,000 to GRAMPI, due in calendar 2001 or as approved by the
Board of Directors, with interest at the IRS effective tax rate and guaranteed
by the former CEO. Nonrecurring charges
include allowances for the receivables from the former CEO and entities he
controls, which includes principal and accrued interest due totaling approximately
$1,925,000. This amount was forgiven
under the terms of the Global Settlement Agreement between the Company and
Masters (Note 13)
(d) K&R loaned funds to TEAM prior to the
Company’s acquisition of K&R, which was among the assets acquired by the
Company in the K&R acquisition.
(e) Interest expense on revolving line of
credit and capital leases with primary DGBU lender (a stockholder), which were
retired with DGBU disposal.
(f) The Company regularly used an airplane
owned by a company owned or controlled 100% by the former CEO. The Company was
charged $430 per hour for flight time.
The Company also paid a company, that may or may not be related to the
former CEO, for pilot services at a daily rate of $376 for flight days and a
daily rate of $330 for nonflight days.
(g) The Clubhouse is a guesthouse located in
Eden Prairie, MN, owned by either all or any of the following: the former CEO, TRUST, the former CEO’s
spouse, TMI, and/or GRAMPI.
(h) The Company used the services of a travel
agency that was controlled by the former CEO.
(i) The former CEO’s current spouse was paid
consulting services through a company she owns beginning in May 1999, at a
monthly rate of $5,000. Current management
was unable to locate a contract specifying the work performed or defining the
length of service, nor was management able to find tangible evidence of any
work product produced by this Company and/or the former CEO’s current spouse in
this consulting role. Current management and the Board of Directors were not
informed that the former CEO’s current spouse owned this company or that
payments were being made to it.
(j) The former CEO’s
second wife was a Company employee.
Under the divorce decree, the former CEO was not required to pay any
alimony to his second wife as long as she was employed by the Company. Subsequent to their separation, but before
the divorce was final, the second wife’s base salary was increased by the
former CEO from $58,000 to $100,000. At
the time of this salary increase, the second wife was the Company Secretary and
Assistant Treasurer, a position she subsequently resigned. The Company
investigated this, as well as allegations that the second wife went for long
periods of time performing minimal or no Company business while drawing this
salary. The former CEO is also
obligated to pay health club and educational expenses for his second wife under
their divorce decree. Those expenses
were paid by the Company and are not included in the previous table.
(k) The Company
purchased hardware and software from TMI in 2000 and 1999 related to a wireless
voice system.
(l) Purchased from a
greater than 5% shareholder.
In June 2001, the Board of Directors authorized bonus payments and option
grants to certain directors for services rendered during 2001.
The options, granted outside the Company’s Stock Option Plan, are fully
vested, nonqualified with a term of 5 years and a $0.16 per share exercise
price.
In 2001, Messrs. Duoos and Adams, current Chairman and Vice-Chairmain of the
Board, were paid $69,000 and $66,000, respectively, for their services as Board
members dating back to 2000.
Transactions Subsequent to June 30, 2001
In the first and second quarter of 2001, for their services on the Board
of Directors and based on letters from the Company dated August 23, 1999 and September
10, 1999, Messrs. Duoos and Adams, respectively, were granted each options to
purchased 100,000 shares of the Company’s common stock at $2.00 and $1.65 per
share, respectively. These options vest
at a rate of 25,000 over four years. In
July 2001, the Board repriced the options to $.15 per share.
In July 2001, the Special Compensation Committee of the Board of
Directors authorized an agreement with the Company’s current Chairman of the Board
(Chairman). The agreement provides for
the Chairman to be paid a monthly consulting services fee of $21,667 for 3
years plus 100,000 options exercisable at $0.15 per share, to be granted on
each anniversary date. If terminated by
the Company, without cause, payment of the compensation is generally continued
until the end of the term 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 as well as reimbursement of
out of pocket expenses of approximately $9,000 in 2001.
In July 2001, the Special Compensation Committee of the Board of
Directors authorized an agreement with the Company’s current Vice-Chairman of
the Board (Vice-Chair). The agreement
provides for the Vice-Chair to be paid a monthly consulting services fee of
$12,500 for 3 years plus 100,000 options exercisable at $0.15 per share, to be
granted on each anniversary date. If
terminated by the Company, without cause, payment of the compensation is
generally continued until the end of the term of the agreement. In August 2001, the Company also authorized
a special consulting fee in the amount of $30,000 for services provided to the Company
outside of the agreement for his monthly consulting services. In addition, the Vice-Chair receives a
monthly directors fee of $3,000 as well as reimbursement of out pocket expenses
of approximately $33,000 in 2001.
In connection with the June and July 2001 agreements with the Chairman and
Vice-Chair, the Company consulted with an independent specialist in this area.
In July 2001, the Board of Directors approved a loan program whereby the
Company will loan up to $500,000 in total to outside Directors to buy stock
from stockholders. In August 2002, the
Chairman and Vice-Chair each acquired Company stock and borrowed $73,314 under
this program.
11. Supplemental
Disclosures of Cash Flow Information -
12. Legal Proceedings -
Kittrell
In August 2000, the Company commenced litigation against Jaffray
Communications, Inc., doing business as Vitesse Networks, Inc. (Vitesse) and
its former President and COO Mark Kittrell in Hennepin County District
Court. 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 Vitesse
and its subsidiaries. The suit also
alleges that Vitesse interfered with the contractual rights of RSPNetwork that
prevented Mr. Kittrell from competing against it and the Company and from
recruiting employees of RSPNetwork and the Company. Finally, the
suit alleges certain securities law violations and misrepresentations by
Mr. Kittrell in connection with the conversion and sale of Company
stock. In connection with this lawsuit,
Mr. Kittrell made a demand for arbitration, alleging breach of contract
and breach of implied covenants of good faith and fair dealing. Kittrell and the Company filed cross motions
in the trial court regarding an arbitration clause in one of the contracts at
issue in the case. Prior to the Court
hearing these motions, Kittrell and the Company agreed to arbitrate the
disputes between them. The suit against
Vitesse was settled with Vitesse agreeing to pay $10,000, and both parties
agreeing to drop all further claims.
The lawsuit against Kittrell went to arbitration in January 2002, with
Kittrell prevailing. The arbitrator
awarded Kittrell, net of certain offsets, $2,708,073. Under terms of the final
settlement, the Company paid 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 book value) due the Company under terms of
the agreement selling the assets of RSPNetwork to RSP Acquisitions.
Wiskus
In January 2001, Michael S. Wiskus brought an action against the Company
in Minnesota state court, Hennepin County, for breach of contract and
promissory estoppel. This action was
settled before reaching court, with the Company agreeing to pay Wiskus $95,000
in exchange for his release of all present and future claims against the
Company.
Metiom
This matter commenced in February 2001, in the United States District
Court for the District of Minnesota.
The Company sued Metiom, Inc. (Metiom) seeking a declaratory judgment
that Metiom breached a September 29, 2000, Software Licensing Agreement by
failing to timely deliver “ConnectTrade” software to it. A few days later, Metiom filed a suit
against the Company in the United States District Court for the District of New
York, alleging that the Company breached the September 29, 2000, Software
Licensing Agreement and is seeking $1,250,000, plus interest at 1% per
month. On July 29, 2002, a negotiated
settlement was reached. Under terms of
the settlement, the Company paid Metiom $365,000 and entered into a mutual
release of all current and future actions, causes of action, individual or
class action claims or demands of any kind.
Feltl
In November 2000, Masters and GRAMPI attempted to convey real estate to
John E. Feltl, which subsequently became subject to the Montana litigation (see
below). The Company joined Feltl as
defendant in the Montana litigation, claiming that the conveyances were
fraudulent. The Company’s claims
against Feltl were relinquished under terms of the March 11, 2002 Global
Settlement Agreement (Note 13).
Masters
On December 1, 2000, the former CEO (Masters), purporting to act both
individually and derivatively on behalf of the Company, filed an action in
Minnesota state court against the Company and three 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 and requested that the Court act to temporarily restrain the
defendants 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 ordinary
course of business, (iv) materially changing any business relationship of the
Company, (v) interfering with the scheduling of a shareholders’ meeting by
Masters to elect new directors or remove 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 the Company’s premises. On December 5, 2000, the Court denied Masters’ motion for a
temporary restraining order in its entirety. The Company thereafter asserted
counterclaims against Masters seeking to recover damages arising from breach of
fiduciary duty, wrongful use of corporate assets and failure to repay personal
loans Masters had received from the Company. At a second injunction hearing
held on January 5, 2001, the Court denied Masters’ renewed motion for a
temporary injunction. After the Company and the director defendants filed
motions to dismiss Masters’ complaint, Masters stipulated to the dismissal of
his claims. His derivative claims were dismissed with prejudice by the Court on
February 12, 2001, and any personal claims dismissed without prejudice. The Court entered a judgment against Masters
regarding the repayment of personal loans. The Company agreed to release Masters from this judgment under
terms of the Global Settlement Agreement, dated March 11, 2002 (Note 13).
Montana
On December 18, 2000, the Company filed an action in Montana state court
against Masters, and two other entities affiliated with Masters. The Company
asserted that Masters and/or GRAMPI purported to grant a security interest to
the Company in Montana properties actually owned by another Master’s affiliate,
Masters Trust I. The Deed of Trust necessary to create the security interest
was never recorded. The complaint sought a declaration that the Company has a
security interest in three parcels of real property owned by the Masters’
affiliate. In addition to filing the complaint, the Company filed the necessary
documents to restrict Masters’ or GRAMPI’s ability to convey any of the
affected parcels of real property while the lawsuit was pending. This action was dropped under terms of the
Global Settlement Agreement between Masters and the Company, dated March 11, 2002
(Note 13).
GRAMPI
On January 10, 2001, the Company commenced an action in Hennepin County
District Court against Masters and GRAMPI.
The action sought, among other things, to void the lease of space in a
business complex owned by GRAMPI on the grounds that the lease was unfair,
unreasonable, and unduly benefited Masters, in violation of Masters’ fiduciary
duties to the Company. The action also
sought the return of profits realized by Masters as a result of his self-dealing
regarding the purchase of the business complex, the lease, and other real
estate transactions with the Company.
In March 2001, GRAMPI asserted a counterclaim against the Company for
breach of the lease contract. The
GRAMPI claims against the Company exceeded $9 million. Masters also asserted a personal
counterclaim at that time for breach of an alleged employment contract with the
Company. Both the Company’s and
Masters’ actions were withdrawn under terms of the Global Settlement Agreement dated
March 11, 2002 (Note 13).
Manugistics
Contrary to explicit instructions received from the majority of the
Board of Directors, Masters signed, on behalf of the Company, a software
licensing agreement with a company called Manugistics and initiated the wire
transfer of an initial payment of $2.5 million. The Company refused to honor the contract alleging that
Manugistics was aware of Masters acting outside of his powers and authorities
when signing the contract and wiring the money. Manugistics commenced an action against the Company in federal
court in Maryland on December 5, 2000, alleging breach of contract. The Company filed in early
February 2001 its Answer and Counterclaims for Rescission and Declaratory
Judgment (Claim) that the alleged contract was not valid. The Company requested that the Court impose
a constructive trust over the $2.5 million Manugistics received. The Claim alleged that Manugistics was
guilty of conversion and was unjustly enriched. The Claim also sought a declaratory judgment that the contract
was null and void, or that the Court rescind the contract. The parties settled the litigation on
July 6, 2001. Manugistics paid $1.3
million to the Company in July 2001, which is included in receivables at June
30, 2001. The parties agreed to
mutually and completely release each other from any further claims.
Thurn et al.
In February 2001, the Company commenced an action in Hennepin County
District Court against Timothy N. Thurn, Nancy Masters Sawyer, and Danny J. Vatland.
The Company sought money damages against the defendants for breaches of their
employment agreements and/or their fiduciary duties. Moreover, the Company
sought to have the Court declare that the defendants breached their respective
employment agreements and were therefore not entitled to any further
compensation or benefits under those agreements and that these agreements are
rescinded. The Company claimed that Thurn violated his contractual and/or
fiduciary duties as Chief Financial Officer and/or Treasurer of the Company,
one of the violations being the transfer of $2.5 million to Manugistics, even
though he was aware or should have been aware that the Company’s Board of
Directors had restricted Masters’ authority to enter into the transaction with
Manugistics. The Company claimed
Masters Sawyer breached her duties as former Secretary/Assistant Treasurer and
most recently as Vice-President of Operations, amongst others, by receiving
excessive unapproved compensation, failing to disclose contracts and
transactions that were contrary to the Company’s interest, and failing to
perform the tasks and duties of her position due to excessive, unexplained
absenteeism. The Company claimed that
Vatland as Vice President of Advanced Technology Development and/or Chief Technology Officer breached his duties
because he failed to disclose and furthered contracts and transactions by
corporate officers and/or directors that were contrary to the Company’s
interest, and because he furthered the use of Company funds and/or assets,
which were not in furtherance of the Company’s interest and were not authorized
or were in contravention of directives issued or restrictions placed by the
Company’s Board of Directors. All
defendants denied the Company’s claims and raised various counterclaims,
including counterclaims for severance payments, breach of contract and
violation of the Workers Adjustment Retraining Notification Act. Vatland and Thurn claimed to be entitled to
12 months of severance pay and Masters Sawyer claimed to be entitled to 36
months of severance pay. Vatland
further contended that he was entitled to pay of $75,000 per year, covering a
period of time after he voluntarily had his base compensation reduced from
$250,000 to $175,000. The Company
settled all claims in June 2001. In
consideration for payments from the Company in the amounts of $157,500,
$45,000, and $55,000, respectively, to Vatland, Thurn, and Masters Sawyer,
respectively, the parties mutually released each other from any further claims
and agreed to execute a stipulation for dismissal with prejudice.
Ryan
In September 2000, former Executive Vice President Thomas Ryan brought a
lawsuit in Hennepin County District Court against the Company and its former
subsidiary, Colorspan Corporation, alleging that he is entitled to severance
payments and performance options based upon an employment agreement with
Colorspan. Mr. Ryan sought damages of
$175,000 in addition to performance options and attorney fees. The matter was tried before a jury and on
October 2, 2001, the jury entered a verdict in favor of the Company. Mr. Ryan is seeking to appeal the verdict.
Other
During fiscal 1999, the Company recorded other income, which is included
in discontinued operations, of $1,500,000 as a result of the settlement of a
lawsuit filed by ColorSpan Corporation against Sentinel Business Systems,
Inc. The Company received $1,150,000 in
cash in May 1999, as was required by the agreement. The $350,000 balance owed to the Company was paid in fiscal 2000.
13. Subsequent
Events -
Global Settlement Agreement - Masters
On March 11, 2002, the Company entered into a Global Settlement
Agreement with Masters, TMI, GRAMPI, David Norlander - individually and as Trustee
of and on behalf of Masters Trust I, Realty Settlement, LLC, and Jessica
Tran-Masters. The parties gave each
other mutual and complete releases for any claims and judgments, thereby ending
the legal proceedings summarized in Note 12 (“Feltl,” “Masters,” “Montana,” and
“GRAMPI”). The Company agreed to convey
to Masters or his designee all of the Company’s assets pertaining specifically
and solely to B2BXchange, and pay to Masters or his designee the amount of $600,000,
which included payment of Masters’ attorneys’ fees. Masters, in turn, agreed to transfer to the Company all shares of
Company stock and all warrants owned or controlled by Masters, GRAMPI, Masters
Trust I, TimeMasters, any parent, sibling, spouse (whether current or future),
child, or grandchild.
Investment - Common Stock
At various times
during October and November 2001, the Company made an aggregate investment of
$1,007,000 for 601,400 shares of Cone Mills Corporation common stock, a
publicly traded company, a producer of denim and decorative fabrics.
Commissions of approximately $36,000 were paid on the purchase of these shares
to Equity Securities Investments, Inc. (Equity), a company whose president is
the Vice-Chair of the company. The Company
joined an existing investor group and in connection therewith executed an
agreement with Equity on the same terms as other members of the group. Under
terms of such agreement, the Company agreed to pay a 20% advisory fee on the
gain from the sale of securities purchased through Equity. The agreement also requires 20% of the
appreciation on certain securities and reflected at December 31 to be paid to
Equity. In May and June 2002, 235,100 of these shares were sold for a net gain
of $446,874. Commissions of $121,086
were paid to Equity on the sale of these shares.
Investment -
Temporary Subordinated Loan Agreement
On October 30, 2001, the Company entered into a Temporary Subordinated
Loan Agreement with Equity. Under terms
of the loan, the Company loaned Equity $1,350,000 at 10% interest. The loan was repaid with interest on December
28, 2001.
Investment - Convertible
Notes
On November 8, 2001, the Company entered into an arrangement with Cash
Systems, Inc. (Borrower), a national provider of cash access services to the
gaming and retail industries, to loan them up to $500,000 in the form of
convertible notes. On November 8, 2001,
the Company loaned the Borrower $200,000 and an additional $200,000 was loaned
on March 1, 2002. The notes mature on
November 8, 2003, pay interest at 12.5%, pay principal and interest on a
monthly basis, and require the Borrower to grant the Company a security
interest in a cash account which is required to maintain a minimum of $300,000
during the term of the loan.
Additionally, the agreement contains personal guarantees of the
President and CEO of the Borrower and a pledge of certain shares of his
stock. The notes are convertible into
common stock of the Borrower at an exercise price of $2 per share. The agreement also indicates that the
Company will receive warrants to purchase up to 125,000 shares of common stock
of the Borrower, dependent upon the level of borrowings. The exercise price of the warrants is $2 per
share. Commissions of $65,000 and warrants
to purchase 50,000 shares of common stock were paid and issued, respectively,
by the Borrower to Equity.
Investment -
Common Stock/Convertible Notes
On October 24, 2001, the Company invested $305,000 for an 80% ownership
position in Business Translation Services, Inc. (BTSV). On November 12, 2001, the Company loaned
$300,000 to BTSV under the terms of a 10% convertible promissory note, payable
in three installments over 12 months.
The note is convertible into the common stock of BTSV at $.50 per share. On November 12, 2001, BTSV merged with
Muller Media, Inc. under a plan of reorganization within the meaning of Section
l68 of the Internal Revenue Code, and BTSV’s name was changed to Muller Media,
Inc (Muller). Muller guaranteed the
convertible promissory note, issued a warrant to the Company to purchase
1,200,000 shares of Muller common stock at an exercise price of $.125 per
share, and agreed to issue to the Company 2,000,000 shares of its common stock
in the event of default. Before taking into account the effects of exercising
the warrant, the Company’s ownership in Muller is approximately 16%. Under terms of the Kittrell Settlement (Note
12), 400,000 shares of Muller were transferred to Kittrell in May 2002,
reducing the Company’s ownership to approximately 13%.
Commissions of $107,550 were paid to Equity who represented the Company
in this transaction, along with 700,000 shares of Muller common stock, and
warrants for 1,000,000 shares of common stock.
In July 2002,
Muller, claiming unspecified damages, defaulted on payment of a $300,000 note
payable to the Company. The Company
intends to actively pursue collection of this note, and in 2002 established a
reserve equal to the full amount of the note.
Options Awarded to Board of Directors
In July 2002, the Board of Directors awarded options to purchase 100,000
shares of the Company’s common stock to its Chairman, Vice-Chair, and each
director. The options vest immediately,
have a term of five years, and have an exercise price of $.05 per share - 120%
of the closing price of the Company’s common stock on the day closest to the
option issue date.
Other
All marketable
securities are held in an account with Equity who represented the Company. All transactions between the Company and
Equity are in accordance with agreements approved by the Company’s Board of
Directors.
Investment - Private
Placement
In May 2002, the Company paid $200,000 for 208,333 private placement
common units of a non-public Illinois company that provides billing,
collections and reimbursement services for healthcare industry clients. If all the private placement units were
sold, the Company would hold a 3.4% ownership position.
14. Uncertainties
-
Ongoing legal proceedings
involving the Company are significant to the Company’s financial position. The consolidated financial statements
include estimated accrued amounts that, in management’s opinion, are sufficient
to adequately reflect payments required under the terms of the various
settlements and related legal expenses incurred subsequent to June 30,
2001. The Company is unaware of any
material existing or potential future legal proceedings for which additional
amounts need to be accrued.
15. Quarterly Results of
Operations (Unaudited) -
In thousands, except per share data
(Quarters restated
for discontinued operations)
(a) The income tax benefit of $14,555
recorded in the second quarter 2000 was originally attributed to continuing
operations. That amount was
reclassified to sale of discontinued operations to match the fiscal year
presentation.
Schedule
II
VirtualFund.com, Inc. and
Subsidiaries
Valuation and Qualifying Accounts
Year Ended June 30, 2001, 2000, and 1999
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized on
December 19, 2002.
POWER OF
ATTORNEY
KNOW ALL MEN BY THESE
PRESENTS, that each person whose signature appears below constitutes and
appoints Timothy R. Duoos and Edward S. Adams and each of them, jointly and
severally, his attorneys-in-fact, each with full power of substitution, for him
in any and all capacities, to sign any and all amendments to this Report on
Form 10-K, and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the
requirements of the Securities Exchange Act of 1934, this Report on Form 10-K
has been signed below by the following persons on behalf 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
CERTIFICATION
I,
Joseph D. Pupel, certify that:
1. I have reviewed this annual report on Form
10-K of VirtualFund.com, Inc.;
2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect
to the period covered by this annual report; and
3. Based on my knowledge, the financial
statements, and other financial information included in this annual report,
fairly present in all material respects the financial condition, results of
operations and cash flows of 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 of the Certification
as set forth in Form 10-K have been omitted, consistent with the Transition
Provisions of SEC Exchange Act Release No. 34-46427, because this Annual Report
on Form 10-K covers a period ending before the Effective Date of Rules 13a-14
and 15d-14.
INDEX TO EXHIBITS
Exhibit Number
Description of Exhibit
2.1
Agreement and Plan of
Merger, dated as of December 18, 1998, by and among VirtualFund.com, Inc., Virtual Acquisition Corp. I, K&R
Technical Services, Inc., and the shareholders of K&R Technical Services,
Inc. Incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed
on December 31, 1998.
2.2
Asset Purchase
Agreement, dated as of June 7, 2000, by and between VirtualFund.com, Inc. and
MacDermid Incorporated. Incorporated by reference to Exhibit 10.7 to the
Company’s Form 8-K filed June 27, 2000.
2.3
Asset
Purchase Agreement effective as of July 23, 2001, by and between RSPNetwork,
Inc., VirtualFund.com, Inc. and RSP Acquisitions, LLC. Incorporated by reference to Exhibit 2 to
the Company’s Form 8-K filed August 7, 2001.
3.1
Articles of
Incorporation of the Company as amended March 24, 1994. Incorporated by reference to Exhibit 3.1
to the Company’s Form 10-K for the year ended June 30, 1994.
3.2
LaserMaster
Technologies, Inc. Minutes of Shareholder Meeting dated April 3, 1998 which
amends Article I of the Articles of Incorporation to change the Company name
to VirtualFund.com, Inc. Incorporated by reference to Exhibit 10.6 to the
Company’s Report on Form 10-K for the fiscal year ended June 30, 1998.
3.3
Restated Bylaws of the
Company as amended March 24, 1994.
Incorporated by reference to Exhibit 3.2 to the Company’s report on
Form 10-K for the fiscal year ended June 30, 1994.
3.4
Amended Article III of
the Articles of Incorporation of the Company, as amended September 5,
2000. Incorporated by reference to
Exhibit 3.5 to the Company’s 10-K for the fiscal year ended June 30, 2000.
4.1
Rights Agreement, dated
as of October 9, 1998, between VirtualFund.com, Inc. and Norwest Bank
Minnesota, N.A., which includes Exhibit A thereto [the form of Certificate of
Designation of Series A Junior Participating Preferred Stock], and Exhibit B
thereto [the form of Rights Certificate]. Incorporated by reference to the
Company Form 8-A12G filed October 29, 1998.
4.2
Certificate of
Designation of the Powers, Preference and Rights, and Qualifications,
Limitations and Restrictions, of Series A Convertible Preferred Stock of
VirtualFund.com, Inc. Incorporated by
reference to Exhibit 4.1 to the Company’s Form 10-Q filed February 17, 1999.
10.1
LaserMaster
Technologies, Inc. 1990 Restated Stock Option Plan, as amended. Incorporated by reference to Exhibit 10.1
to the Company’s report on Form 10-K for the fiscal year ended June 30, 1991.
10.2
Representative Form of
Incentive Stock Option. Incorporated
by reference to Exhibit 10.1 to the Company’s report on Form 10-K for the
fiscal year ended June 30, 1991.
10.3
Representative Form of
Non-Qualified Stock Option.
Incorporated by reference to Exhibit 10.3 to the Company’s report on
Form 10-K for the fiscal year ended June 30, 1991.
10.4
LaserMaster
Technologies, Inc. 1996 Stock Incentive Plan. Incorporated by reference to the Company’s Form S-8
Registration Statement filed August 30, 1996 (No. 333-11157.)
10.5
Representative
Form of Director’s Non-Qualified Stock Option Agreement and Schedule of
Directors Non-Qualified Stock Options.
10.6
First Industrial, L.P.,
Industrial Building Lease.
Incorporated by reference to Exhibit 10.2 to the Company’s report on
Form 10-K for the fiscal year ended June 30, 1996.
10.7
Employment Agreement
with Robert J. Wenzel. Incorporated
by reference to Exhibit 10.4 to the Company’s report on Form 10-K for the
fiscal year ended June 30, 1995.
10.8
Use Indemnification
Agreement dated November 1, 1991 covering property located at 12790 Century
Lane, Eden Prairie, Minnesota.
Incorporated by reference to the Company’s report on Form 10-Q for the
period ended December 31, 1991.
10.9
Employment Agreement
with Nancy Sawyer Masters.
Incorporated by reference to Exhibit 10.3 of the Company’s Form 10
Registration.
10.10
Promissory Note with
Grandchildren’s Realty Alternative Program I, L.P., Pledge Agreement and
Guaranty. Incorporated by reference
to Exhibit 10.7 to the Company’s report on Form 10-K for the fiscal year
ended June 30, 1998.
10.11
Promissory Note
receivable from Steve Fisher.
Incorporated by reference to Exhibit 2.1 to the Company’s report on Form 8-K filed December 31, 1998.
10.12
Amended and Restated
Lease for property in Shady View I & II dated December 1995 between
LaserMaster Corporation and GRAMPI.
Incorporated by reference to Exhibit 10.3 to the Company’s report on
Form 10-Q for the period ended December 31, 1995.
10.13
Promissory Note dated
January 17, 1996 by LaserMaster Corporation to TimeMasters, Inc. Incorporated by reference to the Company’s
report on Form 10-Q for the period ended December 31, 1995.
10.14
Warrants for the
purchase of common stock of LaserMaster Technologies, Inc. issued to
TimeMasters, Inc. dated January 17, 1996.
Incorporated by reference to the Company’s report on Form 10-Q for the
period ended December 31, 1995.
10.15
Promissory Note from
Team Property Management.
Incorporated by reference to Exhibit 2.1 to the Company’s report on
Form 8-K filed December 31, 1998.
10.16
Lease Agreement between
Creo Property B.V. c/o Jacobus Recourt Vastgoed B.V. Incorporated by reference to the Company’s
report on Form 10-K/A-2 filed May 10, 2001.
10.17
Sublease Agreement
between Annex Medical, Inc. and LaserMaster Corporation dated March 19,
1993. Incorporated by reference to
Exhibit 10.16 to the Company’s report on Form 10-K for the fiscal year ended
June 30, 1993.
10.18
Employment Agreement
with Tim Thurn dated February 9, 1996.
Incorporated by reference to the Company’s report on Form 10-K/A-2
filed May 10, 2001.
10.19
Findings of Fact,
Conclusions of Law, Order of Judgment and Decree In re the Marriage of Nancy
Lynn Sawyer and Melvin Leroy Masters, dated December 30, 1994. Incorporated by reference to the Company’s
report on Form 10-K/A-2 filed May 10, 2001.
10.20*
Letters to Tim Duoos,
dated August 23, 1999 and November 30, 1999, relating to compensation for
services as director and consultant.
10.21*
Letters to Ed Adams,
dated September 10, 1999 and November 30, 1999, relating to compensation for
services as director and consultant.
10.22*
Consulting Agreement
with MSJ & Associates, LLC, controlled by Monte Johnson, effective as of
May 1, 2001.
10.23*
Special Committee Compensation
Agreement with Timothy R. Duoos, dated July 1, 2001.
10.24*
Special Committee
Compensation Agreement with Edward S. Adams, dated July 1, 2001.
23.1
Consent of Deloitte
& Touche LLP.
23.2
Consent of KPMG LLP.
23.3
Consent of Lurie Besikof Lapidus & Company, LLP.
99.1
Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith
* Indicates
a management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-K.