Dwindling cash hoard provokes fight over moribund VirtualFund
Neal St. Anthony
A new fight has broken out over what remains of the carcass of VirtualFund.com.
Dissident shareholders want to throw out Tim Duoos, the chairman of the failed Minnetonka-based e-commerce company. They point to the disclosure that the shell company paid Duoos nearly $300,000 in the last fiscal year for consulting services and $202,527 for "reimbursement of moving expenses" to southern California.
Dennis Chase, a Wisconsin investor and businessman who has acquired about 10 percent of VirtualFund's stock, and several other major shareholders said Monday they are outraged that Duoos and Vice Chairman Ed Adams, who was paid $216,000 in fiscal 2002, have managed to spend about $900,000, according to the company's regulatory filings. That amounts to about a fourth of VirtualFund's remaining liquid assets.
"I just don't want any more money burned up," said Chase, reacting to the federal filings the shell corporation made in late December covering the year ended June 30, 2002. "We want Duoos fired and a board elected that represents shareholders."
Chase is nominating himself and others for seats on the board. He plans to meet with Adams today .
Adams, Duoos and Joseph Pupel, who is paid $106,926 as acting CEO, have not responded to several telephone calls from the Star Tribune.
Chase said it should have cost no more than a few thousand dollars a month to preside over the company's meager assets and seek opportunities to merge VirtualFund with a viable company. VirtualFund closed its Eden Prairie operations in 2001, laying off more than 100 people.
Chase has the support of Melk Lehner, chief executive of Sihl-Zurich Paper in Switzerland, which owns more than 15 percent of VirtualFund's stock through an earlier investment in predecessor company LaserMaster. A business-printer company, LaserMaster sold its main business in 2000 to focus on a business-to-business Internet commerce initiative during the tail end of the dot-com boom.
Duoos, the former owner of Lyndale Garden Center and a California nursery that went bankrupt, and Adams, CEO of Equity Securities and law professor at the University of Minnesota, fired former VirtualFund CEO Mel Masters in late 2000 on the grounds that he had engaged in unauthorized spending and used company assets to finance a regal lifestyle. Masters was subsequently removed from the VirtualFund board by vote of shareholders in 2001.
In a letter to shareholders last month the Duoos-Adams-led board of five directors -- who each are being paid $36,000 annually in directors fees -- said it had settled $25 million in various lawsuits and other claims against the company over the past 18 months.
"Not only was bankruptcy averted, these claims were resolved for a fraction of that amount," the letter said. "Each shareholder has benefitted from the company's navigation of this gauntlet of peril."
The company has paid out several million dollars in legal fees and in settlements, and listed $1.4 million in prepaid expenses, believed to be legal fees for a Twin Cities law firm.
The directors said they have made some unspecified investments with VirtualFund's money but "have been unable to find a merger candidate to which we can commit the major portion of the company's remaining capital."
Chase wants an immediate shareholder meeting. He is proposing to replace Duoos and several other directors with himself, representing his family's 1.5 million-share stake and that of Shil-Zurich, and Jim Upfield, a veteran public company director.
Jim Consodine, a Tucson-based money manager who says he owns 25,000 shares of VirtualFund and is not affiliated with Chase, said he was stunned that the directors of a public company would give themselves big cash consulting contracts. That activity may be banned by the recently passed Sarbanes-Oxley Act of 2002, which seeks to establish directors as independent stewards of shareholders.
Chase and Consodine fear that VirtualFund may be used as an investment vehicle or financier for Adams' Equity Securities, based on their reading of the company's filings. VirtualFund reported that it loaned Equity $1.35 million in 2001, which was paid back with interest.
The company also disclosed that it bought and sold stock in Cone Mills Corp. in 2001 and 2002 that resulted in a net gain of $446,874 to VirtualFund and which resulted in commissions of $158,000 to Equity Securities.
''I've never seen anything like this," Consodine said. "There wasn't a shareholder vote . . . to turn this thing into a hedge fund. There are giant conflicts of interest.
"I think they've done an end run around the shareholders. They took over something they said was run badly by Mel Masters. And they accused him of using corporate money for personal things . . . and now it sounds like they're using a public company to take out hundreds of thousands of dollars in consulting fees. If there's only $4 million left, that's ridiculous. They took out almost $900,000 in cash compensation and moving expenses last year."
In its December filing, the company disclosed that in 2002 it paid Masters $600,000, including attorneys fees, for his 18 percent stake in the company and to settle all outstanding litigation.
VirtualFund, which traded at $15 per share in 1999 during the Internet boom, was removed from the Nasdaq in 2001 and has traded recently at less than 15 cents.
Masters restocked his high-turnover board in 1999 with several outsiders who he believed could help him expand rapidly through acquisitions. They included Roger Wikner, former owner of Miller & Schroeder Financial, who resigned from the board in 2001, as well as Adams and Duoos.
After Masters was fired in December 2000 the board determined, through consultants, that the firm had burned through nearly $30 million during the second half of 2000 and had no "valid business plan."
Masters was voted off the board by shareholders in May, after a Hennepin County district judge refused his request to force VirtualFund's board to hold a shareholder meeting where they could choose between him and the Duoos group.
Chase and his associates are now calling for the same thing.
-- Neal St. Anthony reports on companies, people and trends in the Twin Cities business community. His column appears Tuesday and Fridays. He can be reached at 612-673-7144 or
[email protected].
Good luck to whoever catches it!
