U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002.
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-28685
VERTICAL COMPUTER SYSTEMS, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 65-0393635
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6336 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90048
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(323) 658-4211
(ISSUER'S TELEPHONE NUMBER)
SCIENTIFIC FUEL TECHNOLOGY, INC.
--------------------------------
(FORMER NAME OF SMALL BUSINESS ISSUER)
1203 Healing Waters, Las Vegas, NV 89031
----------------------------------------
(Former address of small business issuer)
Indicate by check whether the issuer: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes || No |X|
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock, par value
$.00001 per share,627,691,422 shares issued and outstanding as of June 24,
2002.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
1
VERTICAL COMPUTERS SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-QSB
PART I FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets (unaudited) as of
March 31, 2002 3
Condensed Consolidated Statements of Operations (unaudited)
for the Three Months Ended March 31, 2002 and 2001 5
Condensed Consolidated Statements of Stockholders' Equity
(unaudited) for The Three Months Ended March 31, 2002 6
Condensed Consolidated Statements of Cash Flows (unaudited) for
The Three Months Ended March 31, 2002 and 2001 7
Notes to Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
PART II OTHER INFORMATION
Item 1 Legal Proceedings 21
Item 2 Changes in Securities and Use of Proceeds 22
Item 3 Defaults Under Senior Securities 23
Item 4. Submission of Matters To A Vote Of Security Holders 24
Item 5 Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
2
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Vertical Computer Systems, Inc. and Subsidiaries
Condensed Consolidated Balance
Sheet
March 31,
2002
- --------------------------------------------------------------------------------
Assets
Current Assets
Cash $ 620,185
Restricted cash 1,500,000
Securities available for sale 80,500
Accounts receivable, net of allowance for bad debts of $103,650 1,117,440
Other receivable 49,489
Receivables from related party 39,755
Prepaid expenses and other assets 123,656
- --------------------------------------------------------------------------------
Total Current Assets 3,531,025
Property and equipment, net of accumulated depreciation 3,472,800
Goodwill and other intangibles, net 3,818,949
Deposits and other 7,270
- --------------------------------------------------------------------------------
Total Assets $ 10,830,044
================================================================================
Liabilities, Convertible Preferred Stock and Stockholder's Equity/ (Deficit)
Current liabilities
Accounts payable and accrued liabilities $ 2,599,744
Deferred Revenue 2,233,127
Accrued dividends 663,712
Current portion-notes payable 6,523,951
- --------------------------------------------------------------------------------
Total current liabilities 12,020,534
Convertible debt 265,000
Notes payable, net of discount and current portion 145,000
- --------------------------------------------------------------------------------
Total liabilities 12,430,534
================================================================================
See accompanying notes to the condensed consolidated financial statements
3
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Vertical Computer Systems, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet
March 31,
2002
Series B 10% Convertible Preferred stock; $0.001 Par Value; 375,000 45,000
Shares authorized; 7,200 shares issued and outstanding
Series D 15% Convertible Preferred stock; $0.001 Par Value; 300,000 156,250
Shares authorized; 25,000 shares issued and outstanding
Minority interest -
Stockholders' Deficit
Common Stock; $.00001 par value; 1,000,000,000 shares authorized 6,278
627,691,422 issued and outstanding
Series A 4% Convertible Cumulative Preferred stock; $0.001 50
par value; 250,000 shares authorized; 50,000 shares issued and
outstanding
Series A Preferred Stock; par value $0.001; 750,000 shares
authorized; no shares issued and outstanding -
Series C 4% Convertible Preferred stock; $100.00 par value; 200,000 shares
authorized; 80,000 shares issued and outstanding of which 30,000
are issued to a subsidiary of the Company 50,000
Series C Preferred stock; par value $0.001; 175,000 shares -
authorized; no shares issued and outstanding
Subscription Receivable (2,000)
Additional paid-in-capital 24,911,211
Accumulated deficit (27,058,088)
Accumulated other comprehensive (loss) (9,191)
- --------------------------------------------------------------------------------
Total Stockholders' deficit (1,801,740)
- --------------------------------------------------------------------------------
Total liabilities and stockholders' deficit $ 10,830,044
================================================================================
See accompanying notes to the condensed consolidated financial statements
4
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Vertical Computer Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the Quarters ended
March 31,
2002 2001
------------- -----------
Revenues
Licensing and maintenance $ 1,250,555 $ 243,951
Software Development 6,800 -
Consulting Services 271,860 162,299
Other 32,547 50,562
------------- -----------
Total Revenues 1,561,762 456,812
Selling, general and administrative expenses 3,300,803 2,097,300
------------- -----------
Operating loss (1,739,041) (1,640,488)
Interest income 9,967 -
Interest expense (156,351) -
Equity loss in unconsolidated subsidiary - (44,325)
------------- -----------
Net loss before minority interest (1,885,425) (1,684,813)
Minority interest in loss of subsidiary - 40,226
------------- -----------
Net loss (1,885,425) (1,644,587)
------------- -----------
Dividend applicable to preferred stock (150,006) (7,000)
Net loss applicable to common stockholders' $ (2,035,431) $ (1,651,587)
============= ===========
Basic and diluted loss per share $ (0.00) $ (0.00)
============= ===========
Basic and diluted weighted average of 618,802,533 572,707,507
common shares outstanding ============= ===========
Comprehensive loss and its components consist of the
following:
Net loss $ (1,885,425) $ (1,644,587)
Gain/(Loss) on securities available for sale - 16,000
Gain/(Loss) on foreign currency translation (9,191) -
------------- -----------
Comprehensive loss $ (1,854,616) $ (1,628,587)
============ ===========
See accompanying notes to the condensed consolidated financial statements
5
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Vertical Computer Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
For the Quarter Ended March 31, 2002
Common Stock Series A Series C
-------------------- -------- -------- -------- ---------
Shares Amount Shares Amount Shares Amount
----------- -------- -------- -------- -------- ---------
----------- -------- -------- -------- -------- ---------
Balance, December 31, 615,191,422 $ 6,153 50,000 $ 50 50,000 $350,000
2001 =========== ======== ======== ======== ======== =========
Shares issued for 12,500,000 125
financing fee
to Cornell Capital
(Note 2)
Preferred stock dividends
Issuance of warrants for
consulting services
(Note 2)
Issuance of warrants for
iNet option agreement
(Note 7)
Comprehensive Loss:
Net loss
Foreign Currency
Translation
----------- -------- ------- -------- -------- --------
Balance, March 31, 2002 627,691,422 $ 6,278 50,000 $ 50 50,000 $350,000
=========== ======== ======= ======= ======== ========
Accumulated
Additional Other
Subscription Paid-in Comprehensive Accumulated
Receivable Capital Income Deficit Total
------------ ------------ -------------- ------------- ----------
------------ ------------ -------------- ------------- ----------
Balance, December 31, 2001 $ (2,000) $ 24,670,149 $ 0 $ (25,022,657) $ 1,695
============ ============ ============== ============= ==========
Shares issued for 199,875 200,000
financing fee to
Cornell Capital (Note 2)
Preferred stock dividends (150,006) (150,006)
Issuance of warrants
for consulting services (Note 2) 5,475 5,475
Issuance of warrants
for iNet option agreement (Note 7) 35,712 35,712
Comprehensive Loss:
Net loss (1,885,425) (1,885,425)
Foreign Currency Translation (9,191) (9,191)
------------ ------------ -------------- ------------- ----------
Balance, March 31, 2002 $ (2,000) $ 24,911,211 $ (9,191) $ (27,058,088) $(1,801,740)
============ ============ ============== ============= ==========
See accompanying notes to the condensed consolidated financial statements
6
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Vertical Computer Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the years three months
ended March 31,
2002 2001
--------------- -------------
Cash flows from operating activities
Net loss (1,885,425) $ (1,644,587)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interest in net loss of Subsidiary - (40,226)
Realized gain on sale of subsidiary - -
Depreciation and amortization 134,685 52,014
Equity loss of unconsolidated affiliate - 44,325
Non-employee compensation expense for stock
options issued - 289,355
Issuance of warrants for consulting services 5,475 -
Shares issued for financing of fees to Cornell Capital 200,000 -
Issuance of warrants for iNet option agreement 35,712 -
Allowance for bad debts 103,650 -
Write off fixed assets 42,022 -
Write off of goodwill and investments 770,305 -
Write down marketable securities 95,500 -
Unrealized Gain/(loss) on Change in
Foreign Currency Translation (9,191)
Changes in operating assets and liabilities: (179,489) (1,135,317)
Accounts receivable
Other receivable 370,000 -
Receivable related party 5,132 21,630
Prepaid expenses and other assets (45,773) 2,009
Deposits and other 13,237 3,944
Accounts payable and accrued liabilities 673,844 108,518
Deferred Revenue (10,248) 688,784
--------------- ------------
Net cash (used in) operating activities: 319,437 (1,609,551)
Cash flow from investing activities:
Acquisition - (6,908,742)
Fair value of warrants given in acquisition - 798,500
Purchase of equipment - (258,293)
Purchase of investments - (57,818)
--------------- -------------
Net cash used in investing activities - (6,426,353)
7
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Vertical Computer Systems, Inc. and
Subsidiaries
Condensed Consolidated Statements of
Cash Flows
For the years three months
ended March 31,
2002 2001
--------------- -------------
Cash flow from financing activities:
Pledge of Cash deposit for bank Loan - (1,561,870)
Payments on Note Payable (544,711) (91,562)
Proceeds from issuance of Notes Payable - 5,500,000
Issuance of Notes Payable, net of discount - 870,146
--------------- -------------
Net cash provided by (used in) financing (544,711) 4,716,714
activities
Net increase (decrease) in cash and cash equivalents (225,274) (3,319,190)
Cash and cash equivalents, beginning of quarter 845,459 5,598,812
--------------- -------------
Cash and cash equivalents, end of quarter $ 620,185 $ 2,279,622
=============== =============
Supplemental disclosures of cash flow information:
Cash paid during the year period:
Interest $ 98,112 $ 51,333
Income taxes $ - $ 4,000
=============== =============
Non-cash financing activities
During the quarter ended March 31, 2002, the Company issued warrants to purchase
1,688,312 shares of common stock valued at $5,475 for consulting services (see
Note 2).
During the quarter ended March 31, 2002, the Company issued warrants to purchase
3,500,000 shares of common stock valued at $35,713 in connection with iNET
Purchasing, Inc. (see Note 8)
During the quarter ended March 31, 2001, the Company acquired Now Solutions, LLC
in a non-cash transaction (see Note 7).
See accompanying notes to condensed financial statements
8
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310 of
regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The accompanying unaudited consolidated condensed
financial statements reflect all adjustments that, in the opinion of the
management of Vertical Computer Systems, Inc. and Subsidiaries (collectively,
the "Company"), are considered necessary for a fair presentation of the
financial position, results of operations, and cash flows for the periods
presented. The results of operations for such periods are not necessarily
indicative of the results expected for the full fiscal year or for any future
period. The accompanying financial statements should be read in conjunction with
the audited consolidated financial statements of the Company included in the
Company's Form 10-KSB for the year ended December 31, 2001.
GOING CONCERN UNCERTAINTY
The accompanying condensed consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. The carrying amounts of assets and liabilities presented in
the financial statements do not purport to represent realizable or settlement
values.
The Company has suffered significant recurring operating losses, used
substantial funds in its operations, and needs to raise additional funds to
accomplish its objectives. Additional, at March 31, 2002, the Company has
negative working capital of $8,489,509, and is in default on several of its debt
obligations. These factors raise substantial doubt about the Company's ability
to continue as a going concern. The report of the Company's Independent
Certified Public Accountants for the December 31, 2001 financial statements
included an explanatory paragraph expressing substantial doubt about the
Company's ability to continue as a going concern.
The Company believes it can launch a number of products, services and other
revenue generating programs. Additionally, the Company believes its three
existing international in-country partners have the ability and resources to
market its products concurrently in their respective country of origin.
Furthermore, the Company is exploring certain opportunities with a number of
companies to participate in the marketing of its products. The exact results of
these opportunities are unknown at this time.
The Company is continuing its efforts to secure working capital for operations,
expansion and possible acquisitions, mergers, joint ventures, and/or other
business combinations. However, there can be no assurance that the Company will
be able to secure additional capital, or that if such capital is available,
whether the terms or conditions would be acceptable to the Company. The
condensed consolidated financial statements contain no adjustment for the
outcome of this uncertainty.
9
NOTE 2 - COMMON AND PREFERRED STOCK TRANSACTIONS
For the three months ended March 31, 2002, the Company issued warrants to
various consultants to purchase a total of 1,688,312 shares of common stock. The
fair market value of these warrants at the date of issuance of each grant of
warrants was $5,475.
In January 2002, the Company and Strategic Marketing Alliance agreed to
terminate the Company's interest in WorldBridge in consideration for credit on
the Company's account with Strategic Marketing whereby Strategic Marketing will
continue to provide consulting services through 2002. In addition, Strategic
Marketing will receive 3-year warrants to purchase stock equal to $5000 per
month, based on a strike price formula of $0.01 plus the previous average five
day market price on the date of issuance. These warrants will be issued in lieu
of the warrants specified in the original consulting agreement, dated as of
November 2000, with Strategic Marketing beginning in February 2002. For the
three months ended March 31, 2002, the Company issued warrants to purchase
420,455 shares of common stock. The fair market value for these shares, as of
the date of issuance, was $1,103. During the quarter, the Company accrued
$13,897 relating to the consulting agreement.
In January 2002, the Company and Taurus Global LLC agreed to extend a consulting
services agreement for six months. In consideration of Taurus Global's services,
the Company agreed to pay a monthly fee of $12,500 and issued an additional
100,000 warrants on the same terms as the July 2001 consulting services
agreement. The warrants have vested and are exercisable for five years from
issuance at a strike price equal to the fair market value of the Company 's
common stock on the day of grant. The warrants were valued at $ 1,240 and were
expensed during the quarter. The Company has the option to pay the monthly fee
in common stock valued at 95% of the average closing price 3 trading days prior
to issuance. During the quarter, the Company accrued $37,500 relating to the
monthly fee. In the event the proceeds of the stock result in greater than a 20%
profit or loss for the monthly fee, Taurus or the Company, as the case may be,
shall pay the difference in profit or loss, as applicable, at the end of the
term. The Company may buyback any unsold shares of stock at any time.
In January 2002, the Company executed indemnity and reimbursement agreements
with Mountain Reservoir Corporation to cover the 10,450,000 shares of stock
pledged by Mountain Reservoir Corporation with regard to notes issued by the
Company in October and November 2001 in the amount of $100,000 for each note,
whereby the Company would reimburse Mountain Reservoir Corporation with a number
of shares equal to any shares sold as collateral to cover the default of the
loans. The Note is currently in default and the collateral is currently being
sold by the lender to cover the amounts currently due. Mountain Reservoir Corp.,
a corporation controlled by the W5 Family Trust, of which Mr. Wade is a trustee.
Mr. Wade is President and CEO of the Company .
In January 2002, the Company executed separate indemnity and reimbursement
agreements with Mountain Reservoir Corporation and Mr. Valdetaro to cover their
respective 36,303,932 and 15,000,000 shares of common stock pledged by Mountain
Reservoir Corporation and Valdetaro in connection with the $425,000 note issued
in December 2001, whereby the Company would reimburse Mountain Reservoir
Corporation and Valdetaro with the respective number of shares equal to any
shares sold as collateral to cover the default of any loan. The Note is
currently in default and the collateral is currently being sold by the lender
account to cover the amounts currently due. Mountain Reservoir Corp., a
corporation controlled by the W5 Family Trust, of which Mr. Wade is a trustee.
Mr. Wade is President of the Company.
In March 2002, Vertical Computer issued 12,500,000 shares of common stock for
the remaining fee in connection with the Equity Line of Credit. The fair market
value of these shares at the date of issuance was $200,000. To date, no shares
have been purchased under the Equity Line of Credit.
10
In March 2002, the Company executed an agreement to issue a $100,000 convertible
debenture. In April, 2002, the funds were received and the issuance of debenture
became effective. The debenture accrues interest at 5% per annum and is due
March 2004. The debenture is convertible into shares of common stock at either
120% of the closing bid price on the date of agreement or 80% of the lowest
closing bid prices 5 days prior to the conversion. The debenture is convertible
at the option of the holder, any time after purchase. The holder of the
debentures is a third-party individual. As of April 15, 2002, no conversions
have taken place.
For the three months ended March 31, 2002, the Company issued 1,167,857 warrants
to purchase shares of its common stock to one marketing consultant for services.
The fair market value of these warrants at the date of issuance $3,132.
NOTE 3 - NOTES PAYABLE
In February 2002, the Company defaulted on a $425,000 note payable to a third
party, which the Company had executed in December 2001. The note accrues
interest at 12% per annum and was due January 31, 2002. The note was secured by
36,303,932 shares of common stock of the Company that is owned by Mountain
Reservoir Corporation, and 15,000,000 shares of common stock of the Company that
is owned by Mr. Valdetaro, the Company's Chief Technology Officer, to cover any
shortfall in the event of default. Mountain Reservoir Corp. is a corporation
controlled by the W5 Family Trust. Mr. Wade, the President and CEO of the
Company, is the trustee of the W5 Family Trust. In January 2001, the Company
executed separate indemnity and reimbursement agreements with Mountain Reservoir
Corporation and Mr. Valdetaro to cover their pledges of 36,303,932 and
15,000,000 shares of common stock, respectively. Pursuant to these agreements,
the Company agreed to reimburse Mountain Reservoir and Mr. Valdetaro for any
shares sold as collateral to cover the default of any loan. The collateral of
stock was transferred to the lender's account and is in the process of being
sold to cover the amounts currently due
NOTE 4 - LEGAL PROCEEDINGS
We are, from time to time, involved in various lawsuits generally incidental to
our business operations, consisting primarily of collection actions and vendor
disputes. In the opinion of management, the ultimate resolution of these
matters, if any, will not have a significant effect on the financial position,
operations or cash flows of the Company.
In addition, we are involved in three additional legal proceedings.
The first case entitled, Margaret Greco, et al., v. Vertical Computer Systems,
Inc., filed in United States District Court for the Eastern District of New York
(Case No. 00 Civ. 6551 (DRH)), involves allegations that the plaintiffs
sustained damage as a result of an alleged improper rescission of a subscription
agreement based on a November 1999 private placement memorandum. Plaintiffs seek
in excess of $18 million in damages based on the alleged increase in value of
the stock since the private placement. We believe this matter is without merit
and we intend to vigorously defend this action.
A second matter, entitled LE SOCIETE FRANCAISE DE CASINOS V. VERTICAL COMPUTER
SYSTEMS, INC., was filed in Los Angeles County, California, Superior Court, on
January 19, 2001. This action was filed by a former customer ("Le Societe") of
Externet World, Inc., formerly a wholly owned subsidiary, which claimed that the
Company was liable to it for in excess of $500,000 in costs allegedly paid for
an Internet casino software package to be developed and maintained by Externet
World, Inc. The plaintiff also alleged that the Company had breached an
agreement to pay the disputed sums flowing out of its October 2000 settlement of
litigated matters with two former shareholders of the Company. A settlement
agreement has been executed and a dismissal was filed in January 2002. As part
of the settlement agreement, the parties agreed that Le Societe received
$400,000 and the remaining $100,000 held in escrow, net of approximately $35,000
in other costs, was distributed 60% to the Company and 40% to Externet World,
Inc.
11
A third matter concerns a dispute between Arglen Acquisitions and the Company
concerning its subsidiary NOW Solutions, LLC. On April 12, 2002, the Company
received a letter from Arglen Acquisitions LLC, a member of Now Solutions LLC,
accusing the Company of defaulting on its obligations under Now Solutions'
Operating Agreement by failing to obtain a waiver of default from Now Solutions'
lender, Coast Business Credit. The letter further stated that the default had
triggered the dissolution of Now Solutions, and authorized Arglen Acquisitions
to acquire the Company's ownership interest in Now Solutions at a discounted
price. On May 8, 2002, the Company demanded arbitration from Arglen Acquisitions
seeking to enforce its rights under the Operating Agreement. On May 9, 2002,
Arglen Acquisitions filed a Demand for Arbitration and Statement of Claim
against the Company. In its demand, Arglen Acquisitions alleged that the Company
is in default of its obligations under the Operating Agreement. Arglen is
seeking to enjoin the Company from appointing a fifth member of the Executive
Committee of Now Solutions and other actions, as well as seeking specific
performance of the default provisions of the Operating Agreement, including the
right to purchase the Company's interest in Now Solutions. The Company believes
these allegations are without merit. The Company is defending its rights and is
asserting its own claims against Arglen Acquisitions.
NOTE 5 - NEW ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation to be recognized in the period in which it is incurred if
a reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The
Company believes the adoption of this Statement will have no material impact on
its financial statements.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 requires that these long-lived assets be
measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. SFAS
144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, are to be applied prospectively. The
adoption of this statement did not have a material impact on the financial
statements.
NOTE 6. ADOPTION OF SFAS NO. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS"
The Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142") on February 1, 2002. In
accordance with the requirements of SFAS 142, during the three months ended
March 31, 2002, the Company:
o Evaluated the balance of goodwill and other intangible assets recorded on
the condensed consolidated balance sheet as of February 1, 2002. No
reclassifications were required to be made in order to conform to the new
criteria for recognition.
o Determined that there were no intangible assets (other than goodwill) with
indefinite useful lives.
o Determined that the Company's goodwill is related to one reporting unit,
Now Solutions, LLC., to be used to test for goodwill impairment in
accordance with SFAS 142.
o As required by SFAS 142, the Company will determine the fair value of the
reporting unit and compare it to the carrying value of goodwill effective
February 1, 2002, and report the results in the Form 10-Q for the second
fiscal quarter ending June 30, 2002.
12
As required under SFAS No. 142, with effect from February 1, 2002, the Company
eliminated the amortization of goodwill. The following table represents a
reconciliation of net loss and per share data that would have been reported had
the new rules been in effect during the three months ended March 31, 2002 (in
thousands, except per share data):
March 31, March 31,
2002 2001
Reported net loss $ (1,885) $ (1,646)
Add back goodwill amortization, net of tax _ (43)
----------- -----------
Adjusted net loss $ (1,885) $ (1,689)
----------- -----------
Basic and diluted net loss per common share
Reported net loss $ (0.00) $ (0.00)
Goodwill amortization, net of tax - 0.00
----------- -----------
Adjusted net loss $ (0.00) $ (0.00)
----------- -----------
NOTE 7 - NON-CASH FINANCING ACTIVITIES.
In February 2001 the Company acquired a 60% interest in NOW Solutions, LLC
("NOW"), a company that develops and maintains human resource software, in
exchange for $1,000,0000. Pursuant to the terms of the operating agreement, the
Company's interest will be reduced to 51% over three years as employees of NOW
Solutions will be entitled to receive shares of NOW Solutions common stock.
Also in February 2001 NOW purchased the human resource software assets of Ross
Systems, Inc. ("Ross") in exchange for $5,100,000 and a promissory note due to
Ross for $1,000,000. The Ross note does not bear interest and has payment
requirements of $250,000 and $750,000 due February 2002 and 2003, respectively.
In addition, the agreement calls for various earnout provisions to be paid to
Ross if certain sales levels are achieved by NOW during the two years subsequent
to the purchase.
NOW acquired a $5,500,000 note payable to finance the Ross acquisition. The note
bears interest at Prime plus one and a half (Prime was 6% at September 30, 2001)
and has an interest rate floor of 8.5%. The Note payable is due the earlier of
February 2006 or if terminated, by either party, in accordance with the terms of
the agreement. The note calls for monthly principal payments of $91,500 plus
interest. The Company entered into a declining pledge agreement whereby the
Company guaranteed $1,500,0000 of the note.
Arglen Acquisition, LLC ("Arglen") facilitated the NOW transactions and acquired
a 30% interest in NOW for services provided and received warrants of the Company
to purchase 5% of the total outstanding stock of the Company, for an exercise
price of $0.08. The warrants are anti-dilutive, with a third of the warrants
vesting upon grant and the remaining thirds vesting equally in one and two years
from the grant date. All warrants are exercisable five years from the vesting
date.
The NOW purchase was accounted for under the purchase method of accounting, with
the cash paid to Ross, note payable due to Ross, $667,000 for Arglen's 30%
interest in NOW and $798,000 for the value of the Warrants issued to Arglen
(valued using the black-scholes valuation model), all included as part of the
purchase price. The Company and NOW recognized approximately $7,066,000 of
goodwill and other intangible assets in connection with the purchase, which is
being amortized over a 3 to 8 year period.
NOW is consolidated with the Company for financial reporting purposes, with
minority interest being recognized for the 40% interest. Of the remaining
minority interest, 5% is held by a consultant who facilitated the NOW
transactions and 5% is reserved for the employees.
NOTE 8 - SUBSEQUENT EVENTS
In April 2002, a $180,000 note that bears interest at 12% per annum, which
Vertical issued in August 2001 and which was due February 2002, was amended such
that the amount on the note was increased to $211,136 and the maturity date was
extended so that the note will be payable in August 2002. To secure the loan,
the Company pledged third party securities of eResource Capital Group that it
holds.
In April 2002, the Company entered into an amendment agreement concerning a
$100,000 promissory note that Vertical issued in October 2001, which bears
interest at 12% per annum and was due in February 2002. Pursuant to the
amendment, Vertical and the third party waived any default, and Vertical sold
400,000 shares of eResource Capital Group stock, which Vertical had pledged
pursuant to the Stock Pledge Agreement as collateral. The Company further agreed
to use the proceeds of the eResource Capital Group sales of stock to reduce the
obligations under the note accordingly. Pursuant to this amendment, the Company
made payments of $31,500 and $8,500, and agreed to make ten (10) installment
payments of $6,000 beginning on April 15, continuing until all principal then
outstanding with all interest, fees, charges, and other amounts owing hereunder
and then unpaid by June 2002. The Company is currently delinquent in paying sums
due under the amended note and is currently negotiating an extension.
In April 2002, the Company entered into an amendment agreement concerning a
$100,000 promissory note that Vertical issued in November 2001 that bears
interest at 12% and was due in February 2002. Pursuant to the amendment,
Vertical and the third party agreed waive any default and Vertical agreed to
make monthly installment payments in the amount of $7500 each on the fifteenth
day of each month, beginning in May 2002. Pursuant to this amendment, all
principal then outstanding, and all interest, fees, charges, and other amounts
owing hereunder and then unpaid shall be paid by the end of September 2002. The
Company currently is delinquent in paying sums due under the amended note and is
currently negotiating an extension.
13
In April 2002, the Company entered into an amendment agreement concerning the
$280,000 note issued in connection with the purchase of various intangible
assets by Vertical that bears interest at 4% per annum and was due in June 2004.
Pursuant to the terms of the amendment, Vertical and the third party agreed to
extend the date for which the remaining three (3) $5000 installment payments
would be due to the first day of each month, beginning in May 2002 and the time
to pay all remaining $10,000 installments was extended so that each $10,000
installment would be due and payable on the first day of each month beginning on
August 1, 2002, and shall continue until the principal has been paid in full.
All unpaid amounts are due September 2004. The Company is currently delinquent
in paying sums due under the amended note and is currently negotiating an
extension.
Pursuant to an option agreement with iNet Purchasing, Inc. ("iNet"), which was
entered into in December 2001, the Company had an option to purchase additional
interest in iNet by April 2002, whereby the Company could obtain an aggregate
56% ownership interest in iNet. In accordance with the option agreement, the
Company was required to pay $140,000 in four equal monthly installments
beginning in December 2001 and grant stock options to three iNet employees,
Basil Nikas, Robin Mattern, and Wayne Savage, in the amount of 1,500,000,
1,500,000, and 500,000 shares, respectively. The Company has paid a total of
$112,500 and intends to offset the remaining balance against amounts owed by
iNet pending a final accounting. The options are vested, have a strike price of
$0.010, and must be exercised within 3 years from the date of issuance. Pursuant
to the terms of the Stock Purchase Agreement and the Stockholders Agreements, if
the Company exercised the option to obtain a majority interest in iNet, by April
2002, the Company is required to pay to iNet $860,000 in cash or marketable
securities (pending any potential offsets), issue 70,000 shares of Series "C"
Preferred Stock, and issue additional 3-year warrants and options, as the case
may be, to purchase an additional 6,000,000 common stock shares each to Nikas
and Mattern and 2,000,000 common stock shares to Savage, at a strike price of
$0.025. The fair market value of these warrants at the date of grant was
$35,713. Of these warrants and options, the Company issued 1,500,000 warrants to
Nikas and Mattern and 500,000 warrants to Savage in January 2002. In the event
that the Company does not acquire a majority interest in iNet Purchasing, Inc.,
these options and warrants will be automatically cancelled. Under the terms of
the option, iNet was required to deliver certain financial and non-financial
information. This information was never delivered and the Company is holding the
warrants issued in January until a resolution is reached. The Company is seeking
an extension of the exercise date to allow iNet to deliver the required
information and to allow the Company an opportunity to review the information
and to make an informed investment decision, as well as to allow both parties to
resolve the issues of monies owed by iNet to the Company and vice versa.
Discussions thus far with iNet have not resulted in a resolution of this matter.
In June 2002, the Company issued a $50,000 note, which is due January 2003 and
bears no interest. In connection with the note, the Company issued three year
warrants to purchase 1,200,000 shares of its common stock at a price of $0.0050
per share. The warrants vested immediately and are exercisable for three years
from issuance. The value of the warrants, $1,270 (valued using the black-scholes
valuation model) will be amortized over the term of the loan. The Company also
pledged a limited interest in a deposit account in the event the Company
defaults on the loan. This deposit account in the amount of $1,500,000, was
pledged as collateral for a loan between a third party lender and the Company's
subsidiary, Now Solutions.
In June 2002, the Company issued 3 year warrants to purchase 1,000,000 shares of
its common stock to one consultant for services rendered at an average share
price of $0.005 and warrants to purchase 3,000,000 shares of its common stock to
two employees at an average share price of $0.012.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is a summary of the key factors management considers
necessary or useful in reviewing the Company's results of operations, liquidity
and capital resources. The following discussion and analysis should be read
together with the Condensed consolidated Condensed Financial Statements of
Vertical Computer Systems, Inc. and Subsidiaries and the notes to the Condensed
consolidated Condensed Financial Statements included elsewhere in this Form
10-QSB.
This discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity and cash flows of Vertical
Computer Systems, Inc. and Subsidiaries for the three months ended March 31,
2002 2001. Except for historical information, the matters discussed in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations are forward looking statements that involve risks and uncertainties
and are based upon judgments concerning various factors that are beyond our
control. Actual results could differ materially from those projected in the
forward-looking statements as a result of, among other things, the factors
described below under the caption "Cautionary Statements and Risk Factors."
15
OVERVIEW
The Company maintains its primary focus on developing its proprietary Emily
technology, Web services, Underpinning Web Technologies, and other products such
as ResponseFlash and UniversityFlash. Its subsidiary, NOW Solutions, which was
acquired in 2001, continues to develop its services and products in order to
grow its customer base. Additionally, the Company continues to build its global
network of Local Country Partners toward developing an international network of
Bridges that will serve as distribution platforms throughout the world for its
proprietary and licensed technologies, goods and services.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31,
2001
Total Revenues. The Company had total revenues of $1,561,762 in the three months
ended March 31, 2002. This is an increase of $1,104,950 due to inclusion of Now
Solutions for a full quarter as compared to one month for the three months ended
March 31, 2001. Total revenues primarily consist of software license, consulting
and maintenance fees. Nearly all of these revenues relate to the business
operations of NOW Solutions, a subsidiary in which the Company acquired a 60%
interest in February 2001.
16
Selling, General and Administrative Expenses. The Company had selling, general
and administrative expenses of $3,300,803 and $2,097,300 in the three months
ended March 31, 2002 and 2001, respectively. This increase of $1,203,503 was
attributable to a write down of approximately $720,000 of goodwill associated
with Enfacet, Inc., and two additional months of selling, general, and
administrative expenses of NOW approximating $530,000, less goodwill
amortization of approximately $43,000.
Operating Loss. The Company had an operating loss of $1,739,041 and $1,640,488
in the three months ended March 31, 2002 and 2001 respectively.
INTEREST
The increase in net expenses of approximately $155,000 over the previous year
due to the additional debt incurred for the asset purchase from Ross Systems,
Inc. by NOW Solutions.
Minority Interest in Loss of Subsidiary. The minority interest in loss of
subsidiary was zero and $40,266 for the three months ended March 31, 2002 and
2001, respectively. Losses attributable to minority interests have exceeded
their capital contributions, as of December 31, 2001. Accordingly losses to
minority interests have been suspended.
Net Loss. The Company had a net loss of $1,885,425 and $1,644,587 in the three
months ended March 31, 2002 and 2001 respectively.
Dividends Applicable to Preferred Stock. The Company had outstanding Series A
and C 4% Convertible Cumulative Preferred stock that accrues dividends at a rate
of 4% on a semi-annual basis. The dividends applicable to this preferred stock
is $150,006 in the three months ended March 31, 2002. A $143,006 increase over
the three months ended March 31, 2001. The increase is due to a full quarter
accrual for Series A and the addition of 50,000 Series C issued during November
2001.
Net Loss Applicable to Common Stockholders. The Company had a net loss
applicable to common stockholders of $2,035,431 and $1,661,587 in the three
months ended March 31, 2002 and 2000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company is dependent on external cash to fund its operations. The Company's
primary need for cash during the next twelve months consists of working capital
needs, as well as cash to repay delinquent loans and loans coming due. In order
to meet its obligations, the Company will need to raise cash from the sale of
securities or loans. Other than the Equity Line of Credit discussed below, the
Company does not currently have any commitments for such capital, and no
assurances can be given that such capital will be available when needed or on
favorable terms, if at all. As of March 31, 2002, the Company had cash of
$620,185, substantially all of which is held by Now Solutions, a 60% owned
subsidiary of the Company. This cash is not available for use by the Company.
Accordingly, the Company had little cash available for its operations as of
March 31, 2002. Since March 31, 2002, the Company has borrowed $50,000 from a
third party.
For the three months ended March 31, 2002, the Company had a net decrease in
cash and cash equivalents of $225,274. This consisted primarily of net cash used
in financing activities of $544,711, which was partially offset by net cash
provided by operating activities of $319,437. Net cash used in financing
activities consisted of the payment of outstanding notes payable of $544,711.
Net cash provided by operating activities consisted primarily of non-cash
expenses (including depreciation and amortization, write-off of goodwill and
investments and issuances of stock) of $1,487,343, a net decrease in receivables
of $190,511 and an increase in accounts payable of $673,850. These items were
partially offset by a net loss of $1,885,425.
In June 2002, the Company issued a $50,000 note, which is due January 2003 and
bears no interest. In connection with the note, the Company issued three year
warrants to purchase 1,200,000 shares of its common stock at a price of $0.0050
per share. The warrants vested immediately and are exercisable for three years
17
from issuance. The value of the warrants, $1,270 (valued using the black-scholes
valuation model) has been deferred and will be amortized over the term of the
loan. The Company also pledged a limited interest in a deposit account in the
event the Company defaults on the loan. This deposit account in the amount of
$1,500,000, was pledged as collateral for a loan between a third party lender
and the Company's subsidiary, Now Solutions.
In the quarter ended March 31, 2002, the Company borrowed an aggregate of
$178,000 from Richard Wade, the Company's President and Chief Executive Officer.
The loan is unsecured, non-interest bearing and payable on demand.
In March 2002, the Company entered into an agreement to issue a $100,000
convertible debenture. In April, 2002, the funds were received and the issuance
of debenture became effective. The debenture accrues interest at 5% per annum
and is due March 2004. The debenture is convertible into shares of common stock
at either 120% of the closing bid price on the date of agreement or 80% of the
lowest closing bid price 5 days prior to the conversion. The debenture is
convertible at the option of the holder, any time after purchase. The holder of
the debentures is a third-party individual. As of June 21, 2002, no conversions
have taken place.
In August 2001, the Company entered into an Equity Line of Credit Agreement.
Under this agreement, the Company may issue and sell to Cornell Capital Partners
common stock for a total purchase price of up to $10.0 million. The Company will
be entitled to commence drawing down on the equity line of credit upon the
effectiveness of a Registration Statement registering the sale of the shares to
be issued under the equity line of credit. However the Company will require
additional capital to fund operations and pay down its liabilities, as well as
fund its expansion plans consistent with the Company's anticipated changes in
operations and infrastructure. The condensed consolidated financial statements
contain no adjustment for the outcome of this uncertainty.
The Company is continuing its efforts to secure working capital for operations,
expansion and possible acquisitions, mergers, joint ventures, and/or other
business combinations. However, there can be no assurance that the Company will
be able to secure additional capital, or that if such capital is available,
whether the terms or conditions would be acceptable to the Company.
To date, the Company has primarily generated revenues from licensing and
maintenance agreements from NOW Solutions ("NOW"), its majority owned
subsidiary.
Furthermore, the Company is exploring certain opportunities with a number of
companies to participate in the marketing of its products. The exact results of
these opportunities are unknown at this time.
NOW Solutions, an entity in which the Company has a 60% ownership interest,
believes it has adequate working capital to fund its current operations for the
next 12 months. Debt service for the next twelve months will be approximately
$1,785,000 in principal and interest. NOW Solutions has a renewable maintenance
revenue base of approximately $4.2 million that will provide adequate working
capital for its operations. In addition, it is management's opinion that
Professional Services Consulting and Software Licenses revenue will provide
additional working capital to fund operations for the next twelve months.
Now Solutions has been notified by the lender that it is in default of certain
covenants in the loan agreement. The Company had pledged a $1,500,000 deposit as
collateral pursuant to a deposit pledge agreement to guarantee the first 24
payments of the loan, or $2,200,000 to finance the purchase of HRIS. Although
the Company believes it is entitled to a portion of its $1,500,000 deposit which
increases as Now makes its payments, the Company is currently in discussions
with the lender to resolve NOW Solution's default. Until a settlement is
reached, the default by Now Solutions is cured, or Now Solutions continues to
makes its payments through February 2003, or the Company pursues legal action,
the Company is unlikely to obtain a return of its deposit, or any portion
thereof.
18
GOING CONCERN UNCERTAINTY
The accompanying condensed consolidated financial statements for the three
months ended March 31, 2001, have been prepared assuming that the Company will
continue as a going concern which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
The carrying amounts of assets and liabilities presented in the financial
statements do not purport to represent realizable or settlement values. The
Company has suffered significant recurring operating losses, used substantial
funds in its operations, and needs to raise additional funds to accomplish its
objectives. Additionally, at March 31, 2002, the Company had negative working
capital of approximately $8,500,000 and has defaulted on several of its debt
obligations. The report of the Company's Independent Certified Public
Accountants for the December 2001 financial statements included an explanatory
paragraph expressing substantial doubt about the Company's ability to continue
as a going concern.
MARKET RISKS
The Company anticipates that it will have activities in numerous countries in
future periods. These operations will expose the Company to a variety of
financial and market risks, including the effects of changes in foreign currency
exchange rates and interest rates. As of March 31, 2001, there are no material
gains or losses requiring separate disclosure.
DIVIDENDS
The Company had outstanding Series A and C 4% Convertible Cumulative Preferred
stock that accrues dividends at a rate of 4% on a semi-annual basis. The
dividends applicable to this preferred stock is $150,000 in the three months
ended March 31, 2002. A $143,000 increase over the three months ended March 31,
2001. The increase is due to a full quarter accrual for Series A and the
addition of 50,000 Series C issued during November 2001. The Board intends to
declare and pay dividends on the Company's Preferred Stock based on the
earnings, financial condition, cash flow and business requirements of the
Company. During the first three months of 2002, the Board had not declared
dividends on the Series "A", "B", and "D" Preferred Shares.
NEW ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation to be recognized in the period in which it is incurred if
a reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The
Company believes the adoption of this Statement will have no material impact on
its financial statements.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 requires that these long-lived assets be
measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. SFAS
144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, are to be applied prospectively. The
adoption of this statement did not have a material impact on the financial
statements.
The Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142") on February 1, 2002. In
accordance with the requirements of SFAS 142, during the three months ended
March 31, 2002, the Company:
o Evaluated the balance of goodwill and other intangible assets recorded on
the condensed consolidated balance sheet as of February 1, 2002. No
reclassifications were required to be made in order to conform to the new
criteria for recognition.
o Determined that there were no intangible assets (other than goodwill) with
19
indefinite useful lives.
o Determined that the Company's goodwill is related to one reporting unit,
Now Solutions, LLC, to be used to test for goodwill impairment in
accordance with SFAS 142.
o As required by SFAS 142, the Company will determine the fair value of the
reporting unit and compare it to the carrying value of goodwill effective
February 1, 2002, and report the results in the Form 10-Q for the second
fiscal quarter ending June 30, 2002.
As required under SFAS No. 142, with effect from February 1, 2002, the Company
eliminated the amortization of goodwill. The following table represents a
reconciliation of net loss and per share data that would have been reported had
the new rules been in effect during the three months ended March 31, 2002 (in
thousands, except per share data):
March 31, March 31,
2002 2001
Reported net loss $ (1,885) $ (1,646)
Add back goodwill amortization, net of tax _ (43)
----------- -----------
Adjusted net loss $ (1,885) $ (1,689)
----------- -----------
Basic and diluted net loss per common share
Reported net loss $ (0.00) $ (0.00)
Goodwill amortization, net of tax - 0.00
----------- -----------
Adjusted net loss $ (0.00) $ (0.00)
----------- -----------
20
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are, from time to time, involved in various lawsuits generally incidental to
our business operations, consisting primarily of collection actions and vendor
disputes. In the opinion of management, the ultimate resolution of these
matters, if any, will not have a significant effect on the financial position,
operations or cash flows of the Company.
In addition, we are involved in three additional legal proceedings.
The first case entitled, Margaret Greco, et al., v. Vertical Computer Systems,
Inc., filed in United States District Court for the Eastern District of New York
(Case No. 00 Civ. 6551 (DRH)), involves allegations that the plaintiffs
sustained damage as a result of an alleged improper rescission of a subscription
agreement based on a November 1999 private placement memorandum. Plaintiffs seek
in excess of $18 million in damages based on the alleged increase in value of
the stock since the private placement. We believe this matter is without merit
and we intend to vigorously defend this action.
A second matter, entitled Le Societe Francaise de Casinos v. Vertical Computer
Systems, Inc., was filed in Los Angeles County, California, Superior Court, on
January 19, 2001. This action was filed by a former customer ("Le Societe") of
Externet World, Inc., formerly a wholly owned subsidiary, which claimed that the
Company was liable to it for in excess of $500,000 in costs allegedly paid for
an Internet casino software package to be developed and maintained by Externet
World, Inc. The plaintiff also alleged that the Company had breached an
agreement to pay the disputed sums flowing out of its October 2000 settlement of
litigated matters with two former shareholders of the Company. A settlement
agreement has been executed and a dismissal was filed in January 2002. As part
of the settlement agreement, the parties agreed that Le Societe received
$400,000 and the remaining $100,000 held in escrow, net of approximately $35,000
in other costs, was distributed 60% to the Company and 40% to Externet World,
Inc.
A third matter concerns a dispute between Arglen Acquisitions and the Company
concerning its subsidiary NOW Solutions, LLC. On April 12, 2002, the Company
received a letter from Arglen Acquisitions LLC, a member of Now Solutions LLC,
accusing the Company of defaulting on its obligations under Now Solutions'
Operating Agreement by failing to obtain a waiver of default from Now Solutions'
lender, Coast Business Credit. The letter further stated that the default has
triggered the dissolution of Now Solutions, and authorizes Arglen Acquisitions
to acquire the Company's ownership interest in Now Solutions at a discounted
price. On May 8, 2002, the Company demanded arbitration from Arglen Acquisitions
seeking to enforce its rights under the Operating Agreement. On May 9, 2002,
Arglen Acquisitions filed a Demand for Arbitration and Statement of Claim
against the Company. In its demand, Arglen Acquisitions alleged that the Company
is in default of its obligations under the Operating Agreement. Arglen is
seeking to enjoin the Company from appointing a fifth member of the Executive
Committee of Now Solutions and other actions, as well as seeking specific
performance of the default provisions of the Operating Agreement, including the
right to purchase the Company's interest in Now Solutions. The Company believes
these allegations are without merit. The Company is defending its rights and is
asserting its own claims against Arglen Acquisitions.
21
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In January 2002, the Company and Strategic Marketing Alliance agreed to
terminate the Company's interest in WorldBridge in consideration for credit on
the Company's account with Strategic Marketing whereby Strategic Marketing will
continue to provide consulting services through 2002. In addition, Strategic
Marketing will receive 3-year warrants to purchase stock equal to $5000 per
month, based on a strike price formula of $0.01 plus the previous average five
day market price on the date of issuance. These warrants will be issued in lieu
of the warrants specified in the original consulting agreement, dated as of
November 2000, with Strategic Marketing beginning in February 2002. For the
three months ended March 31, 2002, the Company issued 420,455 shares. The fair
market value for these shares, as of the date of issuance, is $1,103.
In January 2002, the Company and Taurus Global LLC agreed to extend the July
2001 consulting services agreement for 6 months. In consideration of Taurus
Global services, the Company will pay a monthly fee of $12,500 and issued an
additional 100,000 warrants on the same terms as the July 2001 consulting
services agreement. The warrants have vested and are exercisable for five years
from issuance at a strike price equal to the fair market value of the Company's
common stock on the day of grant. the Company has the option to pay the monthly
fee in common stock valued at 95% of the average closing price 3 trading days
prior to issuance. In the event the proceeds of the stock result in greater than
a 20% profit or loss for the monthly fee, Taurus or the Company shall pay the
difference in profit or loss, as applicable, at the end of the term. the Company
may buyback any unsold shares of stock at any time.
In January 2002, the Company executed indemnity and reimbursement agreements
with Mountain Reservoir Corporation to cover the 10,450,000 shares of stock
pledged by Mountain Reservoir Corporation with regard to the October and
November 2001 notes, whereby the Company would reimburse Mountain Reservoir
Corporation with an number of shares equal to any shares sold as collateral to
cover the default of the loans. Mountain Reservoir Corp., a corporation
controlled by the W5 Family Trust, of which Mr. Wade is a trustee. Mr. Wade is
President of the Company.
In January 2002, the Company executed separate indemnity and reimbursement
agreements with Mountain Reservoir Corporation and Mr. Valdetaro to cover their
respective 36,303,932 and 15,000,000 shares of common stock pledged by Mountain
Reservoir Corporation and Valdetaro in connection with the $425,000 note issued
in December 2001, whereby the Company would reimburse Mountain Reservoir
Corporation and Valdetaro with the respective number of shares equal to any
shares sold as collateral to cover the default of any loan. The Note is
currently in default and the collateral is currently being sold by the lender
account to cover the amounts currently due. Mountain Reservoir Corp., a
corporation controlled by the W5 Family Trust, of which Mr. Wade is a trustee.
Mr. Wade is President of the Company.
For the three months ended March 31, 2002, the Company issued 1,167,857 warrants
to purchase shares of its common stock to one marketing consultant for services.
The fair market value of these warrants at the date of issuance $3,132.
In March 2002, the Company entered into an agreement to issue a $100,000
convertible debenture. In April, 2002, the funds were received and the issuance
of debenture became effective. The debt accrues interest at 5% per annum and is
due March 2004. The debenture is convertible into shares of common stock at
either 120% of the closing bid price on the date of agreement or 80% of the
lowest closing bid prices 5 days prior to the conversion. The debenture is
convertible at the option of the holder, any time after purchase. The holder of
the debentures is a third-party individual. As of June 21, 2002, no conversions
have taken place.
In June 2002, the Company issued a $50,000 note, which is due January 2003 and
bears no interest. In connection with the note, the Company issued three year
warrants to purchase 1,200,000 shares of its common stock at a price of $0.0050
per share. The warrants vested immediately and are exercisable for three years
from issuance. The value of the warrants, $1,270 (valued using the black-scholes
valuation model) will be amortized over the term of the loan. The Company also
pledged a limited interest in a deposit account in the event the Company
defaults on the loan. This deposit account in the amount of $1,500,000, was
22
pledged as collateral for a loan between a third party lender and the Company's
subsidiary, Now Solutions.
In June 2002, the Company issued 3 year warrants to purchase 1,000,000 shares of
its common stock to one consultant for services rendered at an average share
price of $0.005 and warrants to purchase 3,000,000 shares of its common stock to
two employees at an average share price of $0.012.
ITEM 3. DEFAULTS UNDER SENIOR SECURITIES
In February 2002, the Company defaulted on a $425,000 note payable to a third
party, which the Company had executed in December 2001. The note accrues
interest at 12% per annum and was due January 31, 2002. The note was secured by
36,303,932 shares of common stock of the Company that is owned by Mountain
Reservoir Corporation, and 15,000,000 shares of common stock of the Company that
is owned by Mr. Valdetaro, the Company's Chief Technology Officer, to cover any
shortfall in the event of default. Mountain Reservoir Corp. is a corporation
controlled by the W5 Family Trust. Mr. Wade, the President and CEO of the
Company, is the trustee of the W5 Family Trust. In January 2001, the Company
executed separate indemnity and reimbursement agreements with Mountain Reservoir
Corporation and Mr. Valdetaro to cover their pledges of 36,303,932 and
15,000,000 shares of common stock, respectively. Pursuant to these agreements,
the Company agreed to reimburse Mountain Reservoir and Mr. Valdetaro for any
shares sold as collateral to cover the default of any loan. The collateral of
stock was transferred to the lender's account and is in the process of being
sold to cover the amounts currently due.
In March 2002, the Company executed an agreement to issue a $100,000 convertible
debenture. In April, 2002, the funds were received and the issuance of debenture
became effective. The debenture accrues interest at 5% per annum and is due
March 2004. The debenture is convertible into shares of common stock at either
120% of the closing bid price on the date of agreement or 80% of the lowest
closing bid prices 5 days prior to the conversion. The debenture is convertible
at the option of the holder, any time after purchase. The holder of the
debentures is a third-party individual. As of April 15, 2002, no conversions
have taken place.
In April 2002, a $180,000 note that bears interest at 12% per annum, which
Vertical issued in August 2001 and which was due February 2002, was amended such
that the amount on the note was increased to $211,136 and the maturity date was
extended so that the note will be payable in August 2002. In addition, interest
on $146,420 will accrue beginning on August 17, 2001 and interest on the
remaining $64,716 will accrue beginning on September 27, 2001. The Company
pledged third party securities of eResource Capital Group that it holds.
In April 2002, the Company entered into an amendment agreement concerning a
$100,000 promissory note that Vertical issued in October 2001, which bears
interest at 12% per annum and was due in February 2002. Pursuant to the
amendment, Vertical and the third party waived any default, and Vertical sold
400,000 shares of eResource Capital Group stock, which Vertical had pledged
pursuant to the Stock Pledge Agreement as collateral. The Company further agreed
to use the proceeds of the eResource Capital Group sales of stock to reduce the
obligations under the note accordingly. Pursuant to this amendment, the Company
made payments of $31,500 and $8,500, and agreed to make ten (10) installment
payments of $6,000 beginning on April 15, continuing until all principal then
outstanding with all interest, fees, charges, and other amounts owing hereunder
and then unpaid by June 2002. The note is in default and the Company is
currently negotiating an extension.
In April 2002, the Company entered into an amendment agreement concerning a
$100,000 promissory note that Vertical issued in November 2001 that bears
interest at 12% and was due in February 2002. Pursuant to the amendment,
Vertical and the third party agreed waive any default and Vertical agreed to
make monthly installment payments in the amount of $7,500 each on the fifteenth
day of each month, beginning in May 2002. Pursuant to this amendment, all
principal then outstanding, and all interest, fees, charges, and other amounts
owing hereunder and then unpaid shall be paid by the end of September 2002. The
note is in default and the Company is currently negotiating an extension.
In April 2002, the Company entered into an amendment agreement concerning the
$280,000 note issued in connection with the purchase of various intangible
assets by Vertical that bears interest at 4% per annum and was due in June 2004.
23
Pursuant to the terms of the amendment, Vertical and the third party agreed to
extend the date for which the remaining three (3) $5,000 installment payments
would be due to the first day of each month, beginning in May 2002 and the time
to pay all remaining $10,000 installments was extended so that each $10,000
installment would be due and payable on the first day of each month beginning on
August 1, 2002, and shall continue until the principal has been paid in full.
All unpaid amounts are due September 2004. The note is in default and the
Company is currently negotiating an extension.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
24
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this filing:
EXHI DESCRIPTION LOCATION
BIT -------------------------------- --------------------------------------
NO.
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2.1 Certificate of Ownership and Incorporated by reference to
Merger Merging Scientific Fuel Exhibit 1.1 to the Registrant's
Technology, Inc. into Vertical Form 8-K 12G3 filed on May 2,
Computer Systems, Inc. 2000
2.2 Stock Purchase Agreement dated Incorporated by reference to
April 5, 2000 between the Company Exhibit 2.2 to the Registrant's
and all the shareholders of Form 10-KSB/A filed on May 17, 2001
Globalfare.com
2.3 Stockholders Agreement dated Incorporated by reference to
October 12, 2000 between the Exhibit 2.3 to the Registrant's
Company and Vijay Amritraj Form 10-KSB/A filed on May 17, 2001
2.4 Vertical - iNPI LLC Operating Incorporated by reference to
Agreement dated April 26, 2000 Exhibit 2.4 to the Registrant's
Form 10-KSB/A filed on May 17, 2001
2.5 INet Government Services LLC Incorporated by reference to
Operating Agreement dated April Exhibit 2.5 to the Registrant's Form
28, 2000 10-KSB/A filed on May 17, 2001
3.1 Original Unamended Certificate of Incorporated by reference to
Incorporation of Vertical Exhibit 1.2 to the Registrant's
Computer Systems, Inc. (f/k/a Form 8-K 12G3 filed on May 2, 2000
Xenogen Technology, Inc.)
3.2 Certificate of Amendment of Incorporated by reference to
Certificate of Incorporation Exhibit 3.2 to the Registrant's
(change name to Vertical Computer Form 10-KSB/A filed on May 17,
Systems, Inc.) 2001
3.3 Certificate of Designation of 10% Incorporated by reference to
Cumulative Redeemable Series B Exhibit 3.3 to the Registrant's Form
Preferred Stock 10-KSB/A filed on May 17, 2001
3.4 Certificate of Designation of 15% Incorporated by reference to
Cumulative Redeemable Series D Exhibit 3.4 to the Registrant's Form
Preferred Stock 10-KSB/A filed on May 17, 2001
3.5 Certificate of Amendment of Incorporated by reference to Exhibit
Certificate of Incorporation 3.5 to the Registrant's Form 10-KSB/A
(2000) filed on May 17, 2001
3.6 Certificate of Designation of 4% Incorporated by reference to
Cumulative Redeemable Series A Exhibit 3.6 to the Registrant's Form
Preferred Stock 10-KSB/A filed on May 17, 2001
3.7 Amended and Restated Bylaws of Incorporated by reference to
the Company Exhibit 3.7 to the Registrant's
Form 10-KSB/A filed on May 17, 2001
4.2 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and Ujjwal Exhibit 4.2 to the Company's
Bhowmik dated December 17, 1999 Registration Statement on Form
S-8 filed on July 13, 2001
4.3 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and Juan Exhibit 4.3 to the Company's
Caballero dated December 17, 1999 Registration Statement on Form
S-8 filed on July 13, 2001
4.4 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and Tawee Exhibit 4.4 to the Company's
Ekundomsin dated December 17, 1999 Registration Statement on Form
S-8 filed on July 13, 2001
4.5 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and John R. Exhibit 4.5 to the Company's
Feeney dated December 20, 1999 Registration Statement on Form
S-8 filed on July 13, 2001
25
EXHI DESCRIPTION LOCATION
BIT -------------------------------- --------------------------------------
NO.
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4.6 Non-Statutory Stock Option Incorporated by reference to
Agreement between Registrant and Exhibit 4.6 to the Company's
Julie M. Holmes Dated December Registration Statement on Form
20, 1999 S-8 filed on July 13, 2001
4.7 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and Laurent H. Exhibit 4.7 to the Company's
Tetard dated December 18, 1999 Registration Statement on Form
S-8 filed on July 13, 2001
4.8 Non-Statutory Stock Option Incorporated by reference to Agreement
between Registrant and Exhibit 4.8 to the Company's
Andre Bertrand dated December 16, Registration Statement on Form
1999 S-8 filed on July 13, 2001
4.9 Non-Statutory Stock Option Incorporated by reference to Agreement
between Registrant and Exhibit 4.9 to the Company's
Jeff Davison dated December 16, Registration Statement on Form
1999 S-8 filed on July 13, 2001
4.10 Non-Statutory Stock Option Incorporated by referenced to
Agreement between Registrant and Exhibit 4.10 to the Company's
Bee C. Lavery dated December 16, Registration Statement on Form
1999 S-8 filed on July 13, 2001
4.11 Non-Statutory Stock Option Incorporated by reference to
Agreement between Registrant and Exhibit 4.11 to the Company's
Donn F. Morey dated December 16, Registration Statement on Form
1999 S-8 filed on July 13, 2001
4.12 Incentive Stock Option Agreement Incorporated by reference to
between Registrant an Steve Lu Exhibit 4.12 to the Company's
dated December 19, 2000 Registration Statement on Form
S-8 filed on July 13, 2001
4.13 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and Ujjwal Exhibit 4.13 to the Company's
Bhowmik dated February 5, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.14 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and Juan Exhibit 4.14 to the Company's
Caballero dated February 5, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.15 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and Tawee Exhibit 4.15 to the Company's
Ekundomsin dated February 5, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.16 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and John R. Exhibit 4.16 to the Company's
Feeney dated February 5, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.17 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and Laurent H. Exhibit 4.17 to the Company's
Tetard dated February 5, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.18 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and Diane Exhibit 4.18 to the Company's
Castillo dated February 5, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.19 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and Carlos Exhibit 4.19 to the Company's
Lomheim dated February 5, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.20 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and Alex Exhibit 4.20 to the Company's
Federico dated February 5, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.21 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and Jeannifer Exhibit 4.21 to the Company's
Caldona dated February 5, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.22 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and Geoffrey Exhibit 4.22 to the Company's
Golliher dated February 5, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.23 Incentive Stock Option Agreement Incorporated by reference to between
Registrant and Feng Yu Exhibit 4.23 to the Company's
(Frank) Zhou dated February 5, Registration Statement on Form
2001 S-8 filed on July 13, 2001
4.24 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and Jennifer Exhibit 4.24 to the Company's
Kim dated February 5, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
26
EXHI DESCRIPTION LOCATION
BIT -------------------------------- --------------------------------------
NO.
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4.25 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and Daniela Exhibit 4.25 to the Company's
Moura dated February 5, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.26 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and James Kim Exhibit 4.26 to the Company's
dated February 5, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.27 Non-Statutory Stock Option Incorporated by reference to
Agreement between Registrant and Exhibit 4.27 to the Company's
Gary Freeman dated February 14, Registration Statement on Form
2001 S-8 filed on July 13, 2001
4.28 Non-Statutory Stock Option Incorporated by reference to
Agreement between Registrant and Exhibit 4.28 to the Company's
William Mills dated February 5, Registration Statement on Form
2001 S-8 filed on July 13, 2001
4.29 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and Richard Exhibit 4.29 to the Company's
Wade dated February 5, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.30 Non-Statutory Stock Option Incorporated by reference to
Agreement between Registrant and Exhibit 4.30 to the Company's
Terry Washburn dated February 5, Registration Statement on Form
2001 S-8 filed on July 13, 2001
4.31 Non-Statutory Stock Option Incorporated by reference to
Agreement between Registrant and Exhibit 4.31 to the Company's
Vijay Amritraj dated June 5, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.32 Non-Statutory Stock Option Incorporated by reference to
Agreement between Registrant and Exhibit 4.32 to the Company's
Munish Gupta dated June 5, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.33 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and Tawee Exhibit 4.33 to the Company's
Ekundomsin dated June 15, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.34 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and John R. Exhibit 4.34 to the Company's
Feeney dated June 15, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.35 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and Laurent Exhibit 4.35 to the Company's
Tetard dated June 15, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.36 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and Diane Exhibit 4.36 to the Company's
Castillo dated June 15, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.37 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and Geoffrey Exhibit 4.37 to the Company's
Golliher dated June 15, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.38 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and Frank Zhou Exhibit 4.38 to the Company's
dated June 15, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.39 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and Jennifer Exhibit 4.39 to the Company's
Kim dated June 15, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.40 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and James Kim Exhibit 4.40 to the Company's
dated June 15, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.41 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and James Kim Exhibit 4.40 to the Company's
dated June 15, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.42 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and Fabian Exhibit 4.42 to the Company's
Marta dated June 15, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.43 Incentive Stock Option Agreement Incorporated by reference to
between Registrant and Daniela Exhibit 4.43 to the Company's
Moura dated June 15, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
27
EXHI DESCRIPTION LOCATION
BIT -------------------------------- --------------------------------------
NO.
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4.44 Warrant Agreement between Incorporated by reference to
Registrant and Phil Alexander Exhibit 4.44 to the Company's
dated October 23, 2000 Registration Statement on Form
S-8 filed on July 13, 2001
4.45 Warrant Agreement between Incorporated by reference to
Registrant and Phil Alexander Exhibit 4.45 to the Company's
dated October 23, 2000 Registration Statement on Form
S-8 filed on July 13, 2001
4.46 Warrant Agreement between Incorporated by reference to
Registrant and Michael Blum dated Exhibit 4.46 to the Company's
October 23, 2000 Registration Statement on Form
S-8 filed on July 13, 2001
4.47 Warrant Agreement between Incorporated by reference to
Registrant and Michael Blum dated Exhibit 4.47 to the Company's
October 23, 2000 Registration Statement on Form
S-8 filed on July 13, 2001
4.48 Warrant Agreement between Incorporated by reference to
Registrant and Gary Blum dated Exhibit 4.48 to the Company's
February 5, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.49 Warrant Agreement between Incorporated by reference to
Registrant and Donald P. Hateley Exhibit 4.49 to the Company's
dated March 5, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.50 Warrant Agreement between Incorporated by reference to
Registrant and Robert Wagman Exhibit 4.50 to the Company's
dated May 1, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.51 Warrant Agreement between Incorporated by reference to
Registrant and Robert Wagman Exhibit 4.51 to the Company's
dated June 1, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.52 Warrant Agreement between Incorporated by reference to
Registrant and Mark Kellner dated Exhibit 4.52 to the Company's
January 18, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.53 Warrant Agreement between Incorporated by reference to
Registrant and Stephen Gunn dated Exhibit 4.53 to the Company's
April 9, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
4.54 Warrant Agreement between Incorporated by reference to
Registrant and Gary L. Blum dated Exhibit 4.54 to the Company's
June 15, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
10.1 1999 Stock Option Plan of the Incorporated by reference to
Company Exhibit 10.1 to the Registrant's
Form 10-KSB/A filed on May 17, 2001
10.2 Business Development and Incorporated by reference to
Marketing Agreement between the Exhibit 10.2 to the Registrant's
Company and Avenel Alliance, Inc. Form 10-KSB/A filed on May 17, 2001
10.3 Marketing Agreement between the Incorporated by reference to
Company and Entertainment Exhibit 10.3 to the Registrant's
Marketing Group Form 10-KSB/A filed on May 17, 2001
10.4 Employment Agreement between the Incorporated by reference to
Company and Richard Wade Exhibit 10.4 to the Registrant's
Form 10-KSB/A filed on May 17, 2001
10.5 Agreement between Registrant and Incorporated by reference to
Xatnu, Inc. dated October 16, 2000 Exhibit 10.1 to the Company's
Registration Statement on Form
S-8 filed on July 13, 2001
10.6 Agreement between Registrant and Incorporated by reference to
Xatnu, Inc. dated June 29, 2001 Exhibit 10.2 to the Company's
Registration Statement on Form
S-8 filed on July 13, 2001
10.7 Agreement between Registrant and Incorporated by reference to
Parker Mills Patel dated June 29, Exhibit 10.3 to the Company's
2001 Registration Statement on Form
S-8 filed on July 13, 2001
10.8 Agreement between Registrant and Incorporated by reference to
Franklin Financial dated July 9, Exhibit 10.4 to the Company's
2001 Registration Statement on Form
S-8 filed on July 13, 2001
28
EXHI DESCRIPTION LOCATION
BIT -------------------------------- --------------------------------------
NO.
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10.9 Agreement between Registrant and Incorporated by reference to
Gary L. Blum, Esq. dated July 10, Exhibit 10.5 to the Company's
2001 Registration Statement on Form
S-8 filed on July 13, 2001
10.10 Agreement between Registrant and Incorporated by reference to
Taurus Global, LLC dated July 9, Exhibit 10.6 to the Company's
2001 Registration Statement on Form
S-8 filed on July 13, 2001
10.11 Agreement between Registrant and Incorporated by reference to
M.S. Farrell & Co., Inc. dated Exhibit 10.7 to the Company's
July 9, 2001 Registration Statement on Form
S-8 filed on July 13, 2001
10.12 Letter Agreement dated as of Incorporated by reference to
February 23, 2001 between Arglen Exhibit 2.1 to the Company's 8-K
Acquisitions, LLC and the filed on May 16, 2001
Registrant
10.13 Now Solutions, LLC Operating Incorporated by reference to
Agreement dated as of February Exhibit 2.2 to the Company's 8-K
27, 2001 between Arglen filed on May 16, 2001
Acquisitions LLC and the Registrant
10.14 Certificate of Designation of Incorporated by reference to
Vertical Computers, Inc. Series Exhibit 3.1 to Company's Form
"C" 4% Cumulative Convertible 10-QSB/A filed on December 19,
Preferred Stock 2001
10.15 (a) Berche Promissory Note dated Incorporated by reference to
August 13, 2001 Exhibit 10.1 to the Company's
(b) Berche Stock Pledge Agreement Form 10-QSB/A filed on December
dated August 13, 2001 19, 2001
(c) Berche Warrants dated August
13, 2001
10.16 Equity Line of Credit Agreement Incorporated by reference to
between the Company and Cornell Exhibit 10.2 to the Company's
Capital Partners, L.P. dated Form 10-QSB/A filed on December
August 16, 2001 19, 2001
10.17 Securities Purchase Agreement Incorporated by reference to
between the Company and third Exhibit 10.3 to the Company's
party buyers for $250,000 of Form 10-QSB/A filed on December
Convertible Debentures 19, 2001
10.18 Enfacet, Inc. Stock Purchase Incorporated by reference to
Agreement dated August 21, 2001 Exhibit 10.4 to the Company's
Form 10-QSB/A filed on December
19, 2001
10.19 Agreement between Enfacet and the Incorporated by reference to
Company dated August 24, 2001 Exhibit 10.5 to the Company's
Form 10-QSB/A filed on December
19, 2001
10.20 Agreement between Registrant and Incorporated by reference to
Chuck Ashman dated October 29, Exhibit 10.1 to the Company's
2001 Registration Statement on Form
S-8 filed on November 8, 2001
10.21 Agreement between Registrant and Incorporated by reference to
Michael Blum dated October 29, Exhibit 10.2 to the Company's
2001 Registration Statement on Form
S-8 filed on November 8, 2001
10.22 Agreement between Registrant and Incorporated by reference to
Gary Blum dated November 2, 2001 Exhibit 10.3 to the Company's
Registration Statement on Form
S-8 filed on November 8, 2001
10.23 Agreement between Registrant and Incorporated by reference to
Justin Davis dated October 29, Exhibit 10.4 to the Company's
2001 Registration Statement on Form
S-8 filed on November 8, 2001
10.24 Agreement between Registrant and Incorporated by reference to
Allison Enderle dated October 29, Exhibit 10.5 to the Company's
2001 Registration Statement on Form
S-8 filed on November 8, 2001
10.25 Agreement between Registrant and Incorporated by reference to
Robert Farias dated October 30, Exhibit 10.6 to the Company's
2001 Registration Statement on Form
S-8 filed on November 8, 2001
10.26 Agreement between Registrant and Incorporated by reference to
Donald P. Hateley dated October Exhibit 10.7 to the Company's
29, 2001 Registration Statement on Form
S-8 filed on November 8, 2001
10.27 Agreement between Registrant and Incorporated by reference to
Annette Keith dated October 29, Exhibit 10.8 to the Company's
2001 Registration Statement on Form
S-8 filed on November 8, 2001
29
EXHI DESCRIPTION LOCATION
BIT -------------------------------- --------------------------------------
NO.
- ---
10.28 Agreement between Registrant and Incorporated by reference to
Aubrey McAuley dated October 29, Exhibit 10.9 to the Company's
2001 Registration Statement on Form
S-8 filed on November 8, 2001
10.29 Agreement between Registrant and Incorporated by reference to
Tom McCloskey dated October 29, Exhibit 10.10 to the Company's
2001 Registration Statement on Form
S-8 filed on November 8, 2001
10.30 Agreement between Registrant and Incorporated by reference to
William Mills dated October 29, Exhibit 10.11 to the Company's
2001 Registration Statement on Form
S-8 filed on November 8, 2001
10.31 Agreement between Registrant and Incorporated by reference to
Leroy Molock dated October 29, Exhibit 10.12 to the Company's
2001 Registration Statement on Form
S-8 filed on November 8, 2001
10.32 Agreement between Registrant and Incorporated by reference to
David Rezeieh dated October 29, Exhibit 10.13 to the Company's
2001 Registration Statement on Form
S-8 filed on November 8, 2001
10.33 Agreement between Registrant and Incorporated by reference to
Steve Rossetti dated October 29, Exhibit 10.14 to the Company's
2001 Registration Statement on Form
S-8 filed on November 8, 2001
10.34 Agreement between Registrant and Incorporated by reference to
Priyam Sharma dated November 2, Exhibit 10.15 to the Company's
2001 Registration Statement on Form
S-8 filed on November 8, 2001
10.35 Agreement between Registrant and Incorporated by reference to
Jacob Stearns dated October 29, Exhibit 10.16 to the Company's
2001 Registration Statement on Form
S-8 filed on November 8, 2001
10.36 Agreement between Registrant and Incorporated by reference to
Marilyn Stewart dated November 1, Exhibit 10.17 to the Company's
2001 Registration Statement on Form
S-8 filed on November 8, 2001
10.37 Agreement between Registrant and Incorporated by reference to
Vasu Vijay dated October 29, 2001 Exhibit 10.18 to the Company's
Registration Statement on Form
S-8 filed on November 8, 2001
10.38 Agreement between Registrant and Incorporated by reference to
Vijay Armitraj dated October 29, Exhibit 10.19 to the Company's
2001 Registration Statement on Form
S-8 filed on November 8, 2001
10.39 Agreement between Registrant and Incorporated by reference to
Taurus Global, LLC dated July 9, Exhibit 10.20 to the Company's
2001 Registration Statement on Form
S-8 filed on November 8, 2001
10.40 Agreement between Registrant and Incorporated by reference to
M.S. Farrell & Co., Inc. dated Exhibit 10.21 to the Company's
July 9, 2001 Registration Statement on Form
S-8 filed on November 8, 2001
10.41 Equity Line of Credit Agreement Incorporated by reference to
dated as of August 2001, between Exhibit 10.40 to the Registrant's
the Company and Cornell Capital Form 10-KSB A filed on May 20,
Partners, L.P. 2002
10.42 Registration Rights Agreement Incorporated by reference to
dated as of August 2001 between Exhibit 10.42 to the Registrant's
the Company and the buyers Form 10-KSB A filed on May 20,
identified therein. 2002
10.43 Escrow Agreement dated as of Incorporated by reference to
August 2001 among the Company, Exhibit 10.43 to the Registrant's
Yorkville Advisors Management, Form 10-KSB A filed on May 20,
LLC and First Union National Bank. 2002
10.44 Form of Debenture Incorporated by reference to
Exhibit 10.44 to the Registrant's
Form 10-KSB A filed on May 20, 2002
10.45 Securities Purchase Agreement Incorporated by reference to
dated as of August 2001 among Exhibit 10.45 to the Registrant's
between the Company and the Form 10-KSB A filed on May 20,
buyers identified therein. 2002
10.46 Consulting Agreement dated as of Incorporated by reference to
August 2001 between the Company Exhibit 10.46 to the Registrant's
and Yorkville Advisors Form 10-KSB A filed on May 20,
Management, LLC. 2002
30
EXHI DESCRIPTION LOCATION
BIT -------------------------------- --------------------------------------
NO.
- ---
10.47 Placement Agent Agreement dated Incorporated by reference to
as of August 2001 among the Exhibit 10.47 to the Registrant's
Company, Westrock Advisors, Inc. Form 10-KSB A filed on May 20,
and Cornell Capital Partners, L.P. 2002
10.48 Registration Rights Agreement Incorporated by reference to
dated as of August 2001 between Exhibit 10.48 to the Registrant's
the Company and Cornell Capital Form 10-KSB A filed on May 20,
Partners, L.P. 2002
10.49 Escrow Agreement dated as of Incorporated by reference to
August 2001 among the Company, Exhibit 10.49 to the Registrant's
Cornell Capital Partners, L.P., Form 10-KSB A filed on May 20, 2002
Butler Gonzalez LLP and First
Union National Bank.
10.50 Warrant dated as of November 2001 Incorporated by reference to
given by the Company to Parker, Exhibit 10.50 to the Registrant's
Mills & Patel, LLP Form 10-KSB A filed on May 20, 2002
10.51 Promissory Note dated as of Incorporated by reference to
November 2001 given by the Exhibit 10.51 to the Registrant's
Company to Parker, Mills & Patel, Form 10-KSB A filed on May 20, 2002
LLP
10.52 Promissory Note dated as of Incorporated by reference to
December 2001 given by the Exhibit 10.52 to the Registrant's
Company to Brighton Opportunity Form 10-KSB A filed on May 20, 2002
Fund, LP
10.53 Bridge loan dated as of December Incorporated by reference to
2001 given by the Company to Exhibit 10.53 to the Registrant's
Brighton Opportunity Fund, LP Form 10-KSB A filed on May 20, 2002
10.54 Option Agreement dated as of Incorporated by reference to
December 2001 given by the Exhibit 10.54 to the Registrant's
Company to iNetPurchasing, Inc. Form 10-KSB A filed on May 20, 2002
10.55 Stock Pledge Agreement dated as Incorporated by reference to
of December 2001 given by Exhibit 10.55 to the Registrant's
Mountain Reservoir Corp. to Form 10-KSB A filed on May 20,
Brighton Opportunity Fund, LP 2002
10.56 Option Agreement dated as of Incorporated by reference to
December 2001 given by the Exhibit 10.56 to the Registrant's
Company to Basil Nikas Form 10-KSB A filed on May 20, 2002
10.57 Option Agreement dated as of Incorporated by reference to
December 2001 given by the Exhibit 10.57 to the Registrant's
Company to Robin Mattern Form 10-KSB A filed on May 20, 2002
10.58 Option Agreement dated as of Incorporated by reference to
December 2001 given by the Exhibit 10.58 to the Registrant's
Company to Wayne Savage Form 10-KSB A filed on May 20, 2002
10.59 Consulting Agreement dated as of Incorporated by reference to
January 2002 between the Company Exhibit 10.59 to the Registrant's
and Taurus Global, LLC Form 10-KSB A filed on May 20, 2002
10.60 Reimbursement and Indemnity Incorporated by reference to
Agreement dated as of January Exhibit 10.60 to the Registrant's
2002 between the Company and Luiz Form 10-KSB A filed on May 20,
Claudio Valdetaro Galvao e Mello 2002
10.61 Stock Pledge Agreement dated as Incorporated by reference to
of December 2001 given by Luiz Exhibit 10.61 to the Registrant's
Claudio Valdetaro Galvao e Mello Form 10-KSB A filed on May 20,
to Brighton Opportunity Fund, LP 2002
10.62 Amendment Agreement dated as of Incorporated by reference to
January 2002 between the Company Exhibit 10.62 to the Registrant's
and Strategic Media Alliance Form 10-KSB A filed on May 20, 2002
10.63 Memorandum of Agreement dated as Incorporated by reference to
of January 2002 between the Exhibit 10.63 to the Registrant's
Company and Strategic Media Form 10-KSB A filed on May 20, 2002
Alliance
10.64 Service Agreement dated as of Incorporated by reference to
October 31, 2001 between the Exhibit 10.64 to the Registrant's
Company and Robert Farias Form 10-KSB A filed on May 20, 2002
31
EXHI DESCRIPTION LOCATION
BIT -------------------------------- --------------------------------------
NO.
- ---
10.65 Promissory Note Agreement as of Incorporated by reference to
October 31, 2001 between the Exhibit 10.65 to the Registrant's
Company and Paradigm Sales, Inc. Form 10-KSB A filed on May 20, 2002
10.66 Asset Pledge Agreement as of Incorporated by reference to
October 31, 2001 between the Exhibit 10.66 to the Registrant's
Company and Robert Farias Form 10-KSB A filed on May 20, 2002
10.67 Letter Agreement as of October Incorporated by reference to
31, 2001 between the Company and Exhibit 10.67 to the Registrant's
Robert Farias Form 10-KSB A filed on May 20, 2002
10.68 Promissory Note Agreement as of Incorporated by reference to
October 31, 2001 between the Exhibit 10.68 to the Registrant's
Company and Robert Farias Form 10-KSB A filed on May 20, 2002
10.69 Stock Pledge Agreement as of Incorporated by reference to
October 31, 2001 between the Exhibit 10.69 to the Registrant's
Company and Robert Farias Form 10-KSB A filed on May 20, 2002
10.70 Stock Pledge Letter Agreement as Incorporated by reference to
of October 31, 2001 between the Exhibit 10.70 to the Registrant's
Company and Robert Farias Form 10-KSB A filed on May 20, 2002
10.71 Promissory Note Agreement as of Incorporated by reference to
November 7, 2001 between the Exhibit 10.71 to the Registrant's
Company and Robert Farias Form 10-KSB A filed on May 20, 2002
10.72 Employment Agreement as of Incorporated by reference to
December 1, 2001 between the Exhibit 10.72 to the Registrant's
Company and Richard Wade Form 10-KSB A filed on May 20, 2002
10.73 Warrant Agreement as of December Incorporated by reference to
19, 2001 between the Company and Exhibit 10.73 to the Registrant's
Richard Wade Form 10-KSB A filed on May 20, 2002
10.74 Warrant Agreement as of December Incorporated by reference to
19, 2001 between the Company and Exhibit 10.74 to the Registrant's
Richard Wade Form 10-KSB A filed on May 20, 2002
10.75 Reimbursement and Indemnity Incorporated by reference to
Agreement as of January 15, 2002 Exhibit 10.75 to the Registrant's
between the Company and Luiz Form 10-KSB A filed on May 20, 2002
Claudio Valdetaro Galvao e Mello
10.76 Reimbursement and Indemnity Incorporated by reference to
Agreement as of January 15, 2002 Exhibit 10.76 to the Registrant's
between the Company and Mountain Form 10-KSB A filed on May 20, 2002
Reservoir Corporation
10.77 Reimbursement and Indemnity Incorporated by reference to
Agreement as of January 15, 2002 Exhibit 10.77 to the Registrant's
between the Company and Mountain Form 10-KSB A filed on May 20, 2002
Reservoir Corporation
10.78 Reimbursement and Indemnity Incorporated by reference to
Agreement as of January 15, 2002 Exhibit 10.78 to the Registrant's
between the Company and Mountain Form 10-KSB A filed on May 20, 2002
Reservoir Corporation
10.79 Letter Amendment Agreement as of Incorporated by reference to
April 5, 2002 between the Company Exhibit 10.79 to the Registrant's
and Robert Farias Form 10-KSB A filed on May 20, 2002
10.80 Letter Amendment Agreement as of Incorporated by reference to
April 12, 2002 between the Exhibit 10.80 to the Registrant's
Company and the Anne Berche Trust Form 10-KSB A filed on May 20, 2002
10.81 Asset Purchase Agreement dated Incorporated by reference to
November 14, 2001 between the Exhibit 10.81 to the Registrant's
Company and Paradigm Sales, Inc. Form 10-KSB A filed on May 20, 2002
32
EXHI DESCRIPTION LOCATION
BIT -------------------------------- --------------------------------------
NO.
- ---
10.82 (a) Promissory Note, dated June Provided herewith
3, 2002, between the Company
and Benjamin
(b) Stock Pledge Agreement, dated
June 3, 2002, between the
Company and Benjamin
(c) Benjamin Warrants, dated June
3, 2002, between the Company
and Benjamin
(b) REPORTS ON FORM 8-K:
None.
33
SIGNATURES
Pursuant to the requirements 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.
Date: June 24 2001 VERTICAL COMPUTER SYSTEMS, INC.
By: /s/ Richard Wade
--------------------------------------------
Richard Wade, President and
Chief Executive Officer
By: /s/ Anthony Fidaleo
--------------------------------------------
Anthony Fidaleo, Controller (Principal
Accounting Officer)
34