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 JUNE 30, 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 Company was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
|X| Yes | | No
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, 652,442,422 shares issued and outstanding as of September 24, 2002.
Transitional Small Business Disclosure Format (check one): Yes | | No |X|
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 Sheet (unaudited) as of
June 30, 2002 3
Condensed Consolidated Statements of Operations
(unaudited) for the Three and Six months Ended June
30, 2002 and 2001 5
Condensed Consolidated Statements of Stockholders'
Equity (unaudited) for The Six months Ended June 30,
2002 6
Condensed Consolidated Statements of Cash Flows
(unaudited) for The Six months Ended June 30, 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
June 30,
2002
- -----------------------------------------------------------------------------------------------
Assets
Current Assets
Cash $ 664,523
Restricted cash 1,500,000
Securities available for sale 4,379
Accounts receivable, net of allowance for bad debts of $77,954 1,921,037
Other receivable 10,833
Employee receivables 87,876
Prepaid expenses and other assets 84,988
- -----------------------------------------------------------------------------------------------
Total Current Assets 4,273,636
Property and equipment, net of accumulated depreciation 402,803
Goodwill and other intangibles, net 6,602,891
Deposits and other 5,270
- -----------------------------------------------------------------------------------------------
Total Assets $ 11,284,600
===============================================================================================
Liabilities, Convertible Preferred Stock and
Stockholder's Equity/ (Deficit)
Current liabilities
Accounts payable and accrued liabilities $ 3,025,414
Deferred revenue 2,550,365
Payables to officers 104,297
Accrued dividends 813,712
Current portion-notes payable 5,168,861
- -----------------------------------------------------------------------------------------------
Total current liabilities 11,662,649
Convertible debt 365,000
Note payable, net of discount and current portion 1,096,943
- -----------------------------------------------------------------------------------------------
Total liabilities 13,124,592
- -----------------------------------------------------------------------------------------------
See accompanying notes to the condensed consolidated financial statements
3
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
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 96,895
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 par value; 50
250,000 shares authorized; 50,000 shares issued and outstanding
Series A Preferred Stock; par value $0.001; 750,000 shares authorized; 0
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 350,000
Series C Preferred stock; par value $0.001; 175,000 shares authorized; 0
no shares issued and outstanding
Notes Payable Officer 254,382
Additional paid-in-capital 24,925,667
Accumulated deficit (27,668,774)
Accumulated other comprehensive income/(loss) (5,740)
- -------------------------------------------------------------------------------------------------
Total Stockholders' (deficit) (2,138,137)
- -------------------------------------------------------------------------------------------------
Total liabilities and stockholders' (deficit) $ 11,284,600
=================================================================================================
See accompanying notes to the condensed consolidated financial statements
4
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months ended
For the Six Months ended
June 30, June 30,
-----------------------------------------------------------------------------
2002 2001 2002 2001
- ---------------------------------------------- -----------------------------------------------------------------------------
Revenues
Licensing and maintenance $ 1,645,177 $ 484,105 $ 2,895,732 $ 728,056
Software Development 42,200 0 49,000
Consulting Services 293,613 422,071 565,474 584,370
Other 87,079 71,991 119,626 122,553
----------------- ----------------- ------------------ ------------------
Total Revenues 2,068,069 978,167 3,629,832 1,434,979
Selling, general and administrative expenses 2,273,913 3,870,712 5,574,716 5,968,012
----------------- ----------------- ------------------ ------------------
Operating (loss) (205,844) (2,892,545) (1,944,885) (4,533,033)
Interest income 10,044 - 20,011 -
Interest expense (167,991) - (324,343) -
----------------- ----------------- -----------------
Net (loss) before minority interest (363,791) (2,892,545) (2,249,216) (4,533,033)
Minority interest in (gain) loss of subsidiary (96,895) 174,068 (96,895) 214,294
----------------- ----------------- ------------------ ------------------
Net (loss) (460,686) (2,718,477) (2,346,111) (4,318,739)
Dividend applicable to preferred stock (150,000) (7,000) (300,006) (7,000)
----------------- ----------------- ------------------ ------------------
Net (loss) applicable to common stockholders' $ (610,686) $ (2,725,477) $ (2,646,117) $ (4,325,739)
================= ================= ================== ==================
Basic and diluted loss per share $ (0.00) $ (0.00) $ (0.00) $ (0.01)
================= ================= ================== ==================
Basic and diluted weighted average of common
shares outstanding 627,691,422 684,200,000 623,246,978 684,200,000
================= ================= ================== ==================
Comprehensive (loss) and its components
consist of the following:
Net (loss) $ (460,686) $ (2,674,152) (2,346,111) (4,318,739)
Gain/(Loss) on foreign currency
translation 3,451 - (5,740) -
Comprehensive (loss) $ (457,235) $ (2,674,152) $ (2,351,851) $ (4,318,739)
================= ================= ================== ==================
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' (Deficit)
For the Quarter Ended June 30, 2002
Common Stock Series A Series C Note Payable
-------------------------- ----------------------- ------------------------
Shares Amount Shares Amount Shares Amount To Officers
-------------- ----------- ---------- ------------ ----------- ---------------------------
-------------- ----------- ---------- ------------ ----------- ---------------------------
Balance, December 31, 2001 615,191,422 $ 6,153 50,000 $ 50 50,000 $ 350,000 $ 0
============== =========== ========== ============ =========== ===========================
Shares issued for financing fee
to Cornell Capital (Note 2) 12,500,000 125
Proceeds from sales of Officers
common stock collateralizing a
note payable, to be repaid by
issuing replacement shares
(Note 3) 254,382
Preferred stock dividends
Issuance of warrants for
consulting services (Note 2)
Issuance of warrants for
iNet option agreement (Note 7)
Issuance of warrants for
with notes payable (Note X)
Issuance of warrants for
employee retention (Note X)
Write-off Subscriptions Receivable
Comprehensive Loss:
Net loss
Foreign Currency Translation
-------------- ----------- ---------- ------------ ----------- ---------------------------
Balance, June 30, 2002 627,691,422 $ 6,278 50,000 $ 50 50,000 $ 350,000 $ 254,382
============== =========== ========== ============ =========== ===========================
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 and Stockholders' (Deficit)
For the Quarter Ended June 30, 2002
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 financing fee
to Cornell Capital (Note 2) 199,875 200,000
Proceeds from sales of Officers
common stock collateralizing a
note payable, to be repaid by
issuing replacement shares
(Note X) 254,382
Preferred stock dividends (300,006) (300,006)
Issuance of warrants for
consulting services (Note 2) 9,040 9,040
Issuance of warrants for
iNet option agreement (Note 7) 35,712 35,712
Issuance of warrants for
with notes payable (Note X) 6,109 6,109
Issuance of warrants for
employee retention (Note X) 6,782 6,782
Write-off Subscriptions Receivable 2,000 (2,000) 0
Comprehensive Loss:
Net loss (2,346,111) (2,346,111)
Foreign Currency Translation (5,740) (5,740)
--------------- ---------------- --------------------- ------------------- ----------------
Balance, June 30, 2002 0 $ 24,925,667 $ (5,740) $ (27,668,774) $ (2,138,137)
=============== ================ ===================== =================== ================
See accompanying notes to condensed financial statements
7
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years Six months ended June 30,
2002 2001
--------------------- ---------------------
Cash flows from operating activities
Net loss $ (2,346,111) $ (4,318,739)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interest in net loss of Subsidiary 96,895 (214,294)
Depreciation and amortization 614,147 126,302
Amortization of note discount 33,967 22,578
Non-employee compensation expense 6,782 511,660
Professional services 9,040 -
Fees associated with Notes Payable 206,109 -
Issuance of warrants for iNet option 35,712 -
Allowance for bad debts 77,955 -
Write off fixed assets 42,022 -
Write off of investments 663,725 -
Write down marketable securities (35,014) -
Unrealized Gain/(loss) on Change in Foreign
Currency Translation (5,740) -
Changes in operating assets and liabilities:
Securities available for sale 206,634 -
Accounts receivable (957,391) (1,557,354)
Other receivable 408,656 -
Employee receivable (42,989) 11,630
Prepaids (7,110) (15,536)
Deposits 15,237 6,445
Accounts payable and accrued liabilities 1,203,817 605,035
Deferred Revenue 306,990 1,817,442
Accrued dividends payable -
--------------------- ---------------------
Net cash provided by (used in) operating activities: 533,332 (3,024,831)
Cash flow from investing activities:
Capitalization and Acquisitions - (5,907,840)
Fair value of warrants given in acquisition - 798,500
Purchase of equipment (86,827) (328,486)
Purchase of investments - (292,750)
--------------------- ---------------------
Net cash used in investing activities (86,826.63) (5,730,576)
Cash flow from financing activities:
Pledge of Cash deposit for bank Loan - (1,561,870)
Proceeds from issuance of convertible debentures 100,000 -
Payment of Note Payable (1,072,253) (274,562)
Proceeds from issuance of Notes Payable - 5,500,000
Issuance of Notes Payable, net of discount 344,811 870,146
--------------------- ---------------------
Net cash provided by (used in) financing activities (627,442) 4,533,714
Net increase (decrease) in cash and cash equivalents, (180,936) (4,221,693)
Cash and cash equivalents, beginning of quarter 845,459 5,598,812
--------------------- ---------------------
Cash and cash equivalents, end of quarter $ 664,523 $ 1,377,119
===================== =====================
Supplemental disclosures of cash flow
information: Cash paid during the year
period:
Interest $ 193,739 $ 152,532
See accompanying notes to the condensed consolidated 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, has $1,500,000 cash deposit presently
restricted due to the bank default by NOW Solutions and needs to raise
additional funds to accomplish its objectives. Additionally, at June 30, 2002,
the Company has negative working capital of $7,389,012, and is in default on
some of its debt obligations, most notably the technical default on the
$4,127,437 bank loan to its 60% subsidiary, NOW Solutions (NOW Solutions has
always been current on the payments). 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, that in conjunction with the expectation of continued
profitability from NOW Solutions (NOW had a net profit of $506,000 for the
quarter ended June 30, 2002), that it can launch a number of products, services
and other revenue generating programs. The Company is focusing its efforts on
launching a number of products in the United States based upon its proprietary
technology. 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 has received an offer from the lender to NOW Solutions and is in
negotiations to release a portion of the $1,500,000 presently restricted as well
as a waiver of the default on the bank loan to NOW Solutions. Additionally, the
Company has a $10,000,000 equity line commitment, which is subject to the
Company's ability to register the shares to be issued under the equity line
commitment with the Securities and Exchange Commission. 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.
NOTE 2 - COMMON AND PREFERRED STOCK TRANSACTIONS
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 $5,000 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
9
the date of issuance, was $1,103. During the quarter ended March 31, 2002, 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 sic months ended June 30, 2002 the Company accrued
$74,400 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 to a third party lender 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. Mountain Reservoir
Corp. is a corporation controlled by the W5 Family Trust, of which Mr. Wade is a
trustee. Mr. Wade is President of the Company. The Company has been informed by
the Lender that 19,751,000 shares of the collateral were sold for $254,382.07,
the remaining 31,552,932 shares were transferred to two third parties, and that
the lender considers the debt satisfied. The Company is currently checking with
the lender to determine the status of the stock held in possession of the two
third parties and the Company's rights and obligations with respect to the
collateral.
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.
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 September 23, 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.
For the three months ended June 30, 2002, the Company issued warrants to two
consultants to purchase a total of 1,500,000 shares of common stock at a strike
price of $0.005. The fair value of these warrants at the date of issuance of
each grant of warrants was $3,565.
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 was payable in August 2002. To secure the loan, the
Company pledged third party securities of eResource Capital Group that it holds.
In August 2002, the $211,136 note along with $25,368 in accrued interest and
fees (as amended) was cancelled and a $236,504 note was issued that bears
interest at 13% per annum which has three payments of $7,500 due on October 1,
November 1, and November 15, 2002 and monthly payments of $7,500, beginning on
December 1, 2002 and continuing thereafter until all principal and interest then
outstanding under the Note has been paid.
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
10
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, 2002, and continuing until all
principal then outstanding with interest, amounts owed and unpaid by June 2002.
The Company is 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 $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, is due by the end of September
2002. The Company is 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 the
$280,000 note issued in connection with the purchase of various intangible
assets by Vertical that bears interest at 4% per annum. Pursuant to the terms of
the amendment, Vertical and the third party agreed to extend the date for which
the remaining three $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. In June 2002, this note was further amended, to extend the date
for which the remaining three $5,000 installment payments would be due to the
first day of each month, beginning in July 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 October 1,
2002. In connection with the amendment, the Company agreed to register the
common shares underlying the 50,000 shares of Series C Preferred Stock that were
issued to a third party in connection with the purchase of the SiteFlash
technology.
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 Company would need to raise additional capital in order to pay the
cash portion of the exercise price. 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 be
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 $0.003
per share. The warrants vested immediately and are exercisable for three years
from issuance. The fair value of the warrants was $2,291 (valued using the
Black-Scholes valuation model). 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 a $50,000 note, which is due January 2003 and
interest at a rate of 12%. In connection with the note, the Company issued three
year warrants to purchase 1,500,000 shares of its common stock at a price of
$0.0040 per share. The warrants vested immediately and are exercisable for three
years from issuance. The value of the warrants was $3,818 (valued using the
Black-Scholes valuation model). The Company also pledged a limited interest in a
11
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 3,000,000 shares of
its common stock to two employees at an average share price of $0.012. The fair
market value of these warrants on the date of issuance of each grant is $3,565.
NOTE 3 - NOTES PAYABLE
In February 2002, the Company became delinquent 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 in the
Company's common stock 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. The Company has
been informed by the Lender that 19,751,000 shares of the collateral were sold
for $254,382, the remaining 31,552,932 shares were transferred to two third
parties, and that the lender considers the debt satisfied. The Company has
recorded a $254,382 note payable to Officers in the Stockholders equity section
of the balance sheet pending the issuance of replacement shares. In addition the
Company is currently awaiting formal documentation from the lender to determine
the status of the stock held in possession of the two third parties and with
Corporate counsel to determine the Company's rights and obligations with respect
to the collateral.
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. The Company's litigation is summarized
below.
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)), involved 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
sought in excess of $18 million in damages based on the alleged increase in
value of the stock since the private placement. The Company successfully
prevailed in a motion for summary judgment and the case has been dismissed in
its entirety.
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 is defending its rights and is asserting its own claims
against Arglen Acquisitions. Arglen filed a motion for a preliminary injunction
in July 2002 to prohibit the Company from taking certain actions concerning NOW
Solutions including an attempt to enjoin the Company from taking control of the
executive committee of NOW Solutions. In August, the Company prevailed on four
of the five motions and remains in control of the executive committee. The only
restriction until the outcome of arbitration is the Company is not allowed to
increase its management fee or any other monies other than for reimbursement for
direct expenses incurred by the Company on behalf of NOW Solutions. The Company
believes that Arglen's allegations are without merit.
The Company's subsidiary, NOW Solutions, LLC ("NOW") recently learned of an
employment agreement between NOW and Garry Gyselen ("Gyselen") whereby Gyselen
would be engaged for a term of 3 years at a salary of $150,000 per annum. The
agreement was executed by Gyselen, acting in the capacity of Chairman on behalf
of NOW, and Gyselen, signing on his own personal behalf as the executive. The
agreement is undated. NOW's corporate legal counsel has informed NOW Solutions'
management and its executive committee that the employment agreement is invalid
in their legal opinion. Gyselen, in his own declaration of the preliminary
injunction, declares that the employment agreement is "entirely inoperative."
Gyselen has not provided NOW with any written acknowledgement confirming that
the agreement is null and void.
12
NOTE 5 - NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which addresses accounting for restructuring and
similar costs. SFAS No. 146 supersedes previous accounting guidance, principally
Emerging Issues Task Force (EITF) Issue No. 94-3. The Company will adopt the
provisions of SFAS No. 146 for restructuring activities initiated after December
31, 2002. SFAS No. 146 requires that the liability for costs associated with an
exit or disposal activity be recognized when the liability is incurred. Under
EITF No. 94-3, a liability for an exit cost was recognized at the date of a
companys commitment to an exit plan. SFAS No. 146 also establishes that the
liability should initially be measured and recorded at fair value. Accordingly,
SFAS No. 146 may affect the timing of recognizing future restructuring costs as
well as the amount recognized.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
This statement eliminates the current requirement that gains and losses on debt
extinguishment must be classified as extraordinary items in the income
statement. Instead, such gains and losses will be classified as extraordinary
items only if they are deemed to be unusual and infrequent, in accordance with
the current GAAP criteria for extraordinary classification. In addition, SFAS
145 eliminates an inconsistency in lease accounting by requiring that
modifications of capital leases that result in reclassification as operating
leases be accounted for consistent with sale-leaseback accounting rules. The
statement also contains other nonsubstantive corrections to authoritative
accounting literature. The changes related to debt extinguishment will be
effective for fiscal years beginning after May 15, 2002, and the changes related
to lease accounting will be effective for transactions occurring after May 15,
2002. Adoption of this standard will not have any immediate effect on the
Company consolidated financial statements.
In August 2001, 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, 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 June
30, 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.
13
o As required under SFAS No. 142, with effect from January 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 and six
months ended June 30, 2001 (in thousands, except per share data):
JUNE 30, JUNE 30,
2002 2001
---------- -----------
Reported net loss $ (461) $ (2,674)
Add back goodwill amortization, net of tax _ (43)
---------- -----------
Adjusted net loss $ (461) $(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)
---------- -----------
JUNE 30, JUNE 30,
2002 2001
---------- -----------
Reported net loss $(2,346) $ (4,319)
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 $1,000,000. 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 $1,500,000 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 warrants vesting equally in one and two
years from the grant date. All warrants are exercisable five years from the
vesting date.
14
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.
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.
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.
NOTE 8 - SUBSEQUENT EVENTS
In July 1, 2002, the Company entered into a two year employment agreement with
Aubrey McAuley, whereby McAuley would provide services in the capacity of
Executive VP, Product Development and Sales Support. McAuley will be paid an
annual salary of $120,000 and a bonus as determined in accordance with the
agreement. In consideration and as incentive for Executive to execute this
Employment Agreement and diligently perform the services provided in connection
with the Employment Agreement, McAuley will receive 7,500 shares of Series "C"
preferred stock of the pool of 30,000 shares of Series "C" preferred stock,
which were reserved in connection with the purchase of Company's subsidiary,
Enfacet, Inc., for former employees of Enfacet and investment purposes. These
shares of Series "C" preferred stock may be converted into 3,000,000 shares of
Company's common stock. The Company will register the underlying shares of
common stock. In the event the employment agreement is terminated, then McAuley
may convert his employment agreement into a subcontractor agreement.
In July 2002, the Company retained the services of Equitilink, Inc. to provide
investor relations services in consideration of the issuance of 5,000,000 shares
of Company's common stock with the Rule 144 restrictive legend. The fair value
of the stock issuance was $23,500.
In August 2002, the Company issued a $25,000 note, which was due in August 2002
and bears interest at a rate of 12%. The note is secured by 10,000,000 shares of
common stock of Vertical Computer that is owned by Mountain Reservoir
Corporation, 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 Vertical Computer Systems, is the trustee of the W5 Family
Trust. The Company has been granted an extension into late September 2002.
In August 2002, the Company retained a consultant to provide investment services
on behalf of Company. Upon execution of the agreement, the Company issued
warrants to purchase 500,000 shares of common stock at a share price of $0.015,
which expire in August 2005 and vest immediately. The fair value of the warrants
was $4,474. which expired in August 2005 and vests immediately. The consultant
is also entitled to 2.5% of any cash funds raised and in the event the
consultant raises $1,500,000, then the Company will issue warrants to purchase
2.0 million shares of common stock, based on 90% of the average closing price
for the five previous trading days prior to the closing date of the transaction.
In August 2002, the Company agreed with a third party lender to loan the Company
$60,000. The lender has currently loaned the Company $31,859. The Company had
agreed to issue warrants to purchase 6 million shares of the Company's common
stock at a strike price of $0.005 per share in connection with funding the total
amount of the loan. The lender has not fully funded the loan and the parties are
negotiating additional terms to the loan. In connection with the loan, the
Company also agreed to compensate a third party with a finders fee with warrants
to purchase Company common stock based on the amount of money actually loaned to
the Company.
In August 2002, the Company issued an $8,000 note, which is due February 2003
and bears interest at a rate of 10% in consideration of a loan from Luiz
Valdetaro, the Chief Technology Officer of the Company. In connection with the
note, the Company issued three year warrants to purchase 1,000,000 shares of its
common stock at a price of $0.005 per share. The warrants vested immediately and
are exercisable for three years from issuance. 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 September 2002, the Company amended an agreement to retain the services of
Stephen Rossetti to provide services in the capacity of Executive V.P.,
Governmental Affairs, in consideration for warrants to purchase 1,000,000 shares
of its common stock at a share price of $0.012, $30,000 for services rendered
through August 31, 2002, and $5,000 per month for a period of one year. The
warrants expire in September 2005.
In August 2002, the Company agreed with a third party lender to loan the Company
$60,000. The lender has currently loaned the Company $31,859. The Company had
agreed to issue warrants to purchase 6,000,000 shares of the Company's common
stock at a strike price of $0.005 per share in connection with funding the total
amount of the loan. The lender has not fully funded the loan and the parties are
negotiating additional terms to the loan. In connection with the loan, the
Company also agreed to compensate a third party with a finders fee with warrants
to purchase Company common stock based on the amount of money actually loaned to
the Company.
In September 2002, the Company issued warrants to purchase 1,750,000 shares of
the Company's common stock at a strike price of $0.006 per shares to two
consultants in connection with accounting services provided to the Company. The
warrants expire in September 2005 and vest immediately. The fair market value of
the warrants issued was $15,830.
15
In September 2002, the Company issued 5,774,704 shares of common stock to Luiz
Valdetaro, the Chief Technology Officer of the Company, and 13,976,296 shares of
common stock to Mountain Reservoir Corporation. These shares were issued in
connection with indemnity and reimbursement agreements between the Company and
Mountain Reservoir Corporation and Mr. Valdetaro, respectively, 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.
In September 2002, the Company issued a promissory note in the amount of $13,000
to a third party lender bearing interest at 8% due in October 2002 and warrants
to purchase 250,000 shares of Company common stock at a strike price of $0.008
per share in consideration for a loan in the amount of $12,500 with a commitment
fee of $500. In connection with the loan, the Company also issued warrants to
purchase 250,000 shares of Company common stock at a strike price of $0.008 per
share to a third party as a finder's fee.
First Serve Entertainment and Vijay Amritraj have agreed to terminate their
business relationship and are proceeding to formalize a mutually acceptable
settlement agreement.
16
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 June 30,
2002. 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, those factors
identified in the Company's Form 10-KSB for the year ended December 31, 2001.
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 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.
In June 2002, Apollo Industries, Inc., of which Vertical owns a 20% interest,
changed is name to TranStar Services, Inc.
RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2002 COMPARED TO THE THREE
AND SIX MONTHS ENDED JUNE 30, 2001
TOTAL REVENUES. The Company had total revenues of $2,068,000 in the three months
ended June 30, 2002. This is an increase of $1,090,000 primarily due to a
$1,161,000 increase in software sales in conjunction with NOW Solutions' emPath
version 6 and full allocation of maintenance revenue compared to the previous
year offset by a $128,000 decline in consulting services. Total revenues
primarily consist of software license and consulting and maintenance fees. All
but $64,,000 of these revenues relate to the business operations of NOW
Solutions, a subsidiary in which the Company acquired a 60% interest in February
2001.
Total Revenues for the six months ended June 30, 2002 increased $2,195,000 from
$1,435,000 to $3,630,000. The increase was primarily due to the inclusion of NOW
Solutions for a full quarter for the three months ended March 31, 2002 as
compared to 2001 plus the increase in NOW Solutions total revenues as described
above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company had selling, general
and administrative expenses of $2,274,000 and $3,871,000 in the three months
ended June 30, 2002 and 2001, respectively. The decrease of $1,597,000 was
primarily attributable to the reduction of these expenses in Vertical Computer
Systems, Inc. which reduced labor, outside consulting fees, expenses involving
the companies international partners, the discontinuance of amortization of
goodwill and a reduction in depreciation expense as a result of fixed assets
written off, as well as the virtual ceasing of operations of the Company's
wholly owned Subsidiaries, Globalfare, Pointmail and Enfacet as part of a global
cost cutting and restructuring efforts, offset by a slight increase in NOW
Solutions' correlating costs due to the increase in NOW's sales and operations.
Selling, General and Administrative Expenses for the six months ended June 30,
2002 decreased $393,000 from $5,968,000 to $5,575,000. The net decrease is
primarily comprised of the results of the net cost cutting measures described
above offset by the write down of approximately $720,000 of goodwill associated
with Enfacet and two additional months of operations of NOW Solutions compared
to the six months ended June 30, 2002.
17
OPERATING LOSS. The Company had an operating loss of $206,000 and $2,892,000 in
the three months ended June 30, 2002 and 2001 respectively. The $2,686,000
decrease is primarily related to the $1,090,000 increase in revenues coupled
with the $1,597,000 decrease in selling, general, and administrative expenses as
described above.
INTEREST. The increase in interest expense of approximately $168,000 over the
three months ended June 30, 2002, when compared to the same period in the prior
year, is due to the debt assumed as part of the Enfacet purchase and the
increase in notes and debentures payable to fund the operations of Vertical and
its wholly owned subsidiaries.
The $324,000 increase in interest for the six months ended June 30, 2002 is
attributable to the debt incurred as part of the asset purchase of NOW Solutions
as well as the debt assumed as part of the Enfacet purchase and the increase in
notes and debentures payable to fund the operations of Vertical and its wholly
owned subsidiaries. The minority interest in income/(loss) of subsidiary was
$97,000 and $(174,000) for the three months ended June 30, 2002 and 2001,
respectively. The $271,000 change from a loss to a gain is attributable to the
$506,000 net income on NOW Solutions for the three months ended June 30, 2002.
The $311,000 net change from a loss to a gain in the minority interest in
income/(loss) of subsidiary for the six months ended June 30, 2002 was primarily
attributable to the $149,000 in income from NOW compared a loss of $536,000 for
the previous period.
NET LOSS. The Company had a net loss of $460,686 and $2,718,477 in the three
months ended June 30, 2002 and 2001 respectively. The $2,257,791 reduction was
primarily due to the profitability of NOW and the reduction of selling, general
and administrative expenses as discussed above.
The $1,680,000 reduction in net loss for the six months ended June 30, 2002 when
compared to the same period in the prior year was primarily due to the
profitability of NOW and the reduction of selling, general and administrative
expenses as discussed above.
DIVIDENDS APPLICABLE TO PREFERRED STOCK. The Company has 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 June 30, 2002, a $143,000 increase over
the three months ended June 30, 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 $293,000 increase in dividends for the six months ended June 30, 2002 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 $611,000 and $2,725,000 in the three months
ended June 30, 2002 and 2001, respectively. The $2,114,000 decrease is primarily
due to the profitability of NOW and the reduction of selling, general and
administrative expenses as discussed above.
The reduction in net loss applicable to common stockholders of $1,679,622 for
the six months ended June 30, 2002 when compared to the same period for the
prior year was primarily due to the profitability of NOW and the reduction of
selling, general and administrative expenses as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Presently, 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 or have the $1,500,000 restricted cash
released by the bank. 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 June 30, 2002, the Company had unrestricted
cash of $665,000, 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 June 30, 2002. Since June 30, 2002, the Company has borrowed $57,000 from
third parties and $8,000 from Luiz Valdetaro, the Chief Technology Officer of
the Company. The Company needs to raise cash in order to continue operations.
18
The Company's primary need for cash is to fund operations until its operations
generate sufficient capital to meet these obligations. In addition, the Company
needs cash to satisfy its current liabilities.
For the six months ended June 30, 2002, the Company had a net decrease in cash
and cash equivalents of $181,000. This consisted primarily of net cash used in
financing activities of $627,000 and net cash used in investing activities of
$87,000, which was offset by net cash provided by operating activities of
$533,000. Net cash used in financing activities consisted of the payment of
outstanding notes payable of $1,072,000 net of proceeds of $445,000 from the
issuance of notes payable and convertible debentures. Net cash provided by
operating activities consisted primarily of the net loss of $2,346,000 less
non-cash expenses (including depreciation and amortization, write-off of
goodwill and investments and issuances of stock) of $1,746,000, a net increase
in operating asset accounts of $374,000, primarily attributable to receivables
offset by an increase in operating liability accounts increase of $1,134,000
primarily attributable to an increase in accounts payable and accrued expenses
In June 2002, the Company issued a $50,000 note (of which it has received
$40,000 to date), 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 $0.0030 per share. The warrants vested
immediately and are exercisable for three years from issuance. The value of the
warrants, $2,291 (valued using the Black-Scholes valuation model) has been
expensed currently 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 a $50,000 note, which is due January 2003 and
bears interest at a rate of 12%. In connection with the note, the Company issued
three year warrants to purchase 1,500,000 shares of its common stock at a price
of $0.0040 per share. The warrants vested immediately and are exercisable for
three years from issuance. The value of the warrants, $3,818 (valued using the
Black-Scholes valuation model) has been expensed currently 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.
During the six months ended June 30, 2002, the Company borrowed an aggregate of
$170,300 from Richard Wade, the Company's President and Chief Executive Officer.
This loan is unsecured, non-interest bearing and payable on demand.
During the quarter ended June 30, 2002 the Company was informed that $254,000 of
a delinquent note payable was repaid via proceeds from sales of 19,751,000 of
the Company's common stock owned by officers of the Company and used as
collateral to secure the a $425,000 note payable. The officers are to be repaid
with replacement shares.
In March 2002, the Company entered into an agreement to issue a $170,500
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
19
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 Company has paid the $400,000 fee associated
with the Equity Line of Credit agreement by issuance of 19,697,857 shares of
common stock of which 12,500,000 were outstanding during the six months period
ended June 30, 2002.
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 60% majority owned
subsidiary. The Company does not receive these revenues and, therefore, they are
not available to the Company as a source of cash.
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
$5,000,000 in principal and interest if NOW does not cure its technical default
with its primary lender. However, as discussed below, NOW is current with all
its principal and interest payments.
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 Human Resources
Information System from Ross Systems, Inc. The Company believes it is entitled
to approximately $1,000,000 of its $1,500,000 deposit as of August 30, 2002 ,
which increases each month as NOW makes its payments, the Company has received
an offer from the bank to release a portion of the $1,500,000 pledge and cure
the default on the NOW Solutions' loan. The Company is negotiating the final
terms of the settlement agreement with the lender and expects a final settlement
by early October 2002. Until an agreement 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.
GOING CONCERN UNCERTAINTY
The accompanying condensed consolidated financial statements for the six months
ended June 30, 2002, 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, has a $1,500,000 cash deposit presently restricted due
to the bank default by NOW Solutions and needs to raise additional funds to
accomplish its objectives. Additionally, at June 30, 2002, the Company had
negative working capital of approximately $7,389,012 and has defaulted on some
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.
CRITICAL ACCOUNTING POLICIES
MARKET RISKS
The Company anticipates that it will have activities in foreign 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 June 30, 2002, there are no material
gains or losses requiring separate disclosure.
20
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.
CAPITALIZED SOFTWARE COSTS
Software costs incurred internally in creating computer software products are
expensed until technological feasibility has been established upon completion of
a detailed program design. Thereafter, all software development costs are
capitalized until the point that the product is ready for sale and subsequently
reported at the lower of unamortized cost or net realizable value. The Company
considers annual amortization of capitalized software costs based on the ratio
of current year revenues by product to the product's total estimated revenues
method, subject to an annual minimum based on straight-line amortization over
the product's estimated economic useful life, not to exceed five years. The
Company periodically reviews capitalized software costs for impairment where the
fair value is less than the carrying value.
LONG-LIVED ASSETS
Long-lived assets, such as property and equipment, are evaluated for impairment
when events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable through the estimated undiscounted future cash
flows from the use of these assets. When any such impairment exists, the related
assets are written down to fair value.
REVENUE RECOGNITION
For the Company's various services, revenue is generally recognized when
services are rendered. In accordance with Statement of Position 97-2, "Software
Revenue Recognition", ("SOP 97-2"), the Company recognizes revenue on sales of
its payroll software products when the following criteria are met: (i)
persuasive evidence of an arrangement exists, (ii) delivery has occurred and the
system is functional, (iii) the vendor's fee is fixed or determinable and (iv)
collectability is probable.
Service revenues are recognized ratably over the contractual period or as the
services are provided.
Deferred revenue on maintenance contracts represent cash received in advance or
accounts receivable from system service consulting sales, which is recognized
over the life of the contract.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation" SFAS 123, establishes a fair value method of accounting for
stock-based compensation plans and for transactions in which a company acquires
goods or services from non-employees in exchange for equity instruments. The
Company has adopted this accounting standard. SFAS 123 also gives the option to
account for stock-based employee compensation in accordance with Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for Stock issued to
Employees," or SFAS 123. The Company elected to follow APB 25, which measures
compensation cost for employee stock options as the excess, if any, of the fair
market price of the Company's stock at the measurement date over the amount an
employee must pay to acquire stock.
INVESTMENTS
Investments in entities in which the Company exercises significant influence,
but does not control, are accounted for using the equity method of accounting in
accordance with Accounting Principles Board Opinion No. 18 "The Equity Method of
Accounting for Investments in Common Stock". Investments in securities with a
readily determinable market value in which the Company does not exercise
significant influence, does not have control, and does not plan on selling in
the near term are accounted for as available for sale securities in accordance
with Statement of Financial Accounting Standard No. 115 "Accounting for Certain
Investments in Debt and Equity Securities".
21
INCOME TAXES
The Company provides for income taxes in accordance with Statements of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 requires a company to use the asset and liability method of accounting for
income taxes.
Under the asset and liability method, deferred income taxes are recognized for
the tax consequences of "temporary differences" by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and liabilities.
A valuation allowance is provided when management cannot determine whether it is
more likely than not the deferred tax asset will be realized. Under SFAS 109,
the effect on deferred income taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
EARNINGS PER SHARE
Statement of Financial Accounting Standards FASB No. 128, "Earnings per Share",
which replaces the calculation of primary and fully diluted earnings (loss) per
share with basic and diluted earnings (loss) per share, is used to calculate
earnings per share. Basic earnings (loss) per share includes no dilution and is
computed by dividing income (loss) available to common shareholders by the
weighted average number of shares outstanding during the period. Diluted
earnings (loss) per share reflects the potential dilution of securities that
could share in the earnings of an entity, similar to fully diluted earnings
(loss) per share.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which addresses accounting for restructuring and
similar costs. SFAS No. 146 supersedes previous accounting guidance, principally
Emerging Issues Task Force (EITF) Issue No. 94-3. The Company will adopt the
provisions of SFAS No. 146 for restructuring activities initiated after December
31, 2002. SFAS No. 146 requires that the liability for costs associated with an
exit or disposal activity be recognized when the liability is incurred. Under
EITF No. 94-3, a liability for an exit cost was recognized at the date of a
companys commitment to an exit plan. SFAS No. 146 also establishes that the
liability should initially be measured and recorded at fair value. Accordingly,
SFAS No. 146 may affect the timing of recognizing future restructuring costs as
well as the amount recognized.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
This statement eliminates the current requirement that gains and losses on debt
extinguishment must be classified as extraordinary items in the income
statement. Instead, such gains and losses will be classified as extraordinary
items only if they are deemed to be unusual and infrequent, in accordance with
the current GAAP criteria for extraordinary classification. In addition, SFAS
145 eliminates an inconsistency in lease accounting by requiring that
modifications of capital leases that result in reclassification as operating
leases be accounted for consistent with sale-leaseback accounting rules. The
statement also contains other nonsubstantive corrections to authoritative
accounting literature. The changes related to debt extinguishment will be
effective for fiscal years beginning after May 15, 2002, and the changes related
to lease accounting will be effective for transactions occurring after May 15,
2002. Adoption of this standard will not have any immediate effect on the
Company consolidated financial statements.
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
22
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 January 1, 2002. In
accordance with the requirements of SFAS 142, during the six months ended June
30, 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 under SFAS No. 142, with effect from January 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 and six
months ended June 30, 2001 (in thousands, except per share data):
JUNE 30, JUNE 30,
2002 2001
---------- -----------
Reported net loss $ (461) $ (2,674)
Add back goodwill amortization, net of tax _ (43)
---------- -----------
Adjusted net loss $ (461) $(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)
---------- -----------
JUNE 30, JUNE 30,
2002 2001
---------- -----------
Reported net loss $(2,346) $ (4,319)
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)
---------- -----------
23
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. The Company's litigation is summarized
below.
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)), involved 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
sought in excess of $18 million in damages based on the alleged increase in
value of the stock since the private placement. The Company successfully
prevailed in a motion for summary judgment and the case has been dismissed in
its entirety.
The second 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. In August, the
Company prevailed on four of the five motions and remains in control of the
executive committee. The only restriction until the outcome of arbitration is
the Company is not allowed to increase its management fee or any other monies
other than for reimbursement for direct expenses incurred by the Company on
behalf of NOW Solutions. The Company believes that Arglen's allegations are
without merit and that the Company will prevail on all five motions.
The Company's subsidiary, NOW Solutions, LLC ("NOW") recently learned of an
employment agreement between NOW and Garry Gyselen ("Gyselen") whereby Gyselen
would be engaged for a term of 3 years at a salary of $150,000 per annum. The
agreement was executed by Gyselen, acting in the capacity of Chairman on behalf
of NOW, and Gyselen, signing on his own personal behalf as the executive. The
agreement is undated. NOW's corporate legal counsel has informed NOW Solutions'
management and its executive committee that the employment agreement is invalid
in their legal opinion. Gyselen, in his own declaration of the preliminary
injunction, declares that the employment agreement is "entirely inoperative."
Gyselen has not provided NOW with any written acknowledgement confirming that
the agreement is null and void.
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 $5,000 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 Company common stock. 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 notes issued to a third
party lender by the Company in October and November 2001 in the amount of
$100,000 each, 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 and CEO of the Company.
24
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. 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. The Company has been
informed by the Lender that 19,751,000 shares of the collateral were sold for
$254,382.07, the remaining 31,552,932 shares were transferred to two third
parties, and that the lender considers the debt satisfied. The Company is
currently checking with the lender to determine the status of the stock held in
possession of the two third parties and the Company's rights and obligations
with respect to the collateral.
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.
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 September 23, 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 is $3,132.
For the three months ended June 30, 2002, the Company issued warrants to two
consultants to purchase a total of 1,500,000 shares of common stock at a strike
price of $0.005. The fair market value of these warrants at the date of issuance
of each grant of warrants was $3,565.
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 was payable in August 2002. To secure the loan, the
Company pledged third party securities of eResource Capital Group that it holds.
In August 2002, the $211,136 note along with $25,368 in accrued interest and
fees (as amended) was cancelled and a $236,504 note was issued that bears
interest at 13% per annum which has three payments of $7,500 due on October 1,
November 1, and November 15, 2002 and monthly payment of $7,500, beginning on
December 1, 2002 and continuing thereafter until all principal and interest then
outstanding under the Note has been paid.
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, 2002, and continuing until all
principal then outstanding with interest, amounts owing and then unpaid by June
2002. The Company is 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 $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, is due by the end of September
2002. The Company is 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 the
$280,000 note issued in connection with the purchase of various intangible
assets by Vertical that bears interest at 4% per annum. Pursuant to the terms of
the amendment, Vertical and the third party agreed to extend the date for which
the remaining three $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. In June 2002, this note was further amended, to extend the date
for which the remaining three $5,000 installment payments would be due to the
first day of each month, beginning in July 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 October 1,
2002. In connection with the amendment, the Company agreed to register the
common shares underlying the 50,000 shares of Series C Preferred Stock that were
issued to a third party in connection with the purchase the SiteFlash
technology.
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
25
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 Company would need to raise additional capital in order to pay the
cash portion of the exercise price. 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 $0.003
per share. The warrants vested immediately and are exercisable for three years
from issuance. The value of the warrants, $2,291 (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 a $50,000 note, which is due January 2003 and
interest at a rate of 12%. In connection with the note, the Company issued three
year warrants to purchase 1,500,000 shares of its common stock at a price of
$0.0040 per share. The warrants vested immediately and are exercisable for three
years from issuance. The value of the warrants, $3,818 (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 3,000,000 shares of
its common stock to two employees at an average share price of $0.012. The fair
market value of these warrants on the date of issuance of each grant is $3,565.
In July 1, 2002, the Company entered into an employment agreement with Aubrey
McAuley, whereby McAuley would provide services in the capacity of Executive VP,
Product Development and Sales Support. McAuley will be paid an annual salary of
$120,000. In consideration and as incentive for Executive to execute this
Employment Agreement and diligently perform the services provided in connection
with the Employment Agreement, McAuley will receive 7,500 shares of Series "C"
preferred stock of the pool of 30,000 shares of Series "C" preferred stock,
which were reserved in connection with the purchase of Company's subsidiary,
Enfacet, Inc. for former employees of Enfacet and investment purposes. These
shares of Series "C" preferred stock may be converted into 3,000,000 shares of
Company's common stock. The Company will register the underlying shares of
common stock. In the event the employment agreement is terminated, then McAuley
may convert his employment agreement into a subcontractor agreement.
In July 2002, the Company retained the services of Equitilink, Inc. to provide
investor relations services in consideration of the issuance of 5,000,000 shares
of Company's common stock with the Rule 144 restrictive legend.
In August 2002, the Company issued a $25,000 note, which was due in August 2002
and bears interest at a rate of 12%. The note is secured by 10,000,000 shares of
common stock of Vertical Computer that is owned by Mountain Reservoir
Corporation, 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 Vertical Computer Systems, is the trustee of the W5 Family
Trust. The Company is currently delinquent on payment.
In August 2002, the Company retained a consultant to provide investment services
on behalf of Company. Upon execution of the agreement, the Company issued
warrants to purchase 500,000 shares of common stock at a share price of $0.015.
The consultant is also entitled to 2.5% of any cash funds raised and in the
event the consultant raises $1,500,000, then the Company will issue warrants to
purchase 2.0 million shares of common stock, based on 90% of the average closing
price for the five previous trading days prior to the closing date of the
transaction.
26
In August 2002, the Company issued a $8,000 note, which is due February 2003 and
bears interest at a rate of 10% in consideration of a loan from Luiz Valdetaro,
the Chief Technology Officer of the Company. In connection with the note, the
Company issued three year warrants to purchase 1,000,000 shares of its common
stock at a price of $0.005 per share. The warrants vested immediately and are
exercisable for three years from issuance. 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 September 2002, the Company amended an agreement to retain the services of
Stephen Rossetti to provide services in the capacity of Executive V.P.,
Governmental Affairs, in consideration for warrants to purchase 1,000,000 shares
of its common stock at a share price of $0.012, $30,000 for services rendered
through August 31, 2002, and $5,000 per month.
In August 2002, the Company agreed with a third party lender to loan the Company
$60,000. The lender has currently loaned the Company $31,859. The Company had
agreed to issue warrants to purchase 6 million shares of the Company's common
stock at a strike price of $0.005 per share in connection with funding the total
amount of the loan. The lender has not fully funded the loan and the parties are
negotiating additional terms to the loan. In connection with the loan, the
Company also agreed to compensate a third party with a finders fee with warrants
to purchase Company common stock based on the amount of money actually loaned to
the Company.
In September 2002, the Company issued warrants to purchase 1,750,000 shares of
the Company's common stock at a strike price of $0.006 per shares to two
consultants in connection with accounting services provided to the Company.
In September 2002, the Company issued 5,774,704 shares of common stock to Luiz
Valdetaro, the Chief Technology Officer of the Company, and 13,976,296 shares of
common stock to Mountain Reservoir Corporation. These shares were issued in
connection with indemnity and reimbursement agreements between the Company and
Mountain Reservoir Corporation and Mr. Valdetaro, respectively, 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.
In September 2002, the Company issued a promissory note in the amount of $13,000
to a third party lender bearing interest at 8% due in October 2002 and warrants
to purchase 250,000 shares of Company common stock at a strike price of $0.008
per share in consideration for a loan in the amount of $12,500 with a commitment
fee of $500. In connection with the loan, the Company also issued warrants to
purchase 250,000 shares of Company common stock at a strike price of $0.008 per
share to a third party as a finder's fee.
ITEM 3. DEFAULTS UNDER SENIOR SECURITIES
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. The Company is in default for failing to register the shares
underlying the debentures with the SEC.
27
November 1, and November 15, 2002 and monthly payment of $7,500, beginning on
December 1, 2002 and continuing thereafter until all principal and interest then
outstanding under the Note has been paid.
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, 2002, and continuing until all
principal then outstanding with interest, amounts owing and then unpaid by June
2002. The Company is 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 $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, is due by the end of September
2002. The Company is 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 Company would need to raise additional capital in order to pay the
cash portion of the exercise price. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
28
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:
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- --------
2.1 Certificate of Ownership and Merger Merging Incorporated by reference to Exhibit 1.1 to the
Scientific Fuel Technology, Inc. into Vertical Company's Form 8-K 12G3 filed on May 2, 2000
Computer Systems, Inc.
2.2 Stock Purchase Agreement dated April 5, 2000 between Incorporated by reference to Exhibit 2.2 to the
the Company and all the shareholders of Company's Form 10-KSB/A filed on May 17, 2001
Globalfare.com
2.3 Stockholders Agreement dated October 12, 2000 Incorporated by reference to Exhibit 2.3 to the
between the Company and Vijay Amritraj Company's Form 10-KSB/A filed on May 17, 2001
2.4 Vertical - iNPI LLC Operating Agreement dated Incorporated by reference to Exhibit 2.4 to the
April 26, 2000 Company's Form 10-KSB/A filed on May 17, 2001
2.5 INet Government Services LLC Operating Agreement Incorporated by reference to Exhibit 2.5 to the
dated April 28, 2000 Company's Form 10-KSB/A filed on May 17, 2001
3.1 Original Unamended Certificate of Incorporation of Incorporated by reference to Exhibit 1.2 to the
Vertical Computer Systems, Inc. (f/k/a Xenogen Company's Form 8-K 12G3 filed on May 2, 2000
Technology, Inc.)
3.2 Certificate of Amendment of Certificate of Incorporated by reference to Exhibit 3.2 to the
Incorporation (change name to Vertical Computer Company's Form 10-KSB/A filed on May 17, 2001
Systems, Inc.)
3.3 Certificate of Designation of 10% Cumulative Incorporated by reference to Exhibit 3.3 to the
Redeemable Series B Preferred Stock Company's Form 10-KSB/A filed on May 17, 2001
3.4 Certificate of Designation of 15% Cumulative Incorporated by reference to Exhibit 3.4 to the
Redeemable Series D Preferred Stock Company's Form 10-KSB/A filed on May 17, 2001
3.5 Certificate of Amendment of Certificate of Incorporated by reference to Exhibit 3.5 to the
Incorporation (2000) Company's Form 10-KSB/A filed on May 17, 2001
3.6 Certificate of Designation of 4% Cumulative Incorporated by reference to Exhibit 3.6 to the
Redeemable Series A Preferred Stock Company's Form 10-KSB/A filed on May 17, 2001
3.7 Amended and Restated Bylaws of the Company Incorporated by reference to Exhibit 3.7 to the
Company's Form 10-KSB/A filed on May 17, 2001
4.2 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.2 to the
and Ujjwal Bhowmik dated December 17, 1999 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.3 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.3 to the
and Juan Caballero dated December 17, 1999 Company's Registration Statement on Form S-8 filed on
July 13, 2001
29
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- --------
4.4 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.4 to the
and Tawee Ekundomsin dated December 17, 1999 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.5 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.5 to the
and John R. Feeney dated December 20, 1999 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.6 Non-Statutory Stock Option Agreement between the Incorporated by reference to Exhibit 4.6 to the
Company and Julie M. Holmes Dated December 20, 1999 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.7 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.7 to the
and Laurent H. Tetard dated December 18, 1999 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.8 Non-Statutory Stock Option Agreement between the Incorporated by reference to Exhibit 4.8 to the
Company and Andre Bertrand dated December 16, 1999 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.9 Non-Statutory Stock Option Agreement between the Incorporated by reference to Exhibit 4.9 to the
Company and Jeff Davison dated December 16, 1999 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.10 Non-Statutory Stock Option Agreement between the Incorporated by referenced to Exhibit 4.10 to the
Company and Bee C. Lavery dated December 16, 1999 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.11 Non-Statutory Stock Option Agreement between the Incorporated by reference to Exhibit 4.11 to the
Company and Donn F. Morey dated December 16, 1999 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.12 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.12 to the
an Steve Lu dated December 19, 2000 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.13 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.13 to the
and Ujjwal Bhowmik dated February 5, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.14 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.14 to the
and Juan Caballero dated February 5, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.15 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.15 to the
and Tawee Ekundomsin dated February 5, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.16 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.16 to the
and John R. Feeney dated February 5, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.17 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.17 to the
and Laurent H. Tetard dated February 5, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
30
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- --------
4.18 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.18 to the
and Diane Castillo dated February 5, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.19 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.19 to the
and Carlos Lomheim dated February 5, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.20 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.20 to the
and Alex Federico dated February 5, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.21 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.21 to the
and Jeannifer Caldona dated February 5, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.22 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.22 to the
and Geoffrey Golliher dated February 5, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.23 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.23 to the
and Feng Yu (Frank) Zhou dated February 5, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.24 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.24 to the
and Jennifer Kim dated February 5, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.25 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.25 to the
and Daniela Moura dated February 5, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.26 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.26 to the
and James Kim dated February 5, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.27 Non-Statutory Stock Option Agreement between the Incorporated by reference to Exhibit 4.27 to the
Company and Gary Freeman dated February 14, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.28 Non-Statutory Stock Option Agreement between the Incorporated by reference to Exhibit 4.28 to the
Company and William Mills dated February 5, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.29 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.29 to the
and Richard Wade dated February 5, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.30 Non-Statutory Stock Option Agreement between the Incorporated by reference to Exhibit 4.30 to the
Company and Terry Washburn dated February 5, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.31 Non-Statutory Stock Option Agreement between the Incorporated by reference to Exhibit 4.31 to the
Company and Vijay Amritraj dated June 5, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
31
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- --------
4.32 Non-Statutory Stock Option Agreement between the Incorporated by reference to Exhibit 4.32 to the
Company and Munish Gupta dated June 5, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.33 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.33 to the
and Tawee Ekundomsin dated June 15, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.34 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.34 to the
and John R. Feeney dated June 15, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.35 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.35 to the
and Laurent Tetard dated June 15, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.36 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.36 to the
and Diane Castillo dated June 15, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.37 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.37 to the
and Geoffrey Golliher dated June 15, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.38 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.38 to the
and Frank Zhou dated June 15, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.39 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.39 to the
and Jennifer Kim dated June 15, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.40 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.40 to the
and James Kim dated June 15, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.41 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.40 to the
and James Kim dated June 15, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.42 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.42 to the
and Fabian Marta dated June 15, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.43 Incentive Stock Option Agreement between the Company Incorporated by reference to Exhibit 4.43 to the
and Daniela Moura dated June 15, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.44 Warrant Agreement between the Company and Phil Incorporated by reference to Exhibit 4.44 to the
Alexander dated October 23, 2000 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.45 Warrant Agreement between the Company and Phil Incorporated by reference to Exhibit 4.45 to the
Alexander dated October 23, 2000 Company's Registration Statement on Form S-8 filed on
July 13, 2001
32
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- --------
4.46 Warrant Agreement between the Company and Michael Incorporated by reference to Exhibit 4.46 to the
Blum dated October 23, 2000 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.47 Warrant Agreement between the Company and Michael Incorporated by reference to Exhibit 4.47 to the
Blum dated October 23, 2000 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.48 Warrant Agreement between the Company and Gary Blum Incorporated by reference to Exhibit 4.48 to the
dated February 5, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.49 Warrant Agreement between the Company and Donald P. Incorporated by reference to Exhibit 4.49 to the
Hateley dated March 5, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.50 Warrant Agreement between the Company and Robert Incorporated by reference to Exhibit 4.50 to the
Wagman dated May 1, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.51 Warrant Agreement between the Company and Robert Incorporated by reference to Exhibit 4.51 to the
Wagman dated June 1, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.52 Warrant Agreement between the Company and Mark Incorporated by reference to Exhibit 4.52 to the
Kellner dated January 18, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.53 Warrant Agreement between the Company and Stephen Incorporated by reference to Exhibit 4.53 to the
Gunn dated April 9, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
4.54 Warrant Agreement between the Company and Gary L. Incorporated by reference to Exhibit 4.54 to the
Blum dated June 15, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
10.1 1999 Stock Option Plan of the Company Incorporated by reference to Exhibit 10.1 to the
Company's Form 10-KSB/A filed on May 17, 2001
10.2 Business Development and Marketing Agreement between Incorporated by reference to Exhibit 10.2 to the
the Company and Avenel Alliance, Inc. Company's Form 10-KSB/A filed on May 17, 2001
10.3 Marketing Agreement between the Company and Incorporated by reference to Exhibit 10.3 to the
Entertainment Marketing Group Company's Form 10-KSB/A filed on May 17, 2001
10.4 Employment Agreement between the Company and Richard Incorporated by reference to Exhibit 10.4 to the
Wade Company's Form 10-KSB/A filed on May 17, 2001
10.5 Agreement between the Company and Xatnu, Inc. dated Incorporated by reference to Exhibit 10.1 to the
October 16, 2000 Company's Registration Statement on Form S-8 filed on
July 13, 2001
10.6 Agreement between the Company and Xatnu, Inc. dated Incorporated by reference to Exhibit 10.2 to the
June 29, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
33
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- --------
10.7 Agreement between the Company and Parker Mills Patel Incorporated by reference to Exhibit 10.3 to the
dated June 29, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
10.8 Agreement between the Company and Franklin Financial Incorporated by reference to Exhibit 10.4 to the
dated July 9, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
10.9 Agreement between the Company and Gary L. Blum, Esq. Incorporated by reference to Exhibit 10.5 to the
dated July 10, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
10.10 Agreement between the Company and Taurus Global, LLC Incorporated by reference to Exhibit 10.6 to the
dated July 9, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
10.11 Agreement between the Company and M.S. Farrell & Incorporated by reference to Exhibit 10.7 to the
Co., Inc. dated July 9, 2001 Company's Registration Statement on Form S-8 filed on
July 13, 2001
10.12 Letter Agreement dated as of February 23, 2001 Incorporated by reference to Exhibit 2.1 to the
between Arglen Acquisitions, LLC and the Company Company's 8-K filed on May 16, 2001
10.13 NOW Solutions, LLC Operating Agreement dated as of Incorporated by reference to Exhibit 2.2 to the
February 27, 2001 between Arglen Acquisitions LLC Company's 8-K filed on May 16, 2001
and the Company
10.14 Certificate of Designation of Vertical Computers, Incorporated by reference to Exhibit 3.1 to Company's
Inc. Series "C" 4% Cumulative Convertible Preferred Form 10-QSB/A filed on December 19, 2001
Stock
10.15 (a) Berche Promissory Note dated August 13, 2001 Incorporated by reference to Exhibit 10.1 to the
Company's Form 10-QSB/A filed on December 19, 2001
(b) Berche Stock Pledge Agreement dated August 13,
2001
(c) Berche Warrants dated August 13, 2001
10.16 Equity Line of Credit Agreement between the Company Incorporated by reference to Exhibit 10.2 to the
and Cornell Capital Partners, L.P. dated August 16, Company's Form 10-QSB/A filed on December 19, 2001
2001
10.17 Securities Purchase Agreement between the Company Incorporated by reference to Exhibit 10.3 to the
and third party buyers for $250,000 of Convertible Company's Form 10-QSB/A filed on December 19, 2001
Debentures
10.18 Enfacet, Inc. Stock Purchase Agreement dated Incorporated by reference to Exhibit 10.4 to the
August 21, 2001 Company's Form 10-QSB/A filed on December 19, 2001
10.19 Agreement between Enfacet and the Company dated Incorporated by reference to Exhibit 10.5 to the
August 24, 2001 Company's Form 10-QSB/A filed on December 19, 2001
34
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- --------
10.20 Agreement between the Company and Chuck Ashman dated Incorporated by reference to Exhibit 10.1 to the
October 29, 2001 Company's Registration Statement on Form S-8 filed on
November 8, 2001
10.21 Agreement between the Company and Michael Blum dated Incorporated by reference to Exhibit 10.2 to the
October 29, 2001 Company's Registration Statement on Form S-8 filed on
November 8, 2001
10.22 Agreement between the Company and Gary Blum dated Incorporated by reference to Exhibit 10.3 to the
November 2, 2001 Company's Registration Statement on Form S-8 filed on
November 8, 2001
10.23 Agreement between the Company and Justin Davis dated Incorporated by reference to Exhibit 10.4 to the
October 29, 2001 Company's Registration Statement on Form S-8 filed on
November 8, 2001
10.24 Agreement between the Company and Allison Enderle Incorporated by reference to Exhibit 10.5 to the
dated October 29, 2001 Company's Registration Statement on Form S-8 filed on
November 8, 2001
10.25 Agreement between the Company and Robert Farias Incorporated by reference to Exhibit 10.6 to the
dated October 30, 2001 Company's Registration Statement on Form S-8 filed on
November 8, 2001
10.26 Agreement between the Company and Donald P. Hateley Incorporated by reference to Exhibit 10.7 to the
dated October 29, 2001 Company's Registration Statement on Form S-8 filed on
November 8, 2001
10.27 Agreement between the Company and Annette Keith Incorporated by reference to Exhibit 10.8 to the
dated October 29, 2001 Company's Registration Statement on Form S-8 filed on
November 8, 2001
10.28 Agreement between the Company and Aubrey McAuley Incorporated by reference to Exhibit 10.9 to the
dated October 29, 2001 Company's Registration Statement on Form S-8 filed on
November 8, 2001
10.29 Agreement between the Company and Tom McCloskey Incorporated by reference to Exhibit 10.10 to the
dated October 29, 2001 Company's Registration Statement on Form S-8 filed on
November 8, 2001
10.30 Agreement between the Company and William Mills Incorporated by reference to Exhibit 10.11 to the
dated October 29, 2001 Company's Registration Statement on Form S-8 filed on
November 8, 2001
10.31 Agreement between the Company and Leroy Molock dated Incorporated by reference to Exhibit 10.12 to the
October 29, 2001 Company's Registration Statement on Form S-8 filed on
November 8, 2001
10.32 Agreement between the Company and David Rezeieh Incorporated by reference to Exhibit 10.13 to the
dated October 29, 2001 Company's Registration Statement on Form S-8 filed on
November 8, 2001
10.33 Agreement between the Company and Steve Rossetti Incorporated by reference to Exhibit 10.14 to the
dated October 29, 2001 Company's Registration Statement on Form S-8 filed on
November 8, 2001
35
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- --------
10.34 Agreement between the Company and Priyam Sharma Incorporated by reference to Exhibit 10.15 to the
dated November 2, 2001 Company's Registration Statement on Form S-8 filed on
November 8, 2001
10.35 Agreement between the Company and Jacob Stearns Incorporated by reference to Exhibit 10.16 to the
dated October 29, 2001 Company's Registration Statement on Form S-8 filed on
November 8, 2001
10.36 Agreement between the Company and Marilyn Stewart Incorporated by reference to Exhibit 10.17 to the
dated November 1, 2001 Company's Registration Statement on Form S-8 filed on
November 8, 2001
10.37 Agreement between the Company and Vasu Vijay dated Incorporated by reference to Exhibit 10.18 to the
October 29, 2001 Company's Registration Statement on Form S-8 filed on
November 8, 2001
10.38 Agreement between the Company and Vijay Armitraj Incorporated by reference to Exhibit 10.19 to the
dated October 29, 2001 Company's Registration Statement on Form S-8 filed on
November 8, 2001
10.39 Agreement between the Company and Taurus Global, LLC Incorporated by reference to Exhibit 10.20 to the
dated July 9, 2001 Company's Registration Statement on Form S-8 filed on
November 8, 2001
10.40 Agreement between the Company and M.S. Farrell & Incorporated by reference to Exhibit 10.21 to the
Co., Inc. dated July 9, 2001 Company's Registration Statement on Form S-8 filed on
November 8, 2001
10.41 Equity Line of Credit Agreement dated as of August Incorporated by reference to Exhibit 10.40 to the
2001, between the Company and Cornell Capital Company's Form 10-KSB A filed on May 20, 2002
Partners, L.P.
10.42 Registration Rights Agreement dated as of August Incorporated by reference to Exhibit 10.42 to the
2001 between the Company and the buyers identified Company's Form 10-KSB A filed on May 20, 2002
therein.
10.43 Escrow Agreement dated as of August 2001 among the Incorporated by reference to Exhibit 10.43 to the
Company, Yorkville Advisors Management, LLC and Company's Form 10-KSB A filed on May 20, 2002
First Union National Bank.
10.44 Form of Debenture Incorporated by reference to Exhibit 10.44 to the
Company's Form 10-KSB A filed on May 20, 2002
10.45 Securities Purchase Agreement dated as of August Incorporated by reference to Exhibit 10.45 to the
2001 among between the Company and the buyers Company's Form 10-KSB A filed on May 20, 2002
identified therein
10.46 Consulting Agreement dated as of August 2001 between Incorporated by reference to Exhibit 10.46 to the
the Company and Yorkville Advisors Management, LLC Company's Form 10-KSB A filed on May 20, 2002
10.47 Placement Agent Agreement dated as of August 2001 Incorporated by reference to Exhibit 10.47 to the
among the Company, Westrock Advisors, Inc. and Company's Form 10-KSB A filed on May 20, 2002
Cornell Capital Partners, L.P.
36
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- --------
10.48 Registration Rights Agreement dated as of August Incorporated by reference to Exhibit 10.48 to the
2001 between the Company and Cornell Capital Company's Form 10-KSB A filed on May 20, 2002
Partners, L.P.
10.49 Escrow Agreement dated as of August 2001 among the Incorporated by reference to Exhibit 10.49 to the
Company, Cornell Capital Partners, L.P., Butler Company's Form 10-KSB A filed on May 20, 2002
Gonzalez LLP and First Union National Bank.
10.50 Warrant dated as of November 2001 given by the Incorporated by reference to Exhibit 10.50 to the
Company to Parker, Mills & Patel, LLP Company's Form 10-KSB A filed on May 20, 2002
10.51 Promissory Note dated as of November 2001 given by Incorporated by reference to Exhibit 10.51 to the
the Company to Parker, Mills & Patel, LLP Company's Form 10-KSB A filed on May 20, 2002
10.52 Promissory Note dated as of December 2001 given by Incorporated by reference to Exhibit 10.52 to the
the Company to Brighton Opportunity Fund, LP Company's Form 10-KSB A filed on May 20, 2002
10.53 Bridge loan dated as of December 2001 given by the Incorporated by reference to Exhibit 10.53 to the
Company to Brighton Opportunity Fund, LP Company's Form 10-KSB A filed on May 20, 2002
10.54 Option Agreement dated as of December 2001 given by Incorporated by reference to Exhibit 10.54 to the
the Company to iNetPurchasing, Inc. Company's Form 10-KSB A filed on May 20, 2002
10.55 Stock Pledge Agreement dated as of December 2001 Incorporated by reference to Exhibit 10.55 to the
given by Mountain Reservoir Corp. to Brighton Company's Form 10-KSB A filed on May 20, 2002
Opportunity Fund, LP
10.56 Option Agreement dated as of December 2001 given by Incorporated by reference to Exhibit 10.56 to the
the Company to Basil Nikas Company's Form 10-KSB A filed on May 20, 2002
10.57 Option Agreement dated as of December 2001 given by Incorporated by reference to Exhibit 10.57 to the
the Company to Robin Mattern Company's Form 10-KSB A filed on May 20, 2002
10.58 Option Agreement dated as of December 2001 given by Incorporated by reference to Exhibit 10.58 to the
the Company to Wayne Savage Company's Form 10-KSB A filed on May 20, 2002
10.59 Consulting Agreement dated as of January 2002 Incorporated by reference to Exhibit 10.59 to the
between the Company and Taurus Global, LLC Company's Form 10-KSB A filed on May 20, 2002
10.60 Reimbursement and Indemnity Agreement dated as of Incorporated by reference to Exhibit 10.60 to the
January 2002 between the Company and Luiz Claudio Company's Form 10-KSB A filed on May 20, 2002
Valdetaro Galvao e Mello
10.61 Stock Pledge Agreement dated as of December 2001 Incorporated by reference to Exhibit 10.61 to the
given by Luiz Claudio Valdetaro Galvao e Mello to Company's Form 10-KSB A filed on May 20, 2002
Brighton Opportunity Fund, LP
10.62 Amendment Agreement dated as of January 2002 between Incorporated by reference to Exhibit 10.62 to the
the Company and Strategic Media Alliance Company's Form 10-KSB A filed on May 20, 2002
10.63 Memorandum of Agreement dated as of January 2002 Incorporated by reference to Exhibit 10.63 to the
between the Company and Strategic Media Alliance Company's Form 10-KSB A filed on May 20, 2002
37
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- --------
10.64 Service Agreement dated as of October 31, 2001 Incorporated by reference to Exhibit 10.64 to the
between the Company and Robert Farias Company's Form 10-KSB A filed on May 20, 2002
10.65 Promissory Note Agreement as of October 31, 2001 Incorporated by reference to Exhibit 10.65 to the
between the Company and Paradigm Sales, Inc. Company's Form 10-KSB A filed on May 20, 2002
10.66 Asset Pledge Agreement as of October 31, 2001 Incorporated by reference to Exhibit 10.66 to the
between the Company and Robert Farias Company's Form 10-KSB A filed on May 20, 2002
10.67 Letter Agreement as of October 31, 2001 between the Incorporated by reference to Exhibit 10.67 to the
Company and Robert Farias Company's Form 10-KSB A filed on May 20, 2002
10.68 Promissory Note Agreement as of October 31, 2001 Incorporated by reference to Exhibit 10.68 to the
between the Company and Robert Farias Company's Form 10-KSB A filed on May 20, 2002
10.69 Stock Pledge Agreement as of October 31, 2001 Incorporated by reference to Exhibit 10.69 to the
between the Company and Robert Farias Company's Form 10-KSB A filed on May 20, 2002
10.70 Stock Pledge Letter Agreement as of October 31, 2001 Incorporated by reference to Exhibit 10.70 to the
between the Company and Robert Farias Company's Form 10-KSB A filed on May 20, 2002
10.71 Promissory Note Agreement as of November 7, 2001 Incorporated by reference to Exhibit 10.71 to the
between the Company and Robert Farias Company's Form 10-KSB A filed on May 20, 2002
10.72 Employment Agreement as of December 1, 2001 between Incorporated by reference to Exhibit 10.72 to the
the Company and Richard Wade Company's Form 10-KSB A filed on May 20, 2002
10.73 Warrant Agreement as of December 19, 2001 between Incorporated by reference to Exhibit 10.73 to the
the Company and Richard Wade Company's Form 10-KSB A filed on May 20, 2002
10.74 Warrant Agreement as of December 19, 2001 between Incorporated by reference to Exhibit 10.74 to the
the Company and Richard Wade Company's Form 10-KSB A filed on May 20, 2002
10.75 Reimbursement and Indemnity Agreement as of January Incorporated by reference to Exhibit 10.75 to the
15, 2002 between the Company and Luiz Claudio Company's Form 10-KSB A filed on May 20, 2002
Valdetaro Galvao e Mello
10.76 Reimbursement and Indemnity Agreement as of January Incorporated by reference to Exhibit 10.76 to the
15, 2002 between the Company and Mountain Reservoir Company's Form 10-KSB A filed on May 20, 2002
Corporation
10.77 Reimbursement and Indemnity Agreement as of January Incorporated by reference to Exhibit 10.77 to the
15, 2002 between the Company and Mountain Reservoir Company's Form 10-KSB A filed on May 20, 2002
Corporation
10.78 Reimbursement and Indemnity Agreement as of January Incorporated by reference to Exhibit 10.78 to the
15, 2002 between the Company and Mountain Reservoir Company's Form 10-KSB A filed on May 20, 2002
Corporation
10.79 Letter Amendment Agreement as of April 5, 2002 Incorporated by reference to Exhibit 10.79 to the
between the Company and Robert Farias Company's Form 10-KSB A filed on May 20, 2002
10.80 Letter Amendment Agreement as of April 12, 2002 Incorporated by reference to Exhibit 10.80 to the
between the Company and the Anne Berche Trust Company's Form 10-KSB A filed on May 20, 2002
38
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- --------
10.81 Asset Purchase Agreement dated November 14, 2001 Incorporated by reference to Exhibit 10.81 to the
between the Company and Paradigm Sales, Inc. Company's Form 10-KSB A filed on May 20, 2002
10.82 (a) Promissory Note, dated June 3, 2002, between the Incorporated by reference to Exhibit 10.1 to the
Company and Benjamin Company's Form 10-QSB filed on June 24, 2002
(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
10.83 (a) Loos Promissory Note, dated June 24, 2002, Provided herewith
between the Company and Loos
(b) Loos Stock Pledge Agreement, dated June 24,
2002, between the Company and Loos
(c) Loos Warrants dated June 24, 2002, between the
Company and Loos
10.84 Second Amendment of Farias Services Documents and Provided herewith
Note, between Robert Farias and Company, dated June
25, 2003
10.85 Employment Agreement, dated July 1, 2002, between Provided herewith
McAuley and the Company
10.86 Equitilink Services Agreement, dated July 10, 2002, Provided herewith
between the Company and Equitilink
10.87 (a) Loos Promissory Note, dated August 7, 2002, Provided herewith
between the Company and Loos
(b) Loos Stock Pledge Agreement, dated August 7,
2002, between the Company and Loos
10.88 Agency Services Agreement dated, August 9, 2002, Provided herewith
between the Company and Loos
10.89 (a) Valdetaro Promissory Note, dated August 20, Provided herewith
2002, between the Company and Valdetaro
(b) Valdetaro Stock Pledge Agreement, dated August
20, 2002, between the Company and Valdetaro
(c) Valdetaro Warrants, dated August 20, 2002,
between the Company and Valdetaro
10.90 Amendment to Consulting Agreement, dated Provided herewith
July 13, 2001, by and between the Company and
Rossetti
(B) REPORTS ON FORM 8-K:
None.
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
DATE: SEPTEMBER 24, 2002 VERTICAL COMPUTER SYSTEMS, INC.
By: /s/ Richard Wade
--------------------------------------
Richard Wade, President,
Chief Executive Officer and
Acting Chief Financial Officer
(Principal Accounting Officer)
40
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Vertical Computer Systems,
Inc. (the "Company") on Form 10-Q for the period ended June 30, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
each of the undersigned, in the capacities and on the dates indicated below,
hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operation of the
Company.
By: /s/ Richard Wade
-------------------------------------
Richard Wade, President and
Chief Executive Officer
By: /s/ Richard Wade
-------------------------------------
Richard Wade
Acting Chief Financial Officer
41
FORM OF OFFICER'S CERTIFICATE
PURSUANT TO SECTION 302
The undersigned Chief Executive Officer and Acting Chief Financial
Officer of Vertical Computer Systems, Inc., hereby certifies that:
1. he has reviewed the report;
2. based on his knowledge, the report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by the
report;
3. based on his knowledge, the financial statements, and other
financial information included in the report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
issuer as of, and for, the periods presented in the report;
4. he and the other certifying officers:
a. are responsible for establishing and maintaining
"disclosure controls and procedures" (a newly-defined term reflecting the
concept of controls and procedures related to disclosure embodied in Section
302(a)(4) of the Act) for the issuer;
b. have designed such disclosure controls and procedures to
ensure that material information is made known to them, particularly during the
period in which the periodic report is being prepared;
c. have evaluated the effectiveness of the issuer's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
the report; and
d. have presented in the report their conclusions about the
effectiveness of the disclosure controls and procedures based on the required
evaluation as of that date;
5. he and the other certifying officers have disclosed to the issuer's
auditors and to the audit committee of the board of directors (or persons
fulfilling the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls (a pre-existing term relating to internal controls regarding financial
reporting) which could adversely affect the issuer's ability to record, process,
summarize and report financial data and have identified for the issuer's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the issuer's internal controls;
and
6. he and the other certifying officers have indicated in the report
whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of their evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Richard Wade
----------------------------------------
Richard Wade
Chief Executive officer and
Acting Chief Financial Officer
42