U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2001.
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
Commission file number 0-28685
VERTICAL COMPUTER SYSTEMS, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 65-0393635
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6336 Wilshire Boulevard
Los Angeles, California 90048
(Address of Principal Executive Offices)
(323) 658-4211
(Issuer's Telephone Number)
Scientific Fuel Technology, Inc.
----------
(Former name of small business issuer)
1203 Healing Waters, Las Vegas, NV 89031
----------
(Former address of small business issuer)
Indicate by check whether the issuer: (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes |X| 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, 572,707,507 shares issued and outstanding as of March 31, 2001.
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. Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheets (unaudited) as of
March 31, 2001 and March 31, 2000 3
Consolidated Condensed Statements of Income (unaudited) for the
Three Months Ended March 31, 2001 and 2000 5
Consolidated Condensed Statements of Cash Flows (unaudited) for the
Three Months Ended March 31, 2001 and 2000 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II OTHER INFORMATION
Item 1 Legal Proceedings 14
Item 2 Changes in Securities and Use of Proceeds 14
Item 3 Defaults Under Senior Securities 14
Item 4. Submission of Matters To A Vote Of Security Holders 14
Item 5 Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
2
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
Item 1. Consolidated Condensed Financial Statements
March 31,
---------------------------
2001 2000
----------- -----------
Assets
Current Assets
Cash $ 2,279,622 $10,124,428
Restricted cash 2,068,290
Securities available for sale 704,000
Accounts receivable 1,141,755 7,372
Receivable due from related party -- 30,247
Other receivable 35,000 20,091
Subscription receivable -- 35,933
Prepaid expenses 39,840 72,623
Royalties receivable 20,000 --
----------- -----------
Total current assets 6,288,507 10,290,694
Property and equipment, net of accumulated depreciation 750,422 127,832
Intangibles 7,380,266 --
Notes receivable -- 861,700
Investments 676,365 --
Royalties receivable, long-term 80,000 --
Other assets 2,000 17,987
Deposits 65,120 --
Total assets $15,242,680 $11,298,213
=========== ===========
Liabilities, Convertible Preferred Stock and Stockholders'
Equity (Deficit)
Current liabilities
Accounts payable and accrued liabilities $ 325,608 $ 48,915
Deferred revenue 688,784 5,000
Accrued dividends 188,712 34,891
Payable due to officer -- 7,066
Payable due to shareholder --
Current portion - notes payable 1,350,000 --
----------- -----------
Total current liabilities 2,553,104 95,872
Note payable, net of discount 4,928,584 --
----------- -----------
Total liabilities 7,481,688 95,872
----------- -----------
3
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
March 31,
------------------------------
2001 2000
------------ ------------
Minority interest 359,779
Commitments and contingencies
Series B 10% Convertible Preferred stock; $0.001 par value; 375,000 shares
authorized; 7,200 shares issued and outstanding at March 31, 2001 and
2000, respectively 45,000 45,000
Series D 15% Convertible Preferred stock; $0.001 par value; 300,000 shares
authorized; 25,000 shares issued and outstanding at March 31, 2001
and 2000, respectively 156,250 156,250
Stockholders' equity (deficit)
Common stock; $0.00001 par value; 1,000,000,000 shares authorized;
572,707,507 and 735,642,520 shares issued and outstanding
at March 31, 2001 and 2000, respectively 5,727 7,356
--
Series A 4% Convertible Cumulative Preferred stock; $0.001 par value; 250,000
shares authorized; 50,000 shares issued and outstanding at
March 31, 2001 and 2000, respectively 50 50
Series A Preferred stock; par value $0.001; 750,000 shares authorized;
no shares issued and outstanding at March 31, 2001 and 2000
Series C Preferred stock; par value $0.001; 375,000 shares authorized;
no shares issued and outstanding at March 31, 2001 and 2000 -- --
Note receivable from shareholder -- (178,786)
Subscription receivable (2,000) --
Additional paid-in capital 23,912,823 11,705,984
Accumulated deficit (17,120,637) (533,513)
Accumulated other comprehensive income 404,000 --
------------ ------------
Total stockholders' equity (deficit) 7,401,213 11,202,341
Total liabilities and stockholders' equity $ 15,242,680 $ 11,298,213
============ ============
See accompanying notes to the consolidated financial statements
4
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
For the Three Months Ended
March 31,
--------------------------------
2001 2000
------------- -------------
Net sales $ 456,812 $ 56,622
Cost of sales 57,612 10,606
------------- -------------
Gross 399,200 46,016
Selling, general and administrative expenses 2,039,688 515,901
------------- -------------
Operating loss (1,640,488) (469,885)
Equity loss of unconsolidated affiliate (44,325) --
Minority interest in subsidiary 40,226 --
------------- -------------
Net loss (1,644,587) (469,885)
Dividend applicable to preferred stock (7,000) (10,590)
------------- -------------
Net loss available to common shareholders (1,651,587) (480,475)
Basic and diluted loss per common share 0.003 $ 0.001
============= =============
Basic and diluted weighted average of common shares
outstanding 572,707,507 684,200,000
============= =============
Diluted weighted average of number of common shares
outstanding 572,707,507 684,200,000
============= =============
See accompanying notes to consolidated financial statements.
5
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
Three Months Ended March 31,
-----------------------------
2001 2000
----------- ------------
Cash flows from operating activities:
Net income/(Loss) $(1,644,587) $ (469,885)
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 46,368 5,250
Amortization note discount 5,646 --
Minoirty interest in subsidiary (40,226) --
Equity loss of unconsolidated affiliate 44,325 --
Non-employee compensation expense 289,355 --
Changes in assets and liabilites:
Accounts receivable (1,135,317) 26,988
Receivable from shareholder -- (11,802)
Receivable for related party 21,630 --
Subscription receivable -- (5,233)
Prepaids 2,009 (72,623)
Deposits 3,944 8,000
Other receivable -- 10,283
Accounts payable 108,518 (72,742)
Payable to officer -- (8,387)
Payable to shareholder -- (13,708)
Deferred revenue 688,784 5,000
Net cash used in operating activities (1,609,551) (598,859)
Cash flow from investing activities:
Recapitalization and acquisitions (6,908,742) --
Fair value of warrants given in acquisition 798,500 --
Payments for equipment (258,293) (105,000)
Purchase of investments (57,818) 9,987
Net cash provided by (used in) investing activities (6,426,353) (95,013)
Cash flow from financing activities:
Proceeds from issuance of Series A Preferred stock -- 9,000,000
Proceeds from stock options exercised -- 1,617,376
Pledge of cash deposit for bank loan (1,561,870) --
Payment of cash dividends -- --
Payment on note payable (91,562) (10,000)
Proceeds of note payable 5,500,000 --
Issuance of note payable,net of discount 870,146 --
Net cash provided by financing activities 4,716,714 10,607,376
Net increase (decrease) in cash (3,319,190) 9,913,504
Cash and cash equivalents, beginning of quarter 5,598,812 210,924
----------- ------------
Cash and cash equivalents, end of quarter $ 2,279,622 $ 10,124,428
=========== ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 51,333 $ --
Income taxes $ 4,000 $ --
=========== ============
See accompanying notes to consolidated financial statements.
6
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated condensed 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, 2000.
The Company was incorporated in the State of Delaware in March 1992. The Company
operated as a non-reporting public shell company, with a wholly owned
subsidiary. On October 21, 1999, the Company acquired the outstanding capital
stock of Externet World, Inc. ("EW"), with the issuance of 786,433,100 shares of
the Company's common stock. The issuance of the Company's common stock to the
shareholders of EW made the Company become an active operating entity. Generally
accepted accounting principles require that the Company whose stockholders
retain the majority interest in a combined business be treated as the acquirer
for accounting purposes. The relevant acquisition process utilizes the capital
structure of Vertical Computer Systems, Inc. and the assets and liabilities of
EW are recorded at their historical cost. EW is the continuing operating entity
for financial reporting purposes and the financial statements prior to October
21, 1999 represent EW's financial position and results of operations. The net
assets of $35,609 of Vertical Computer Systems, Inc. are included as of October
21, 1999. Although EW is deemed to be the acquiring company for financial
accounting and reporting purpose, the legal status of the Company as the
surviving corporation does not change. The Company is a software development
company, which provides global e-commerce solutions. During December 1999, the
Company acquired the software rights to MLE (aka "EMILY"), a computer language,
which assists the Company in the development of software products.
Note 2 - Earnings Per Share
Options to purchase 82,809,398 shares of common stock at an average price of
$0.08 were granted in the three months ended March 31, 2001; all of those were
unexercised and outstanding at March 31, 2001. These shares were not included in
the computations of diluted earnings per share because the effect of the
exercise would be anti-dilutive on earnings per share.
Note 3 - Contingencies
The Company is subject to certain legal proceedings and claims arising in
connection with its business. In the opinion of management, there are currently
no claims that will have a material adverse effect on the Company's consolidated
financial position, results of operation or cash flows.
7
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 4: Related Party Transactions
None
Note 5 - Subsequent Events
None
8
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 Consolidated Condensed Financial Statements of Vertical
Computer Systems, Inc. and Subsidiaries and the notes to the Consolidated
Condensed Financial Statements included elsewhere in this Form 10-QSB.
This discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity and cash flows of Vertical
Computer Systems, Inc. and Subsidiaries for the three months ended March 31,
2001 and March 31, 2000. Except for historical information, the matters
discussed in this Management's Discussion and Analysis of Financial Condition
and Results of Operations are forward looking statements that involve risks and
uncertainties and are based upon judgments concerning various factors that are
beyond our control. Actual results could differ materially from those projected
in the forward-looking statements as a result of, among other things; the
factors described below under the caption "Cautionary Statements and Risk
Factors."
Overview
The Company operates in the high technology industry and is a software
development company with limited revenue generated at this time. It is a
multi-lingual gateway provider, software developer and e-commerce solutions
company based in the United States. The financial statements have been prepared
in conformity with generally accepted accounting principles, which contemplates
continuation of the Company as a going concern. However, the Company has
suffered operating losses, although it does not have a capital deficiency as of
March 31, 2001.
The Company's products and services, technology, and distribution channels
complement each other and are supported by its distinctive e-commerce business
model, the Home Country Gateways (HCGs). Currently, the Company has four HCG's
in full operation:, the US Bridge (http://www.theUSbridge.com), the Brazil
Bridge (http://www.thebrazilbridge.com), the China Bridge
(http://www.thechinabridge.com) and the India Bridge
(http://www.theindiabridge.com). Others, including the Korea Bridge
(http://www.thekoreabridge.com) and Bridges for each of the fifty U.S. states,
are either under construction or are being considered as future sites.
HCGs are being developed in strong alliance with local partners who provide
country specific expertise, capital and/or content. As the company's
distribution channels, HCGs are expected to secure multiple revenue streams from
advertising, revenue sharing agreements, and licensing and fee arrangements.
Utilizing this expanded global network of online HCGs, the Company offers B2B,
B2G, and B2C solutions through its wide range of accessible resources that
specifically cater to the needs and desires of targeted communities around the
world. Two recognizable alliances established in recent months include Net2Phone
and WebAddressBook.com, which greatly add to the usability of the gateways.
The companies identified as potential alliances are poised to make an immediate
impact in the country in which the gateway operates. The specific purposes of
these partnerships are twofold:
9
(1) develop a major network of gateways in different countries, and (2) to
market Vertical's proprietary and licensed technologies throughout the world
while developing its own applications.
The Company will continue to review partnerships with other regionally
established suppliers of Internet infrastructure and content, top management and
authorities, as well as companies and individuals with expertise and familiarity
with the financial, business and marketing communities. In accordance with the
Company's business plan for the development of multi-lingual gateways, the
company continues to align itself with partners whose infrastructures and goals
are complementary to its own.
ZAPQUOTE, S.A.
In March 2000 the Company entered into two joint ventures with ZAPQuote, S.A.,
Brazil's second largest provider of real time financial information for Brazil's
financial markets. ZAPQuote, S.A., established in 1985, has used its proprietary
wireless technology to become the fastest growing company for financial news and
information based in Brazil. ZAPQuote, S.A. also has a major position in
providing back office software to many of Brazil's major financial institutions.
Both joint venture ownerships are held 50% by the Company and 50% by ZAPQuote,
S.A. The first joint venture was converted to a Brazilian corporation named
Vertical Zap S.A. in August 2000 with the Company owning 3,400 common shares and
Zap Quote owning 3,400 common shares of the 6,800 outstanding. The terms of
Vertical Zap S.A. call for the Company to provide the latest in U.S. technology
and products while ZAPQuote, S.A. will add its expertise and familiarity with
the Brazilian financial and business communities along with the initial
financing for the project. The specific purpose of this joint venture is to
develop a major Internet Home Country Gateway in Brazil and to market the
Company's proprietary and licensed technologies throughout the country.
The second joint venture was entered into to develop ZAPQuote, S.A.'s
proprietary wireless financial applications for business in countries and
territories around the world, excluding South America.
EMILY SOLUTIONS
The Company acquired the rights to Emily Solutions web technology in December
1999. Emily Solutions' work platform, "the Emily Framework", consists of
executable programs, files, configuration data and documentation needed to
create web-based applications that intercommunicate via XML and HTTP. The Emily
Framework is intended to be an engineering package comparable to other web
development tools such as Allaire Cold Fusion or Microsoft Frontpage.
The primary component of the Emily Framework is MLE (Markup Language Executive),
a programming language that already runs on Windows NT, Windows 2000, Linux and
several UNIX platforms. MLE is intended to be both a complement and possibly an
alternative to Java on the server side. MLE implements XML explicitly designed
for server-to-server communication, XML being the industry-endorsed format for
business-to-business communication.
10
The company released the official beta version of the first product of its Emily
Solutions' suite of products, called the XML Catalog Enabler Agent in August
2000. Subsequently, the company launched its XML Catalog Enabler Agent in March
2001.
GLOBALFARE.COM
In May 2000, the Company acquired 100% of Globalfare.com ("Globalfare").
Headquartered in Las Vegas, Nevada, Globalfare is an e-commerce B2C and B2B
outlet whose aim is to seek out and promote travel products from across the USA
and around the world that are the best values in terms of price, quality and
selection.
POINTMAIL.COM, INC.
In June 2000 the Company acquired 100% of Pointmail.com, Inc., which owned
proprietary, web-based e-mail software that enhances the Company's existing
Postmaster internet service. "The Postmaster.Net" and its ramifications (HCG
e-mail applications) are a Web-based e-mail provider and are based on the
premise that e-mail access should be easy and possible from any computer with
Internet access. By adhering to the universal Hypertext Transfer Protocol (HTTP)
standard, ThePostmaster.Net eliminates the disparities that exist between
different e-mail programs.
Sending and receiving e-mail from ThePostmaster.Net is as easy as visiting a Web
site. By using a Web browser as a universal e-mail program, ThePostmaster.Net
brings the user personal information in a globally retrievable form.
ThePostmaster.Net is based on an open Web-based technology. The Web browser,
which is more universally available than any proprietary e-mail program, is used
for e-mail sent from and received by ThePostmaster.Net.
ThePostmaster.Net is accessible world wide, offers a cross-platform e-mail
solution, and is cheaper and easier than using traditional e-mail programs. An
additional advantage of ThePostmaster.Net is that a user is not required to
install any new software other than a Web browser.
VCSY also offers a Personal Information Management system through a licensing
agreement with WebAddressBook. VCSY acquired the license to the source code for
"WebAddressBook", which allows VCSY to tailor the functionality of
WebAddressBook and host the site on its own servers.
This system allows users to manage personal information such as address book,
calendar, contacts, bookmarks, note pads, files and tasks. This Personal
Information Management system adds to the menu of services available on VCSY's
network of Home Country Gateways as well as the services of its affiliates.
WebAddressBook is customizable, multi-language and user-friendly. This system
gives individuals and businesses real-time access to vital information, anywhere
in the world, 24 hours a day. It is a full-featured customizable product that
fits seamlessly into VCSY's existing infrastructure.
VCSY offers a free Internet messaging service through Webbe, which is licensed
and co-branded from a third party. Webbe is a revolutionary platform that
provides communication, navigation, and personalized content solutions for both
Internet and Intranet users worldwide. Webbe is a downloadable integrated client
application that bundles a host of functions and enables them to appear on the
user's screen as a virtual remote control. Some of the features now available on
VCSY's HCGs are:
> Instant Foreign Language Chat
> ENotes - Allows exchange of instant messages
> ELinks - Instant electronic green notes that link to other web pages
> EMinders - Instant blue notes that remind users of the important
things in life such as Birthdays
> File transfer - Drag and drop files of any size
> Portal Links - To all theWorldBridge pages
> Search Engine - Giving easy access to The World Bridge engine
Webbe, essentially a highly personalized Web browser, is a one-stop shop for
Internet activity, and adds unique communications tools to VCSY's global network
of Home Country Gateways.
iNETPURCHASING, INC.
The Company entered into two Limited Liability Company (LLC) agreements with
iNetPurchasing.com, Inc. (iNPI). Both joint venture ownerships are held 50% by
the Company and 50% by iNET Purchasing.com, Inc. One LLC, iNET GOVERNMENT
SERVICES LLC, calls for iNPI to market the Company's existing and developmental
products, including Emily, to state and local governments within the U.S. as
part of its comprehensive e-solutions bundle.
The second joint LLC, Vertical-iNET LLC, calls for the Company to
internationally market iNPI's online procurement services through the Company's
alliances abroad. The initial marketing targets will be foreign governments,
partly in response to certain standards set forth by the WorldBank, ExlmBank and
USAID requiring recipient nations to implement modern procurement procedures
before the release of funds. The Company will target international public and
private companies as well.
In May 2000, the Company invested $500,000, in consideration of 2.5% of iNPI's
outstanding shares and a royalty license, which provides for royalty payments to
the Company based upon iNPI's transactional fees. INPI anticipates revenues
commencing in second quarter of 2001.
NOW SOLUTIONS, LLC
In March 2001, Now Solutions LLC ("NOW"), of which VCSY owns a 60 percent
majority interest, purchased the Renaissance CS(R) Human Resources and Payroll
("HRIS/PAYROLL") product division from Ross Systems, Inc. (NASDAQ: ROSS).
HRIS/PAYROLL, which reaches into small and growing businesses, is a widely
supported human resources software system and used by over 200 companies in
North America.
The purchase price was $6.1 million excluding incentives. The purchase was
financed with a loan from a lender for $5.5 million and a note to ROSS for $1
million. VCSY contributed $1 million for its 60% equity in NOW. VCSY also
provided a cash deposit of $1.5 million as additional collateral for the $5.5
million loan. Portions of the deposit will be released after certain number of
principal payments are paid. The entire pledged amount will be released by
lender after the first twenty-four (24) principal payments or $2.2 million have
been paid by NOW.
In addition, VCSY granted options for 80,763,943 shares at an exercise price of
$0.08 per share to ARGLEN, LLC,a shareholder in NOW, as compensation for
negotiating the purchase of the assets from ROSS. Approximately 30,763,943
shares are immediately exercisable and 50 million shares are exercisable based
on certain performance criteria.
APOLLO INDUSTRIES, INC.
Apollo Industries, Inc. ("Apollo") is a smart card-based financial transaction
and service solutions provider located in Los Angeles, California. In exchange
for a 30% equity interest, VCSY agreed to provide up to $275,000 in funding to
Apollo for the enhancement of its ApolloSmart(TM) technology and development of
its service business. Upon completion, ApolloSmart(TM) will be integrated with
VCSY's HCGs for added services.
ApolloSmart(TM) technology will be used by VCSY to offer consumers many features
from small-change transactions, banking and credit/debit spending, computer
security, Web-based shopping, and Internet voting up to assisting enterprises
around the world in implementing and expanding smart card usage
Results of Operations
Net sales for the three months ended March 31, 2001 were $456,812, which are
primarily made up of software license, consulting, and maintenance fee revenue
generated by NOW Solutions in the month of March. This is a $400,190 increase
from the same period ended March 31, 2000 where the majority of revenues were
derived from a software development contract between Externet World, Inc. and an
outside party, as well as some incidental computer sales to clients requiring
separate servers maintained onsite.
Cost of Goods Sold (COGS) for the three-month period ended March 31, 2001, were
$57,612 which includes the amortized cost of the HRIS/Payroll source code for
license revenue in March and third party software royalties. Also in this
period, COGS includes the cost of tickets sold through Globalfare.com. This is a
$47,006 increase from the three-month period ended March 31, 2000, the primary
COGS included the website hosting charges for SSL requirements as well as the
costs for computers and peripherals that were purchased on behalf of client(s).
12
The net loss of ($1,644,587) generated during the three months ended March 31,
2001, was an increase of ($1,174,702) when compared to the net loss of
($469,885)for the three months ended March 31, 2000. The loss for the period
ended March 31, 2001 includes operating expenses that were not incurred in the
prior reporting period due to the limited extent of operations, primarily that
of Externet World, Inc. during 2000. Significant operating expenses for the
three month period ended March 31, 2001 include Consulting fees
($73,807),Commissions ($78,002), Marketing ($158,710), Insurance ($21,068),
Legal and Professional fees ($183,817), Salaries and related payroll taxes
($726,022).
Liquidity and Capital Resources
Negative cash flows from operating activities of ($1,609,551) for the
three-month period ended March 31, 2001 were a result of operating activities
consisting mainly of expenditures incurred in the normal course of business as
described above. Of that amount, ($310,432) of the negative cash flow is a
result of changes in non-cash current assets and current liabilities. These were
primarily changes in accounts receivable ($1,135,317) and deferred revenue
$688,784 relating to NOW's operations.
The Company will have to sell additional equity over the next 12 months to
maintain adequate working capital until the various businesses begin to provide
positive cash flow from operations.
Such sources of financing could include capital infusions from our strategic
alliance partners, additional equity financings or debt offerings, all of which
may not be possible to obtain if and when needed.
During the three months ended March 31, 2001, the Company had an overall
increase in liabilities due to debt financing incurred in NOW for the purchase
of the HRIS/Payroll assets from ROSS.
MARKET RISKS
The Company anticipates that it will have activities in numerous countries in
future periods. These operations will expose the Company to a variety of
financial and market risks, including the effects of changes in foreign currency
exchange rates and interest rates. As of March 31, 2001, there are no material
gains or losses requiring separate disclosure.
DIVIDENDS
The Board intends to declare and pay dividends on the Company's Preferred Stock
based on the earnings, financial condition, cash flow and business requirements
of the Company. During the first six months of 2000, the Board had not declared
dividends on the Series "A", "B", and "D" Preferred Shares. However, for the
three months ending March 31, 2001, $7,000 of dividends accrued. Dividends on
preferred shares of $188,712 are in arrears at March 31, 2001.
13
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is, from time to time, involved in various lawsuits generally
incidental to its business operations, consisting primarily of collection
actions and vendor disputes. In the opinion of management, the ultimate
resolution of these matters, if any, will not have a significant effect on the
financial position, operations or cash flows of the Company.
In addition, the March December 31, 2001. The case entitled, Margaret Greco, et
al., v. Vertical Computer Systems, Inc., filed in United States District Court
for the Eastern District of New York (Case No. 00 Civ. 6551 (DRH)), involves
allegations of that the plaintiffs sustained damage as a result of an alleged
improper rescission of a subscription agreement based on a November 1999 private
placement memorandum. Plaintiffs seek damages based on the alleged increase in
value of the stock since the private placement. The Company intends to
vigorously defend this action.
A second matter, entitled Le Societe Francaise de Casinos v. Vertical Computer
Systems, Inc., was filed in Los Angeles County, California, Superior Court, on
January 19, 2001. This action was filed by a former customer of EW which claims
that the Company is liable to it for in excess of $500,000 in costs allegedly
paid for an Internet casino software package to be developed and maintained by
EW. The plaintiff also alleges that the Company has breached an agreement to pay
the disputed sums flowing out of its October 2000 settlement of litigated
matters with two former shareholders of the Company. Vertical intends to defend
this action vigorously.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Under Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
14
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K.
Form 8-K filed March 23, 2001 for acquisition of 60% of Now
Solutions LLC
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 21, 2001 VERTICAL COMPUTER SYSTEMS, INC.
By: /s/ Richard Wade
Richard Wade
Its: President
By: /s/ Stephen R. Gunn
Stephen R. Gunn
Its: Chief Financial Officer
16