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 September 30, 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, 594,967,965 shares issued and
outstanding as of September 30, 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
September 30, 2001 3
Consolidated Condensed Statements of Income (unaudited) for the
Nine Months Ended September 30, 2001 and 2000 5
Consolidated Condensed Statements of Cash Flows (unaudited) for
The Nine Months Ended September 30, 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 14
Item 6. Exhibits and Reports on Form 8-K 14
2
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
Item 1. Consolidated Condensed Financial Statements
September 30,
2001
Assets
Assets
Cash $ 225,042
Restricted cash 2,071,405
Accounts Receivable 1,098,701
Restricted Marketable securities 528,000
- -----------------------------------------------------------------------------
Total current assets 3,923,148
Fixed Assets, net 705,185
Other assets 208,120
Intaingables 7,681,325
Investment in joint ventures 443,334
- -----------------------------------------------------------------------------
Total Assets 12,961,112
=============================================================================
Liabilities, Convertible Preferred Stock and Stockholders' Equity (Deficit)
Liabilities
Accounts payable $1,012,590
Convertible Debt 125,000
Deferred revenue 1,811,886
Current portion - notes payable 5,869,958
Dividends payable 34,891
Total current liabilities 8,854,325
Notes payable, net of discount 1,094,885
- -----------------------------------------------------------------------------
Total liabilities 9,949,210
3
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
Commitments and contingencies
Series B 10% Convertible Preferred stock; $0.001 par value; 375,000 Shares
authorized; 7,200 shares issued and outstanding
at September 30, 45,000
Series D 15% Convertible Preferred stock; $0.001 par value; 300,000 Shares
authorized; 25,000 shares issued and outstanding
at September 30, 156,250
Stock Holders Equity (deficit)
Common stock; $0.00001 par value;
1,000,000,000 shares authorized; 594,967,965 and shares
issued and outstanding at September 30, 5,950
Series A 4% Convertible Cumulative Preferred stock; $0.001 par value;
250,000 shares authorized; 50,000 shares issued and
outstanding at September 30, 50
Series A Preferred stock; par value $0.001; 750,000 shares
authorized; No shares issued and outstanding
at September 30, --
Series C 4% Cumulative Convertible Preferred Stock; par value $0.001;
200,000 shares authorized; 30,000 shares issued and
outstanding at September 30, 2001 30
Series C Preferred stock; par value $0.001; 175,000 shares
authorized; no shares issued and outstanding at September 30,
2001 --
Subscription receivable (2,000)
Series C treasury stock; 30,000 shares (30)
Additional paid-in capital 25,288,790
Accumulated deficit (22,710,138)
Accumulated other comprehensive income 228,000
Total stockholders' equity (deficit) 2,810,652
Total liabilities and stockholders' equity $12,961,112
See accompanying notes to the consolidated financial statements
4
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
For the Nine Months Ended
September 30,
----------------------------------------
2001 2000
-------------------- ------------------
Net sales $ 2,473,865 94,074
Cost of sales 68,393 39,188
-------------------- ------------------
Gross profit 2,405,472 54,886
Operating expenses 9,742,647 3,022,682
-------------------- ------------------
Net loss from operations (7,337,175) (2,967,796)
Other expense (88,977) --
Interest income / (expense)- Net (207,941) 255,370
Gain on sale of asset -- 838,253
-------------------- ------------------
Minority interest in subsidiary 400,005 --
-------------------- ------------------
Net loss (7,234,088) (1,874,175)
Net loss available to common shareholders (7,234,088) (1,874,175)
Basic and diluted loss per common share $ (0.012) $ (0.003)
==================== ==================
Basic and diluted weighted average of common shares
outstanding 590,174,993 728,576,772
==================== ==================
Diluted weighted average of number of common shares
outstanding 590,174,993 728,576,772
==================== ==================
See accompanying notes to consolidated financial statements.
5
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(Unaudited)
Nine Months Ended September 30,
---------------------------------
2001 2000
---------------------------------
Cash Flows From Operating activities
Net income/ (Loss) $(7,234,088) ($1,400,262)
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 154,459 22,893
Issuance of common stock for services 1,798,822 --
Non-employee compensation expense 450,000 424,197
Changes in assets and liabilities:
Accounts receivable (1,070,633) (43,233)
Other receivables 110,913 --
Other assets 135,000 --
Accounts Payable 506,902 (23,048)
Deferred revenue 1,811,886 --
Net cash used in operating activities (3,336,739) (1,310,055)
Cash flow from investing activities:
Payments for equipment (197,656) (465,162)
Restricted cash (1,964,375) --
Purchase of investments -- (445,470)
Net cash (used in) investing activities (2,162,031) (910,632)
Cash Flow from financing activities:
Proceeds from issuance of Series A Preferred Stock -- 9,000,000
Proceeds form stock options exercised -- 46,500
Receipts from Convertible Debt 125,000 --
Net Cash provided by financing activities 125,000 10,746,500
Net increase (decrease) in cash (5,373,770) 8,525,813
Cash and cash equivalents, beginning of period 5,598,812 210,923
Cash and cash equivalents, end of period $ 225,042 $ 8,736,736
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 152,532 $ 13,558
Income Taxes $ NIL $ NIL
6
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
SEC rules issued in Release No. 34-42266 requires that companies' independent
auditors review the companies' financial information prior to the companies
filing their Quarterly Reports on Form 10-Q or Form 10-QSB with the Commission.
As of the date the Company's Quarterly Report on Form 10-QSB for the period
ended September 30, 2001 was filed, the Company's Independent Certified Public
Accountants had not completed their Review.
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 the Company. 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 Company's net
assets of $35,609 of 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
(also referred to as "EMILY"), a computer language, which assists the Company in
the development of software products.
Note 2 - Earnings Per Share
On July 27, 2001, the Company issued 7,106,449 shares of common stock to certain
individuals, which were included in a registration statement on a Form S-8,
filed on July 13, 2001, for services rendered to Company.
On August 13, 2001, the Company borrowed $129,885 from a third party with a
further commitment to loan an additional $64,600 and executed a six-month
$180,000 promissory note with a 12% interest rate to repay the loan. The loan is
secured by securities owned by the Company and which the Company intends to sell
to repay the loan. The third party received a three year warrant from the
Company to purchase 500,000 common shares of Company stock at a price of $0.028
per share.
On August 16, 2001, the Company entered into an Equity Line of Credit Agreement
with Cornell Capital Partners, L.P.("Cornell"), whereby Cornell agreed to
purchase from the Company up to $10,000,000 worth of the Company's common stock.
On August 16, 2001, the Company entered into a Security Purchase Agreement
whereby certain third party buyers purchased $250,000 of convertible debentures,
which are convertible into shares of Company's common stock for a total purchase
price of $250,000.
On August 21, 2001, the Company acquired 100% of Enfacet, Inc. for 30,000 shares
of Series C 4% Cumulative Convertible preferred stock of Company.
On September 5, 2001, the Company issued 3,140,960 shares of common stock to
certain individuals, which were included in a registration statement on a Form
S-8, filed on July 13, 2001, for services rendered to Company.
7
On September 14, 2001, the Company issued 4,960,192 shares of common stock to
certain individuals, which were included in a registration statement on a Form
S-8, filed on July 13, 2001, for services rendered to Company.
On September 14, 2001, the Company issued 7,142,857 shares of common stock as
$200,000 payment of the first installment for payment of a $400,000 commitment
fee to Cornell Capital Partners, L.P., pursuant to the Equity Line of Credit
Agreement, executed on August 16, 2001.
On September 30, 2001, the Company issued options for 2,500,000 shares of common
stock pursuant to the Incentive Stock Option Plan, to individuals affiliated
with Enfacet, Inc. in order to retain their services.
Warrants to purchase 3,747,770 shares of common stock at an average price of
$0.029 were granted in the three months ended September 30, 2001; all of those
were unexercised and outstanding at September 30, 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.
NOW Solutions, LLC has been notified by a lender that it is in technical default
of a loan agreement that the Company has pledged $1.5 million deposit as
collateral. As of November 12, 2001, 2001, the lender has not drawn on the
deposit and it is the opinion management that the technical default will be
cured or waived and the deposit will not be drawn on by the lender.
Note 4: Accounting principles
The Company and its subsidiaries have adopted SOP 97-2 "Software Revenue
Recognition".
Note 5 - Subsequent Events
On October 31, 2001, the Company borrowed $100,000 from a third party and
executed a four month promissory note with a 12% interest rate to repay the
loan. The loan is secured by securities owned by the Company and which the
Company intends to sell to repay the loan and by a personal guarantee of Richard
Wade, President of the Company, to sell up to 5,225,00 shares of common stock
owned by Richard Wade to cover any shortfall.
On October 31, 2001, the Company agreed to reduce its interest in Worldbridge
Webscasting, LLC from 51% to 49%, in consideration for extending the Company's
obligation to make a capital contribution pursuant to the Operating Agreement in
the amount of $100,000 up to and including January 15, 2001. In the event the
Company does not make payment by January 15, 2002, the Company's interest shall
be further reduced from 49% to 25%.
On November 7, 2001, the Company borrowed $100,000 from a third party and
executed a four month promissory note with a 12% interest rate to repay the loan
to purchase certain assets of Adhesive Software. The loan is secured by
securities owned by the Company which the Company intends to sell to repay the
loan and by a personal guarantee of Richard Wade, President of the Company, to
sell up to 5,225,00 shares of commons stock owned by Richard Wade to cover any
shortfall.
On November 14, 2001, the Company purchased intellectual property and other
assets of Adhesive Software from a third party for $100,000 cash, a promissory
note with a 4% interest rate for $280,000 (payable in monthly installments of
$5,000 payments for the first four months and $10,000 payments in subsequent
months until repaid), secured by certain the Adhesive Software technology and
50,000 shares of 4% Convertible Cumulative preferred stock.
The Company has issued 20,223,458 shares of common stock as payment for services
rendered by consultants and vendors which were registered on a form Form S-8
which was filed on November 8, 2001.
Between September 30, 2001 and November 9, 2001, the Company issued stock
options to its employees for 2,740,000 shares pursuant to the Incentive Stock
Option Plan, dated December 16, 1999.
As of November 9, 2001, warrants to purchase 1,836,795 shares of common stock at
an average price of $0.0326 were granted since September 30, 2001; all of those
were unexercised and outstanding as of November 9, 2001. These shares were not
included in
8
the computations of diluted earnings per share because the effect of the
exercise would be anti-dilutive on earnings per share.
On November 12, 2001, the Company also entered into a license agreement with
iNET whereby the Company licensed its Emily software and technology for use in
connection with iNet's e-procurement system in Texas, Maine, and Idaho in
exchange for a 20% commission of subscription fees and the ability to market all
subscription fees (except for Texas QVIS vendors) as well as a joint marketing
effort to sell the Company's Emily Agent to all vendors whereby the Company
retains 100% of the $495 sales price.
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 September 30,
2001 and September 30, 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 is a global provider of e Business Solutions in the areas of
advanced data management products and services; dynamic integration and enabling
technologies; global partner distribution networking. Vertical Computer acquires
and operates technology companies that (a) have demonstrated a lead in their
technology space, (b) are on the path to profitability, (c) complement each
other, and (d) provide cross-product distribution channels.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 September 30, 2001.
BRIDGES
The Home Country Gateways ("HGCs" or "Bridges") represent an international
distribution platform for the demonstration, deployment and sale of Company's
goods, services and technology. Currently, the Company has six Bridges in full
operation, the World Bridge (http://www.theworldbridge.com), the US Bridge
(http://www.theUSbridge.com), the Brazil Bridge
(http://www.thebrazilbridge.com), the China Bridge
(http://www.thechinabridge.com), the India Bridge
(http://www.theindiabridge.com) and the Korea Bridge
(http://www.thekoreabridge.com). Additionally, bridges for each of the fifty
U.S. states, are either under construction or are being considered as future
sites.
These Bridges are targeted at individual audience segments and users, with
maximum personalization thanks to the underlying technology. A sample segment is
private expatriates living abroad, as well as those on government service in the
military or diplomatic corps. For example, 6 million U.S. expatriates living
abroad are able to better stay in touch with events in the US and their home
state(s) through the mix of products and services on theUSbridge.com and various
state bridges.
The first step is to build the Bridges' inter-connectivity and presence in the
marketplace. The goal is to aggressively build traffic, so the Company can
successfully bring in strategic alliances and expand the users' base.
9
In the meantime, the Company goes towards the implementation of structured
subscription fees as goods, services and technology are added to the Bridges.
Later, these Bridges will also offer exclusive sponsorship opportunities in a
broad range of ways to effectively deliver companies' messages and desired
product information to millions of newfound consumers worldwide.
These Bridges display Web Services like the Personal Information Management
system through a licensing agreement with WebAddressBook. The Company acquired
the license to the source code for "WebAddressBook", which allows the Company 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 the
Company'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 the Company's existing
infrastructure.
The Bridges also offer 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 the Company's HCGs are: (a) Instant Foreign Language Chat; (b)
ENotes - Allows exchange of instant messages; (c) ELinks - Instant electronic
green notes that link to other web pages; (d) EMinders - Instant blue notes that
remind users of the important things in life such as Birthdays; (e) File
transfer - Drag and drop files of any size; (f) Portal Links- To all
theWorldBridge pages; and (g) 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 the Company's global
network of Bridges.
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 into 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 also developed a Emily broker application, used now as the interface
between Publicbuy.Net e-procurement system for the state of Texas. As part of
the agreement between iNet Purchasing and Company, the Emily XML Enabler Agent
will be offered as an optional product to expedite the interface at a price of
$495. This arrangement will also be applicable for the PublicBuy.Net
e-procurement contracts for Maine and Idaho. The number of prospective suppliers
for all three states is in excess of 20,000. The Emily scripting language has
been enabled to work on Java and the option is being explored to launch the
Emily scripting language as part of a Java tool kit in the next two months.
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.
Globalfare also offers a point of presence on the web for travelers looking for
the best buys available for travel within a relatively short time frame and for
those who are looking to plan vacations trips throughout the world during the
coming year. Globalfare's goal is to become the world's most complete online
travel service, and offer a comprehensive range of best-buy travel products;
excellent hotels to suit all budgets; and first-rate travel insurance at
reasonable costs, all with instant confirmation and the convenience of credit
card payment.
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
"ThePostmaster.Net" 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.
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.
11
NOW SOLUTIONS, LLC
In February 2001, Now Solutions LLC ("NOW"), of which the Company 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. The Company contributed $1 million for its 60% equity in NOW. The
Company 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, the Company 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.
Now Solutions, LLC has been notified by a lender that it is in technical default
of a loan agreement that the Company has pledged $1.5 million deposit as a
collateral. As of November 16, 2001, the lender has not drawn on the deposit and
it is the opinion of management that the technical default will be cured or
waived and the deposit will not be drawn on by the lender.
ENFACET, INC.
The Company acquired 100% of Enfacet, Inc. on August 21, 2001, for 30,000 shares
of Series C 4% Cumulative Convertible preferred stock. EnFacet is a software
products company that has web-based eBusiness software used by newspapers,
government agencies, universities and large franchises. Enfacet's products,
NewsFlash (catering to the publishing industry and newspapers in particular) and
SiteFlash (the affiliation/syndication web product) are already accepted in the
marketplace and are based on award winning (CrossRoads A-List for 2000 and
2001), patent pending technologies. The products are mature products in a
growing market, and provide for satisfying the enormous growth in the Internet
data, web sites and e-commerce. On November 14, 2001, the Company acquired
software technology assets of Adhesive Software for $100,000 and 50,000 shares
of Series C 4% Cumulative Convertible preferred stock from a third party.
APOLLO INDUSTRIES, INC.
Apollo Industries, Inc. ("Apollo") is a smart card-based financial transaction
and service solutions provider located in Los Angeles, California. On October
14, 2000, Company agreed to provide $250,000 in funding to Apollo for the
enhancement of its ApolloSmart technology and development of its service
business in exchange for a 30% equity interest. Also on October 14, 2000, in
consideration for $25,000 from Company, Apollo agreed to pay a royalty of 2% of
all transaction fees up to $275,000 and 1% up to $3,000,000. On April 19, 2001,
Company loaned Apollo $24,000 which was due on June 30, 2001. On May 8, 2001,
Company loaned Apollo an additional $24,000 which was due on July 16, 2001. The
loans are secured pursuant to a stock pledge in the amount of 500,000 shares for
each of the two loans.
ApolloSmart technology will be used by the Company 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.
WORLDBRIDGE WEBCASTING SERVICES, LLC.
Worldbridge Webcasting Services, LLC, provides webcast services. In exchange for
49% equity interest, the Company agreed to pay $250,000, pursuant to the terms
of the operating agreement, dated June 19, 2001, as amended in October of 2001.
This sum, due in installments, has $100,000 outstanding due and payable on or
before January 15, 2002.
12
Results of Operations
Net sales for the nine months ended September 30, 2001 were $2,473,865, which
are primarily made up of software license, consulting, and maintenance fee
revenue generated by NOW Solutions in the period. This is a $2,379,791 increase
from the same period ended September 30, 2000.
Cost of Goods Sold (COGS) for the nine-month period ended September 30, 2001,
were $ 68,393. This is the cost of tickets sold through Globalfare.com. COGS for
the same period ended September 30, 2000 was primarily cost of tickets sold
through Globalfare.com.
The net loss of ($7,234,088) generated during the nine months ended September
30, 2001, was an increase of ($5,359,833) when compared to the net loss of
($1,874,175) for the nine months ended September 30, 2000. The loss for the
period ended September 30, 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 nine month period ended September 30, 2001 include Consulting
fees , Marketing, Insurance Travel , Legal and Professional fees, Salaries and
related payroll taxes .The primary increase in salaries is due to the
acquisition of NOW Solutions as of March 1, 2001. There is little substantiation
as to when the investments will generate net income and positive cash flow. The
only investment not reserved was NOW Solutions that generated $ 2,329,987 in net
revenue for the nine months ended September 30, 2001.
Liquidity and Capital Resources
Negative cash flows from operating activities of ($3,336,739) for the nine month
period ended September 30, 2001 were a result of operating activities consisting
mainly of expenditures incurred in the normal course of business as described
above. The Company will have to sell additional equity or borrow over the next
12 months to maintain Adequate working capital until the various businesses
begin to provide positive cash flow from operations. See Note 5 "Subsequent
Events".
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.
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.
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 September 30, 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 nine months of 2001, the Board had not declared
dividends on the Series "A", "B", and "D" Preferred Shares. Dividends on
preferred shares of $288,712 are in arrears at September 30, 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 Company is involved in two additional litigated matters. 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 matter is open and the Company is vigorously defending 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 Externet World,
Inc., a former wholly owned subsidiary, which claimed 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 Externet World. 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. The Company executed a Settlement and Mutual
General Release Agreement as of July 20, 2001. Pursuant to the settlement
agreement, the Company received all right, title, and interest in and to the
internet gaming software package developed by Externet World and Casino in
exchange for payment by Company and Marc Elalouf of $400,000 to Casino, and
payment of state and federal taxes on behalf of Externet World. Only a few
nominal and non-contested matters remain open regarding (a) payment of state
taxes and (b) transfer of domain names. Those issues should be resolved within
the next 90 days from the end of the quarter ended September 30, 2001.
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
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Certificate Of Designation Of Vertical Computers, Inc.
Series "C" 4% Cumulative Convertible Preferred Stock
10.1 (a) Berche Promissory Note, dated August 13, 2001
(b) Berche Stock Pledge Agreement, dated August 13, 2001
(c) Berche Warrants, dated August 13, 2001
10.2 Equity Line Of Credit Agreement between Company and
Cornell Capital Partners, L.P, dated August 16, 2001.
10.3 Securities Purchase Agreement between Company and third
party buyers for $250,000 of Convertible Debentures,
dated August 16, 2001
10.4 Enfacet, Inc. Stock Purchase Agreement, dated August 21,
2001
10.5 Agreement Between Enfacet and the Company, dated August
24, 2001
14
(b) Form 8-K
None.
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: November 19, 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
15