Document/Exhibit Description Pages Size
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19: EX-9 Exh. 10.58 6 30K
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42: EX-23 Exhibit 23.1 - Certified Independent Accountants 1 12K
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 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 No X
----- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [ ]
Registrant's revenues for the fiscal year ended December 31, 2001 were:
$4,156,088.
The aggregate market value for the Registrant's voting common stock
held by non-affiliates based upon the closing bid price for the common stock on
May 15, 2002, as reported on the NASD Bulletin Board system, was approximately
$3,028,296.
Shares of common stock held by each officer and director and each
person who owns 5% or more of the outstanding common stock have been excluded in
that such persons may be deemed to be affiliates. The determination of affiliate
status is not necessarily a conclusive determination for other purposes.
The number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock, par value $.00001
per share, 627,691,422 shares issued and outstanding as of May 15, 2002.
Transitional Small Business Disclosure Format (check one):
Yes No X
----- ---
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
ITEM 1. DESCRIPTION OF BUSINESS..........................................1
ITEM 2. DESCRIPTION OF PROPERTY.........................................14
ITEM 3. LEGAL PROCEEDINGS...............................................14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............15
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........15
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS......21
ITEM 7. FINANCIAL STATEMENTS............................................34
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT .....35
ITEM 10. EXECUTIVE COMPENSATION..........................................38
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..42
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................42
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K................................44
i
ITEM 1. DESCRIPTION OF BUSINESS
Management has used best efforts in writing Vertical's Form 10-KSB
report in plain, easy to understand English. Vertical Computer and the Industry
Overview Sections attempt to outline both the meaning and scope of the
strategies currently employed at Vertical. Although both these sections are
compelling, the other information contained in this report is important and
necessary in order to gain a thorough understanding of our business, markets,
customers and competition. Accordingly, please read our entire Form 10-KSB
report prior to making an investment in Vertical, as these are complicated
technologies and solutions that involve risks and uncertainties. References to
"we", "us", "our", "Vertical" or "Vertical Computer" means Vertical Computer
Systems, Inc. and its subsidiaries and divisions, and their predecessor
companies and subsidiaries.
When used in this report, the words "anticipate", "believe",
"estimate", "will", "may", "intend", "in our opinion", and "expect" and similar
expressions identify forward-looking statements. Forward-looking statements in
this report include, but are not limited to, those relating to the general
expansion of our business, particularly with respect to our e-business
initiatives and including our ability to develop multiple applications, our
planned introduction of new products and services, the possibility of acquiring
complementary businesses, products, services and technologies and our
development of relationships with other providers of leading edge technologies.
Although we believe that our plans, intentions and expectations reflected in
these forward-looking statements are reasonable, we can give no assurance that
these plans, intentions or expectations will be achieved.
Actual results, performance or achievements could differ materially
from those contemplated, expressed or implied by the forward-looking statements
contained in this report. Important factors that could cause actual results to
differ materially from our forward-looking statements are set forth in this
report and contained in Item 6, "Management's Discussion and Analysis or Plan of
Operations." These factors are not intended to represent a complete list of the
general or specific factors that may affect us.
DESCRIPTION OF BUSINESS
OVERVIEW
Vertical Computer was incorporated in the State of Delaware in March
1992. Vertical Computer operated as a non-reporting public shell company, with a
wholly owned subsidiary, which was sold at the time of acquiring Externet World,
Inc. In October 1999, we acquired all the outstanding capital stock of Externet
World, an Internet service provider, and became an operating entity. In December
1999, we acquired Emily Solutions' Web technology. The Emily framework consists
of executable programs, files, configuration data and documentation needed to
create Websites that intercommunicate via XML and HTTP.
In March 2000, we entered into a joint venture with Zap S.A., Brazil's
second largest provider of real time financial information for Brazil's
financial markets, and subsequently established a Web portal,
theBrazilbridge.com, Vertical Computer's first Home Country Gateway ("HCG" or
"Bridge"). Vertical Computer acquired all of the stock of Globalfare.com, an
on-line travel service, in May 2000. Later, in May 2000, Vertical Computer paid
$400,000 to acquire a 2.5% equity interest in iNetPurchasing, Inc., and another
$100,000 to receive a royalty on all iNetPurchasing transactions for 20 years.
During June 2000, Vertical acquired Pointmail.com, Inc., a company in the
process of developing an Internet e-mail system. In October 2000, Vertical
Computer launched another Bridge, theUSbridge.com. In October 2000, Vertical
Computer sold its wholly owned subsidiary Externet World, Inc. to two former
shareholders of Vertical Computer. Also, in October 2000, First Serve
Entertainment Pvt. Ltd. became a global partner, and entered into a joint
venture with Vertical Computer to develop another Bridge in India.
During March 2001, Vertical Computer entered into a joint venture with
Navicom Co. Ltd., an e-commerce and telecommunications company that is a leading
provider of Global Positioning System technologies and GPS-related applications
in Korea. As part of the joint venture, Navicom intends to establish a
distribution platform within the Korean technology and e-commerce communities
for Vertical Computer's products and services. Navicom and Vertical Computer
launched theKoreaBridge.com in October 2001. In March 2001, Vertical Computer
invested $1,000,000 to obtain a 60 percent majority interest in Now Solutions,
LLC ("Now"). Also in March 2001, Now acquired the Renaissance CS(R) Human
Resources and Payroll assets from Ross Systems, Inc. The Renaissance Payroll
System, which reaches into small and growing businesses, is a human resources
software system and used by over 175 companies in North America. In May 2001,
Vertical Computer issued 3-year warrants to purchase 1,000,000 shares of common
stock at a strike price of $0.05 per share for exclusive licensing rights to a
patent-pending fiber optics
1
technology application created and owned by Aluizio Cruz. As part of its overall
strategy to provide a full suite of products and services to global customers,
Vertical acquired EnFacet, Inc. in August 2001 and certain assets of Adhesive
Software in November 2001, including the SiteFlash technology. EnFacet sold two
products, NewsFlash (catering to the publishing industry and newspapers in
particular) and SiteFlash (the affiliation/syndication Web product) which are
based on award winning (CrossRoads A-List for 2000 and 2001), patent pending
technologies. In addition Vertical is also in the process of developing and
marketing other "Flash" based products - AffiliateFlash, ResponseFlash, and
UniversityFlash.
In November 2001 Vertical entered into a license agreement with iNet
Purchasing ("iNet") whereby it licensed the 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 QISV vendors). Pursuant to the license
agreement, Vertical also obtained a joint marketing effort to sell its Emily
Agent to these vendors. Vertical is entitled to retain all of the $495 sales
price for sales any vendors. In December 2001, Vertical Computer entered into an
option agreement with iNet to purchase an additional interest in iNet in April
2002. If exercised, Vertical would own 56% of iNet upon exercise of the option.
The option has an exercise price of $860,000 and is due by the end of April
2002. Under the terms of the option, iNet was required to deliver certain
financial and non-financial information. This information was never delivered.
Vertical is seeking an extension of the exercise date to allow iNet to deliver
the required information and to allow Vertical an opportunity to review the
information and to make an informed investment decision. Discussions thus far
with iNet have not resulted in a resolution of this matter.
Vertical agreed to pay $250,000, of which $150,000 was actually paid,
in exchange for 51% equity interest in WorldBridge Webcasting Services, LLC
("WorldBridge"), a webcast services company. In October 2001, Vertical agreed to
reduce its interest in WorldBridge from 51% to 49%. In January 2002, Vertical
Computer and Strategic Marketing Alliance agreed to terminate Vertical
Computer's interest in WorldBridge in consideration for credit on Vertical
Computer'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.
Vertical Computer 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 is striving to develop its services and products in order to grow its
customer base. Additionally, Vertical Computer continues to build its global
network of Local Country Partners with the goal of developing an international
network of Bridges that will serve as distribution platforms throughout the
world for its proprietary and licensed technologies, goods and services.
BUSINESS DIVISIONS
Vertical Computer's business operations are broken into the following
divisions: Emily Solutions, EnFacet, Adhesive Software Assets, Now Solutions,
Globalfare.com, Home Country Gateways, Pointmail.com, and joint ventures,
strategic partnerships and minority interests. Each of these divisions is
discussed below.
EMILY SOLUTIONS
Vertical Computer 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
(Extensible Markup Language) and HTTP. HTTP or Hypertext Transfer Protocol is
the set of rules for exchanging files (text, graphic images, sound, video, and
other multimedia files) on the Web. The Emily Framework was developed 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 runs on Windows
NT, Windows 2000, Linux and several UNIX platforms. MLE is developed to be both
a complement and an alternative to Java on the server side.
In addition, Vertical Computer developed the Emily XML Enabler Agent
and the Emily Broker applications, which is now used as the interface between
iNet e-procurement system for the states of Texas, Maine and Idaho. As part of
the agreement between iNet Purchasing and Vertical Computer, the Emily XML
Enabler Agent is offered as an optional product to expedite the interface at a
price of $495 to each vendor.
2
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.
For the twelve months ended December 31, 2001, Emily Solutions had no
assets and no material revenue or expenses.
ENFACET, INC.
In August 2001, Vertical Computer acquired all of EnFacet, Inc. for
30,000 shares of Series C 4% Cumulative Convertible preferred stock. EnFacet is
a software-products company that has Web-based e-Business software used by
newspapers, government agencies, universities and large franchises. EnFacet sold
two products Newsflash (catering to the publishing industry and newspapers in
particular) and SiteFlash (the affiliation/ syndication Web product), which were
originally licensed from a third-party, Adhesive Software, Inc. Vertical
Computer later acquired certain assets of Adhesive, including these
technologies, from a third party. Both NewsFlash and SiteFlash are based on
award winning (Crossroads A-List for 2000 and 2001), patent pending
technologies. Vertical Computer recognized approximately $757,000 of goodwill in
connection with the purchase, which is being amortized over a 3-year period.
For the five months ended December 31, 2001, EnFacet had approximately
$638,000 of net goodwill.
ADHESIVE SOFTWARE ASSETS
In November 2001, Vertical Computer acquired software technology assets
of Adhesive Software, including the SiteFlash technology platform, from a third
party for $100,000 in cash, 50,000 shares of Series C 4% Cumulative Convertible
preferred stock, and a 4% promissory note in the amount of $280,000. All unpaid
amounts are due September 2004. The note is secured by certain assets of
Vertical Computer reserved as collateral.
NOW SOLUTIONS, LLC
In February 2001, Vertical Computer acquired a 60% interest in Now
Solutions, LLC, a company that develops and maintains human resource software,
in exchange for $1,000,000. Also in March 2001, Now Solutions purchased the
Human Resource Information Service Application Software assets ("HRIS") 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 earn-out provisions to be paid to
Ross if certain sales levels are achieved by Now Solutions during the two years
subsequent to the purchase. Now Solutions acquired a $5,500,000 note payable to
finance the Ross acquisition and used the excess amount for working capital. The
note bears interest at prime plus one and a half (prime was 4.75% at December
31, 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. Now Solutions has been notified by the lender that it is
in default of certain covenants in the loan agreement. Vertical Computer had
pledged a $1.5 million deposit as collateral pursuant to a deposit pledge
agreement to guarantee the first 24 payments of the loan to finance the purchase
of HRIS. Although Vertical Computer believes it is entitled to a portion of its
$1.5 million deposit which increases as Now makes its payments, it is currently
in discussions with the lender to resolve NOW Solution's default. Until a
settlement is reached, the default by Now Solutions is cured, or Now Solutions
continues to makes its payments through February 2003, or Vertical Computer
pursues legal action, Vertical Computer is unlikely to obtain a return of its
deposit, or any portion thereof.
Arglen Acquisitions, LLC facilitated the Now Solutions' transactions
and acquired a 30% interest in Now Solutions for services provided and received
warrants of Vertical Computer to purchase 5% of the total outstanding stock of
Vertical Computer or the initial grant of 30,763,943 shares. If, during the last
90 trading day period of the first year from the date the issuance of the
initial set of options, the per share value of Vertical Computer's shares,
adjusted for any forward or reverse splits and any other dilutive effect, is
less than $0.50, then Arglen will be entitled to an additional 25,000,000
warrants to purchase common shares. If, during the last 90 trading day period of
the second year from the date the issuance of the initial set of options, the
per share value of Vertical Computer, adjusted for any forward or reverse splits
and any other dilutive effect, is less than $1.00, then Arglen, provided it has
not exercised and sold more than 25% of the 55,763,943 shares underlying the
previous stock warrants, shall be entitled to an additional 25,000,000 warrants
to purchase common shares. The exercise price of the warrants will be $0.08, and
the warrants shall be exercisable for a period of 5 years from the date the
warrants are registered with the Securities and Exchange Commission for resale
or an exemption from registration becomes available.
Pursuant to the terms of the operating agreement, Vertical Computer's
interest will be reduced to 51% over three years as employees of Now Solutions
will be entitled to receive ownership interests in Now Solutions.
3
The Now Solutions' purchase was accounted for under the purchase method
of accounting, with the cash paid to Ross in connection with the purchase of
HRIS. The purchase price also included $667,000 for Arglen's 30% interest in Now
Solutions and $798,000 for the value of the Warrants issued to Arglen (valued
using the Black-Scholes valuation model). Vertical Computer and Now Solutions
recognized approximately $7,294,000 of goodwill and other intangible assets in
connection with the purchase, which is being amortized over a 3- to 8-year
period.
On April 10, 2002, Vertical Computer appointed a fifth representative
to the Now Solutions Executive Committee. On April 12, 2002, Vertical Computer
received a letter from Arglen Acquisitions LLC, a member of Now Solutions LLC,
accusing Vertical Computer 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 Vertical Computer's ownership interest in Now Solutions at a
discounted price. On May 8, 2002, Vertical Computer demanded arbitration from
Arglen Acquisitions seeking to enforce its rights under the Operating Agreement,
including the appointment of the fifth representative to the Now Solutions
Executive Committee. On May 9, 2002, Arglen Acquisitions filed a Demand for
Arbitration and Statement of Claim against Vertical Computer. In its demand,
Arglen Acquisitions alleged that Vertical Computer is in default of its
obligations under the Operating Agreement. Arglen is seeking to enjoin Vertical
Computer 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
Vertical Computer's interest in Now Solutions. Vertical Computer believes these
allegations are without merit. Vertical Computer intends to defend its rights
and to assert its own claims against Arglen Acquisitions.
For the ten months ended December 31, 2001, Now Solutions had
approximately $4,987,000 of net goodwill and other intangible assets.
GLOBALFARE.COM
In May 2000, Vertical Computer acquired Globalfare.com. Globalfare is
headquartered in Los Angeles, California. In light of the relocation and the
future of the travel industry caused by the terrorist attacks at the World Trade
Center, Vertical Computer has suspended operations of Globalfare while it
formulates its future strategy. Globalfare was an e-commerce
business-to-consumer and business-to-business outlet whose aim has been 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.
Prior to the suspension of operations, Globalfare also offered 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. Globalfare's goal was to become a
complete on-line 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.
For the twelve months ended December 31, 2001, Globalfare.com had
assets of $51,650, net revenues of $92,139 and a net loss of $570,581.
HOME COUNTRY GATEWAYS
Vertical Computer is developing a Web-based distribution platform
called Home Country Gateway as part of its Global Partners System. These
gateways represent an international distribution platform for the demonstration,
deployment and sale of Web services and Underpinning Web Technologies.
Currently, Vertical Computer has five gateways in operation, the U.S. 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), the Korea Bridge
(http://www.thekoreabridge.com) and the World Bridge
(http://www.theworldbridge.com).
The goal of the gateways is to use them as a distribution platform for
Web Services. In the meantime, Vertical Computer continues toward the
implementation of structured subscription fees as Web Services and technology
are added to the gateways. Later, these gateways are also expected to offer
exclusive sponsorship opportunities in a broad range of ways to effectively
deliver companies' messages and desired product information to newfound
consumers worldwide.
The gateways display Web Services like the Personal Information
Management system through a licensing agreement with WebAddressBook, whereby
Vertical Computer acquired a permanent license to utilize the source code for
"WebAddressBook" in October 2000. This system allows users to manage personal
information such as address book, calendar, contacts, bookmarks, note pads,
files and tasks. WebAddressBook is customizable, multi-language and
user-friendly. It is a full-featured customizable product that fits seamlessly
into Vertical Computer's existing infrastructure.
4
The gateways continue to offer a free Internet messaging service
through Webbe, which is licensed and co-branded from a third party. Vertical
Computer has renewed this license for a term of 1 year at a rate of $19,400,
which was due by the end of January 2002. As of December 31, 2001, Vertical
Computer has paid $5,000 toward the amount owed. The balance is now due. Webbe,
essentially a highly personalized Web browser, is a one-stop shop for Internet
activity, and adds additional communications tools to Vertical Computer's global
network of gateways.
For the twelve months ended December 31, 2001, Vertical Computer has no
assets, revenues or expenses in relation to the gateways.
POINTMAIL.COM, INC.
In June 2000, Vertical Computer acquired Pointmail.com, Inc., which
owns proprietary, Web-based e-mail software that enhances Vertical Computer's
existing "ThePostmaster.Net" Internet service. ThePostmaster.Net is accessible
world wide, offers a cross-platform e-mail solution, and is cheaper and easier
than using traditional e-mail programs.
For the twelve months ended December 31, 2001Pointmail.com had assets
of $82, no revenues and a net loss of $89,234.
JOINT VENTURES, STRATEGIC PARTNERSHIPS, AND MINORITY INTERESTS
INET PURCHASING, INC. iNet Purchasing, Inc., based in Bethesda,
Maryland, is a developer of Internet-based procurement services targeted at the
specific needs of public sector purchasing in the state and local government
arena through PublicBuy.net. State governments in Texas, Maine and Idaho have
selected iNet's unique technology to meet their statewide procurement needs.
Through its strategic partnerships, iNet solutions handles everything from
requisition to final payment, providing an end-to-end audit trail essential for
governmental processes, which can lead to increased efficiency and lowered
expenses of current public sector purchasing processes both for the buyer and
the supplier. iNet has directed its talents, resources, technologies and
Internet-based services to reduce the overhead in the government-to-business
market.
By using iNetPurchasing's services, public and private sector entities
can manage the cost of the purchasing process. iNetPurchasing's Internet-based
services provide quick and easy access to vendor contracts and open market
catalogs maintained for the public sector agency through iNetPurchasing's
proprietary e-catalog technology. The iNetPurchasing service offers the full
procurement cycle workflow process from end-user requisition through payment
reconciliation. The service is offered either as a stand-alone, front end,
Web-based system or can be interfaced to agency financial systems, such as
PeopleSoft, SAP or Oracle.
iNetPurchasing is in effect a communications link between the
governmental buyer and the private supplier for which it charges the supplier a
value-added fee for the electronic processing of purchases.
In April 2000, Vertical Computer entered into two joint ventures with
iNetPurchasing.com, Inc., iNet Government Services, LLC and Vertical iNet LLC.
Neither entity has begun operations. Both joint venture ownerships are held 50%
by Vertical Computer and 50% by iNet. In May 2000, Vertical Computer invested
$400,000 in iNet for 2.5% of iNet's outstanding shares and $100,000 for a
royalty license, which provides for royalty payments to Vertical Computer based
upon iNet's transactional fees.
In November 2001, Vertical Computer entered into a license agreement
with iNet, where the Emily software and technology was licensed for use in
connection with iNet's e-procurement system in Texas, Maine, and Idaho in
exchange for a 20% commission on subscription fees and the ability to market all
subscription fees (except for Texas QISV vendors). Pursuant to the license
agreement, Vertical Computer also obtained a joint marketing effort to sell its
Emily Agent to these vendors. Vertical is entitled to retain all of the $495
sales price for sales to any vendors.
In December 2001, Vertical Computer entered into an option agreement
with iNet to purchase additional interest in iNet by April 2002, whereby
Vertical Computer could obtain an aggregate 56% ownership interest in iNet. In
accordance with the option agreement, Vertical Computer 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.
Vertical Computer 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 Vertical Computer exercises its
option to obtain a majority interest in iNet, by April 2002, Vertical Computer
is required to pay to iNet $860,000 in cash or marketable securities, 70,000
5
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.
The strike price is the closing price of the Vertical common stock on January 6,
2002, and, in the event that Vertical 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.
Vertical is seeking an extension of the exercise date to allow iNet to deliver
the required information and to allow Vertical 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 and Vertical Computer and
vice versa. Discussions thus far with iNet have not resulted in a resolution of
this matter.
As of December 31, 2001, all of the iNet investments and advances paid
for royalties are reserved. There have been no revenues or expenses in relation
to the investments for the twelve months ended December 31, 2001.
APOLLO INDUSTRIES, INC. Apollo Industries, Inc. ("Apollo"), based in
Los Angeles, California, is a systems integrator and consulting firm that is
establishing an E-business platform focused on multiple-application Smart Card
based solutions for credit, debit and other high volume informational
transactions with their customer base. Vertical Industries intends to create and
manage innovative end-to-end (turnkey) Smart Card systems that optimize the
convenience, mobility and flexibility vital to accessing information and
exchanging commercial value.
In October 2000, Vertical Computer 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 Vertical Computer, 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, Vertical Computer loaned Apollo $24,000, which
was due on June 30, 2001. On May 8, 2001, Vertical Computer 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 of Apollo common
stock for each of the two loans. Apollo is in default of the two loans. Vertical
Computer has not foreclosed on either loan and Apollo is in the process of
securing funding to repay both loans. Vertical Computer intends to use
ApolloSmart technology 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.
As of December 31, 2001, the investment in notes receivable and all of
the advances paid to Apollo for royalties have been reserved. There have been no
revenues and a net loss of $202,334 was deferred in relation to Apollo for the
twelve months ended December 31, 2001.
ZAP QUOTE, S.A. In March 2000, Vertical Computer entered into two joint
ventures with ZAP Quote, S.A., Brazil's second largest provider of real time
financial information for Brazil's financial markets. ZAP Quote, 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. ZAP
Quote, S.A. also has a major position in providing back office software to many
of Brazil's financial institutions.
Both joint venture ownerships are held 50% by Vertical Computer and 50%
by ZAP Quote, S.A. The first joint venture was converted into a Brazilian
corporation named Vertical Zap S.A. in August 2000. The terms of Vertical Zap
S.A. require Vertical Computer to provide the latest in U.S. technology and
products while ZAP Quote, S.A. will add its expertise and familiarity with the
Brazilian financial and business communities, along with the initial financing
for the project. As part of Vertical Computer's Global Partners' System,
Vertical Zap S.A. developed and launched an Internet distribution Website or
"Bridge" to market and distribute Vertical Computer's Web services and
Underpinning Web Technologies throughout Brazil. The second joint venture, known
as ZAP Vertical, has not been converted into a corporation, but is developing a
strategy to market and distribute ZAP Quote, S.A.'s proprietary wireless
financial applications in countries and territories around the world, excluding
South America.
WIRELESS LEARNING SYSTEMS, LLC. In June 2001, Epsylon Technologies,
Taurus Global, LLC and Vertical Computer formed Wireless Learning Systems, LLC
("Wireless Learning"), which was formulating plans to develop wireless solutions
for schools to support teacher and student wireless educational systems.
Vertical issued 3-year warrants to purchase 846,000 shares of common stock at a
strike price of $0.050 per share in connection with the formation of the
Wireless Learning LLC. The holders of these warrants are Robert Langworthy, Igor
Shoifot, and Alexander Sergeev in equal amounts. In addition, Vertical issued
3-year warrants to purchase 54,000 shares of common stock at a strike price of
$0.050 per share to Taurus Global in connection with the formation of Wireless
Learning. Vertical Computer has put Wireless Learning on hold until relevant
technology is acquired.
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WORLDBRIDGE WEBCASTING SERVICES, LLC. In June 2001, Vertical Computer
agreed to pay $250,000, of which $150,000 was actually paid, in exchange for a
51% equity interest in WorldBridge Webcasting Services, LLC ("WorldBridge"), a
webcast services company. In October 2001, Vertical Computer agreed to reduce
its interest in WorldBridge from 51% to 49%. In January 2002, Vertical Computer
and Strategic Marketing Alliance agreed to terminate Vertical Computer's
interest in the WorldBridge Webcasting LLC in consideration for credit on
Vertical Computer'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
with Strategic Marketing beginning in February 2002.
THE BRAZILBRIDGE.COM. In April 2000, Vertical Computer and its partner
ZAP Quote, S.A. launched the Brazil Bridge. Each party has a 50% interest in the
joint venture.
THE KOREABRIDGE.COM. In February 2001, Vertical Computer entered into
an agreement with Navicom Co. Ltd., to form a joint venture to launch and
operate "theKoreaBridge.com" and related businesses. Each party has a 50%
interest in the joint venture. The Korea Bridge was launched in October 2001.
THE INDIABRIDGE.COM. In October 2000, Vertical Computer entered into an
agreement with First Serve Entertainment, Inc., to form a joint venture to
launch and operate "theIndiaBridge.com" and related businesses. Each party has a
50% interest in the joint venture. The India Bridge was launched in December
2000.
For the twelve months ended December 31, 2001, all of the joint venture
investments are fully reserved. There have been no revenues or expenses in
relation to the investments for the twelve months ended December 31, 2001.
BUSINESS OPERATIONS
Vertical Computer's business operations consist of three main business
technologies: (i) Underpinning Web Technologies, (ii) Web Services and (iii)
Global Partners System. Each of these technologies is discussed below:
UNDERPINNING WEB TECHNOLOGIES
EMILY XML SCRIPTING LANGUAGES (EMILY). Emily is a Very High Level (VHL)
programming language, designed for the specific purpose of working with Markup
Language documents, especially XML. Emily is a core Underpinning Web Technology
of Vertical Computer since it has the capability to create other Underpinning
Web Technologies, such as the Emily Agent. The emergence of a standard (XML) for
inter-business exchange of data, coupled with inexpensive development tools (PC,
Emily, etc.) and communications media (Internet), make the business-to-business
market, in our opinion, ready to go beyond conventional Electronic Data
Interchange to full-scale data exchange in order to fully utilize the benefits
of tight supply chain management. 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.
EMILY XML ENABLER AGENT. The XML Enabler Agent was created to
XML-enable any database. The first Beta test resulted in a full-fledged
application with iNet where a solution was needed to connect the State of Texas
supplier's catalogs to iNet catalog database for the new state of Texas
e-procurement. The solution was developed utilizing Emily broker software. All
Texas suppliers can purchase the Emily Enabler Agent to make their catalog
instantaneously available on the State of Texas e-procurement catalog with
automatic updates when the supplier changes their catalog information. The
market is any database that is not XML-enabled. The XML Enabler Agent is sold
for a price of $495 for the standard version and $995 for the professional
version. Vertical Computer is currently looking for opportunities to use the XML
Enabler Agent with another large potential application that can result in
multiple sales opportunities for the XML Enabler Agent. The XML Enabler Agent is
a product developed by Vertical Computer utilizing the Emily Scripting Language.
SITEFLASH. SiteFlash is an e-Business Suite that provides content
management, e-commerce, workflow, as well as affiliation/syndication
capabilities. It has multi-lingual and multi-modal (any output device -
including cell phones, PDAs) capabilities. The core product is rooted in
patent-pending technology that splits the Web pages or the Web site into smaller
components in three distinct categories - form, function and content. SiteFlash
then allows one to combine these objects from all these categories arbitrarily -
which means that re-usability of code, GUI elements and content is increased,
without significant additional programming. SiteFlash is XML enabled and is
compatible with diverse software systems that may exist in the target
environment. There is a varied market for SiteFlash because, with minimal
customization, the core SiteFlash technology can be immediately applied to
several vertical markets, including newspapers, franchise operations, government
umbrella agencies, and institutions of higher education. SiteFlash revenue flow
is expected to be derived from three revenue streams: SiteFlash will be sold as
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(i) a software product, where revenues are expected to be derived from license
fees and annual maintenance and/or support fees; (ii) a core Web platform where
revenues are expected to come from a one-time product sale, as well as
additional royalties for any run-time applications that the third party may
distribute in connection with the SiteFlash core platform; and (iii) a service
where revenues are expected to consist of a one-time setup fee plus monthly fees
for continued use of the service.
WEB SERVICES
NEWSFLASH - PUBLISHING. Vertical Computer acquired NewsFlash with its
purchases of EnFacet and the assets of Adhesive software that had been developed
from the SiteFlash technology. NewsFlash is a fully developed product and had
been successfully marketed to a number of newspapers. The newspapers that
purchased NewsFlash still use the product and offer third party endorsements.
The new upgraded product that is being finalized is expected to enhance the
features and functionality of NewsFlash. Vertical Computer's initial focus has
been on the newspaper industry, particularly on those newspapers that do not
have the capabilities of purchasing and maintaining a high quality, real-time
Web site. Vertical Computer owns all of NewsFlash.
UNIVERSITYFLASH - HIGHER EDUCATION. UniversityFlash is a new product
that developed from the SiteFlash technology. UniversityFlash is being rolled
out at California State University in Fullerton. The UniversityFlash product has
been fully developed by working in conjunction with California State University
in Fullerton for custom applications and integration with the other systems. On
the higher education front, UniversityFlash's open architecture and ability to
create and maintain multiple affiliate sites from a single installation of the
product provides control, as well as the flexibility that permits individual
departments to freely choose, develop and maintain their own Web presence using
the same software code rather than different departments developing different
software code. By bringing disparate data together in one place, we believe
UniversityFlash ensures data integrity and consistency, and thereby simplifies
the decision-making processes. We believe that universities, big and small, in
the United States comprise part of the market for UniversityFlash. Vertical
Computer owns all of UniversityFlash.
AFFILIATEFLASH - FRANCHISES/INDEPENDENT AGENTS. AffiliateFlash
leverages the affiliation/syndication capabilities that lie at the core
SiteFlash product. AffiliateFlash provides organizations with the ability to
create and maintain all related Web sites from a central location, regardless of
the structure by which they were organized, whether as loosely connected agents,
a multi-level hierarchy, a networked hierarchy, or matrix based. AffiliateFlash
has the capabilities that provide the franchiser with a degree of control and
tracking while also enabling the franchisee to focus on the end-customer without
having to take time to perform routine administrative tasks. We believe that the
AffiliateFlash market is made up of franchises headquartered in the United
States, as well as companies using multi-level marketing arrangements with a
large set of independent agents that need to have some central tracking while
maintaining their independent status. Vertical Computer owns all of
AffiliateFlash.
RESPONSEFLASH - EMERGENCY MANAGEMENT. ResponseFlash is another product
based on the SiteFlash core technology. ResponseFlash addresses the need for
real-time two-way communications between an organization and its various
departments and among the various departments. Applying this to a governmental
scenario in an emergency management framework, this translates into several
possibilities where various agencies may have the need to (a) communicate
directly to the citizens; (b) communicate with several other agencies and enable
communication among agencies; (c) have two-way communication between itself,
other agencies and the citizens. The domestic market for ResponseFlash includes
governmental and non-governmental bodies. We believe that the potential
customers of ResponseFlash include all of the independent governing bodies in
the United States that are required by Federal and State guidelines to set up an
emergency communications infrastructure. ResponseFlash is currently being
implemented with the Metropolitan Emergency Communications Agency in
Indianapolis and Marion County, Indiana. Vertical Computer owns all of
ResponseFlash.
INETPURCHASING - E-PROCUREMENT SERVICES FOR THE PUBLIC SECTOR. By using
iNet's services, public and private sector entities can efficiently manage the
costs of the purchasing process. iNet's Internet-based services provide quick
and easy access to vendor contracts and open market catalogs maintained for the
public sector agency through iNet's proprietary e-catalog technology. The iNet
service offers the full procurement cycle workflow process from end-user
requisition through payment reconciliation. The service is offered either as a
stand-alone, front end, Web-based system or can be interfaced to agency
financial systems, such as PeopleSoft, SAP or Oracle.
iNet has over 1,700 term contracts with over 1,300 vendors constituting
nearly a half-million lines of commodity items in its production e-catalog
system. Idaho, Texas, Maine, Nevada, and Jackson County (Kansas City), Missouri,
have selected the iNet offering, "PublicBuy.Net" Government-to-Business service,
over its competitors. iNet's revenue model combines both subscription and
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transaction-based fees, as well as fees for Web-based services and tools that
assist merchants in becoming Web-enabled suppliers. Vertical Computer has an
option to purchase a majority interest in iNet.
NOW SOLUTIONS - HUMAN RESOURCES/PAYROLL. Now Solutions is a company
specializing in end-to-end, fully integrated human resource and payroll
solutions to large and mid-size companies. Now Solutions derives revenue from
software licenses, professional services consulting, and renewable maintenance
from approximately 175 customers. The product suite has a successful track
record in providing solutions to many well-known organizations. Vertical
Computer acquired the human resources and payroll product suite from Ross
Systems through a newly incorporated entity called Now Solutions of which
Vertical Computer currently owns 60%, although this percentage will decline to
51% over three years as employees of Now Solutions earn ownership interests.
The product suite is targeted to address the needs of management in
today's dynamic business environment and gives organizations functionally rich
in a "user friendly" and flexible software solutions, without the multi-million
dollar implementation budgets of the competitors. Now Solutions has recently
released a new version of their product offering called Empath 6.0. The existing
revenue model is based upon three components: new licensing fees, professional
services, and annual maintenance fees. Now Solutions has approximately 175
customers paying annual maintenance fees totaling approximately $4 million.
GLOBALFARE.COM INC. - TRAVEL. Globalfare.com was originally conceived
to be both an e-commerce and brick and mortar business that sells travel
products on-line on its Globalfare.com Web site and through a customer care and
reservation center. In light of the relocation and the future of the travel
industry based upon the attacks of September 11, 2001, Vertical Computer has
suspended operations while it reformulates its strategy. On-line sales were
intended to include sales through co-branded sites with solutions targeted to
assist the travel agent industry and through Vertical Computer in-country
partners, corporate travel and management programs, government relocation
programs, and local and state government sales.
Globalfare.com's net fare database contains negotiated and net fares
that, in many cases, are priced lower than the airlines' published airfares, and
thereby provide Globalfare with higher percentage commissions, particularly with
regard to consolidator fares. Globalfare.com is evaluating new joint marketing
options of high quality products and services. Globalfare.com's website and
on-line booking engine's are designed from the ground up to quickly provide
affiliates and partners with a complete co-branded on-line travel presence.
APOLLO INDUSTRIES - SMART CARDS. Apollo's target market is
organizations (like affinity groups) that generate and can use information from
high volume financial, or data-rich non-financial, transactions. Typical
examples include the often-complex needs of hotel, transportation, travel,
medical, campus and fast food establishments. Until the advent of smart cards,
such detailed data could not be collected, aggregated and instantaneously used
in a cost effective, secure manner. Apollo expects to earn revenue from fees
charged to customers for Smart Card-based systems Apollo designs. Revenues are
expected to be based on multiple factors that can include card issuance, system
integration, transaction benefits and volume, cost savings and volume that
benefit the affinity group. Revenue should also include fees from banks and
other institutions that serve the organizations, as do current credit and debit
card programs. We believe that Smart Card readers, systems integration software
and hardware, on-card logo advertising, extended (value added) card functions
and other systems components may provide new types of revenue. Apollo's revenue
for credit applications and other services are expected to be shared with
various affinity groups. Vertical Computer acquired 30% of Apollo in 2000 and
has a royalty arrangement whereby it will receive a royalty of 2% of all
transaction fees up to $275,000 and 1% up to $3,000,000.
WIRELESS APPLICATIONS. Since Vertical Computer is currently in the
planning stages with regard to wireless applications, Vertical Computer has no
projects developed in this market. However, Vertical Computer is in discussions
with two of its partners, Zap Quote, S.A. and Navicom concerning wireless
applications to market their existing products, as well as to develop new
products.
GLOBAL PARTNERS SYSTEM
The Global Partners System provides the resources and services to
commercially exploit and distribute worldwide the Web services and products of
Vertical Computer and its affiliates through its local country partners. Through
the Global Partners System, the local country partners have the ability to
launch products or services globally through the Vertical Computer Bridge
network. Our current local country partners include Zap Quote S.A. (Brazil),
Navicom Co. Ltd (Korea), and First Serve Entertainment (India).
APPLICATION PLATFORMS (BRIDGES, HOME COUNTRY GATEWAYS OR HGCS). As part
of its Global Partners System, the Bridges function as a service that provides
commercial distribution for Vertical Computer Web Services and Underpinning Web
9
Technologies, as well as for those of third parties. Six Bridges are in
operation. The Bridges are designed to meet the need for a place where Web users
can "bridge" national and cultural barriers to connect with each other for
commerce or personal interests and purchase Web services. Utilizing this
expanding global network of Web services, Vertical Computer offers
business-to-business, business-to-government, and business-to-consumer Web
services through its range of accessible resources that specifically cater to
the desires of targeted communities around the world.
At the core of each Bridge is an alliance with a local country partner,
which provides country-specific expertise, capital and/or content. Each local
partner supports its respective Bridge and gains access for Vertical Computer
Web Services and technology to market and distribute in its markets. Vertical
Computer is planning to add new partners to develop a network of Bridges in
different countries, and thereby market Vertical Computer's proprietary and
licensed technologies, goods and services worldwide while continuing to develop
its own applications. Local country partners have the option to market their own
products and services internationally through the Bridge network.
ZAP QUOTE S.A. ZapQuote S.A., established in 1985, uses proprietary
wireless communications technology to enhance its position in the Brazilian
marketplace. Using available carrier channel space on the FM Band, Zap Quote
Wireless Data Broadcasting is able to deliver real time data over broad areas at
a low cost, including real-time financial data to banks, brokers and travel
agencies at competitive prices. Zap Quote and Vertical Computer launched the
Brazil Bridge (WWW.THEBRAZILBRIDGE.COM) in April 2000 and markets Vertical
Computer's proprietary and licensed technologies throughout Brazil.
NAVICOM CO. LTD. Navicom Co. Ltd., is a leading provider of global
positioning system technologies and GPS-related applications in Korea. The
global positioning system is the only system currently available to show a
person's (or an object's) exact position on Earth anytime, in any weather,
anywhere. Since commencing operations in 1996, it has devoted itself
continuously to developing numerous applications and opportunities involving GPS
receiver technology. Vertical Computer and Navicom launched the Korea Bridge in
October 2001.
FIRST SERVE ENTERTAINMENT, INC. First Serve Entertainment, Inc., Los
Angeles, and India-based First Serve Entertainment India Pvt. Ltd. (FSE-India),
are both headed by international sports celebrity and business executive Vijay
Amritraj, who was recently named a United Nations Messenger of Peace by
Secretary-General Kofi Annan. In the United States, FSE is a television company
producing, broadcasting, syndicating and distributing television programs in
India, Asia and North America. In India, FSE-India is a multimedia company
producing, broadcasting, syndicating and distributing television programs and
feature films in India and Asia. FSE-India has successfully launched the entry
of Columbia TriStar International Television, Turner International, ESPN and
others in India. With Vertical Computer, Amritraj launched and co-owns
www.theIndiaBridge.com, which along with its established functions, has also
channeled funds to survivors of the Gujarat Earthquake. Vertical Computer and
FSE launched the India Bridge in December 2000.
COMPETITION
In general, Vertical Computer has substantial competition from software
and hardware vendors, system integrators, and multinational corporations focused
upon information technology. Furthermore, each product offered by Vertical has
competition within its market niche. Below is a description of Vertical
Computer's principal competitors. Many of Vertical Computer's competitors have
substantially greater financial resources and name recognition than Vertical
Computer.
SOFTWARE/HARDWARE VENDORS
Various software and hardware vendors have initiatives that compete
with Vertical Computer's Software technologies. Besides a number of smaller
companies, Vertical Computer faces competition from Microsoft, Sun, Oracle, IBM,
and Compaq.
MICROSOFT'S ".Net" initiative provides software on a per-use rental
basis. This is the primary distribution model with which Vertical Computer must
compete. As part of its .Net strategy, Microsoft, in March 2001, launched
HailStorm, a collection of consumer Web services, among them a calendar, an
address book, user profiles (including secure credit card information and
personal preferences), and in-boxes for receiving alerts and messages, all of
which are housed on Microsoft's servers. For business services, Microsoft
launched another initiative, bCentral, which hosts several types of
applications, including a Website builder, content management, order entry,
accounting, and customer tracking software services, all of which are available
for approximately $110 per month. The bCentral Web site had about 1.7 million
visitors in February 2002, making it the second-ranking small-business Web site,
according to Media Metrix.
10
IBM has several products and services that compete with Vertical
Computer's offerings in providing applications platforms. For example, IBM Start
NOW Infrastructure Solutions provide open, standard interfaces and protocols
that allow systems to interoperate and enables users to manage demanding
databases and storage challenges, to develop Internet and intranet presence, to
set up log on and registration procedures for customers and suppliers and to
share information and data on-line.
ORACLE AND SUN are also developing XML technologies through a joint
venture to convert Microsoft-based software into Java software. Java is
supported by Oracle, Sun, BEA Systems, IBM and others, as competition for
Microsoft's own proprietary method of writing software. The new software tools
will translate Microsoft Active Server Pages into Java Server Pages without
forcing developers to rewrite their software code. These rival technologies both
allow "dynamic" Web content--meaning content that repeatedly changes, such as
stock quotes or weather forecasts--to appear on Web pages. These new tools are
aimed at moving customers to Oracle's application-server software that runs
e-commerce and other Web site transactions.
COMPAQ COMPUTER CORP. is preparing a restructuring that will see it
emphasize sales of industry-specific packages of computers, software and
services over computer hardware. Among the plans, other key elements are
acquisitions to bolster computer-service revenue, and expanded software
development and sales to lessen its reliance on hardware. Compaq expects to
cater to industries such as financial services, telecommunications, health care
and manufacturing, rather than the Internet customers that it has championed for
the last two years. A new marketing unit is being organized to develop
industry-specific packages from its own and others' products. Like IBM, Compaq
aims to expand higher-margin services to offset its increasingly lower margins
on revenues derived from its traditional hardware business.
SYSTEM INTEGRATORS
System integrators generally provide information technology management
and consulting services for larger organizations. Their built-in infrastructure
costs generally make it impractical to service organizations with less than 100
workstations. The major system integrators with which Vertical Computer competes
include Computer Associates, Hewlett Packard, IBM, and the consulting divisions
of the big 5 accounting firms.
MULTINATIONAL CORPORATIONS
Vertical Computer has substantial competition in global distribution
systems from multinational corporations in the technology field, such as IBM,
General Electric, as well as foreign multinationals such as the European
electronics multinationals (Siemens, Nokia, SAP), Japanese Kereitsus
(Mitsubishi, Mitsui), Korean Chaerbols (Samsung), and others.
DIRECT COMPETITION TO VERTICAL COMPUTER - DISTRIBUTION AND PRODUCTS
EMILY SOLUTIONS XML SCRIPTING LANGUAGE (SCRIPTING LANGUAGE).
Competition for the Emily base product consists of traditional languages, and
toolkits designed for those languages. The competition is mainly from currently
existing generic programming languages. Most generic programming languages do
not have specific extensible markup language or XML support. The most recently
announced Microsoft VisualBasic.Net supports XML. Our Emily product will work
under the .NET framework and is expected to interface with the latest versions
of Microsoft products that support XML. The Java programming language is another
dominant language program and Emily is uniquely positioned to interoperate with
Java and additionally can extend Java's abilities. Emily enables Java
programmers to quickly write XML applications that interoperate with Java.
EMILY XML ENABLER AGENT (XML-BASED DATABASE TOOLS). There are a number
of products that can either be modified to perform the same functions as our
Emily XML Enabler Agent, but they are available as either standalone products or
are part of very complex high-priced packages, such as Web Method's "B2Bi"
product, which is priced at $500,000 and up. Another competitor, IBM, has a
product called Extensible Lightweight Extractor, that does some similar
functions, but is not yet available as a product for sale to the public.
SITEFLASH - CONTENT MANAGEMENT, E-COMMERCE AND WORKFLOW. SiteFlash's
competition is derived from its competencies in content management, e-commerce,
and workflow. In the content management arena, Vignette and BroadVision are
competitors. In the e-commerce arena, ClearCommerce is a competitor, whereas in
the workflow arena, there are competing products from IBM and Oracle. However,
Vertical Computer believes that no single product exists that integrates all of
these components to provide the scope of functionality that SiteFlash provides
nor the affiliation/syndication capabilities found in SiteFlash. In addition,
SiteFlash's multi-lingual and multi-modal capabilities give these projects
capabilities much more than any single competitor's product in one integrated
solution. Taking the cue from the market, SiteFlash is now available as a single
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integrated product or as a set of individual modules that the customer can
purchase separately.
NEWSFLASH-CONTENT MANAGEMENT AND PUBLISHING. In the realm of content
management, the larger newspapers have a choice between NewsFlash and
conventional content management systems like Vignette and BroadVision. However,
for medium to small newspapers this is a less viable option because the price
points of the competing products are high, ranging from about $250,000 up to $1
million, plus additional consulting fees for customization. However, NewsFlash
is the only product that has been specifically designed for the newspaper
industry. In addition, NewsFlash is the only product that offers more features
than just a content management system.
UNIVERSITYFLASH - HIGHER EDUCATION. Vertical Computer is not aware of
any direct competitors to UniversityFlash. Vertical's competition in this market
consists of homegrown custom software firms, Vignette, Yahoo Geocities and
consulting firms, each of whom might duplicate different features of
UniversityFlash.
AFFILIATEFLASH - FRANCHISES/INDEPENDENT AGENTS. Current competition in
this market consists of homegrown custom software, Vignette, Yahoo GeoCities and
Yahoo! Store and consulting firms each of whom might duplicate different
features of AffiliateFlash.
RESPONSEFLASH - EMERGENCY COMMUNICATION MANAGEMENT. ResponseFlash
functionality leverages the most powerful capability of the SiteFlash technology
- the real-time immediate two-way communication between thousands of Web sites
among themselves, as well as with the central site. ResponseFlash has been
tailored for the emergency communications management segment and has features
that are not offered by competitive products. At present, Vertical Computer is
not aware of a commercially available package that replicates this
functionality.
INETPURCHASING - E-PROCUREMENT SERVICES FOR THE PUBLIC SECTOR.
iNetPurchasing began offering products and services that combine deep content
and management capabilities accessible through the Internet designed
specifically for the public sector. Although Vertical Computer is not aware of
any direct competition for iNet's specific services or products, Ariba,
CommerceOne, and FedCenter.Com have offerings that may compete.
NOW SOLUTIONS - HUMAN RESOURCES AND PAYROLL SOFTWARE. Now Solutions'
competitors include PeopleSoft, Oracle, Lawson, Cyborg and SAP. Now Solutions
believes its product can accommodate the complexities of the large and
multi-dimensional companies without considerable modifications.
GLOBALFARE.COM INC-TRAVEL SERVICES. Globalfare.com's competitors
include Travelocity and Expedia. These two companies, who are among the industry
leaders of the on-line travel industry, primarily focus on delivering standard
published fares to the mass public. Other companies such as Cheap Seats and
Cheap Tickets provide discount or negotiated fares via phone sales but provide
mostly published fares on-line.
BRIDGES (COMMERCIAL DISTRIBUTION PLATFORM). Competition for Vertical
Computer's Bridges is two-fold. First, there are competitors with Internet
portals on an international basis like Yahoo, AOL, Lycos and MSN. These
companies operate on a worldwide basis with different arrangements in each
country and compete on a general and specific basis with all of our Bridges.
Second, there are portals that are geared toward their respective country of
origin like IG.com.br in Brazil, which compete only with the specific Bridge for
that territory (e.g., theBrazilbridge.com). Both global and territory-specific
portals such as these typically target an advertising revenue stream that is
generated by sheer mass of hits to their sites, and consequently, tend to spend
significant advertising dollars to bring masses to their sites. In contrast,
Vertical Computer's approach is to utilize affiliate programs and in-country
name recognition of Vertical Computer's global partners combined with selective
and limited advertising to attract specific visitors by technology and products.
APOLLO INDUSTRIES. Many companies seek to provide financial and
informational solutions to affinity group clients. MasterCard and Visa
International have focused on authorization systems. Card issuing banks assume
credit risks. Other companies have focused on hardware and software. In Apollo's
belief, few companies appear to be focusing on designing transactional systems
designed to integrate all financial and informational exchange needs in an
integrated system. Apollo's direct competition will be consulting organizations
like Booz Allen Hamilton, which hope to provide complete systems solutions for
Smart Card transactions in addition to their general consulting services. Apollo
has focused on offering a fully integrated systems management and banking
interface.
VERTICAL ZAP S.A. Because Vertical Computer is in the development stage
of its wireless applications business, it has not identified its potential
competition. Vertical Zap intends to utilize the FM frequency. As with its
existing Web service strategy, Vertical Computer's focus is on the international
12
development and deployment of wireless Web services and Underpinning Web
technology with our current joint ventures with Zapquote, S.A.
STRATEGIC OVERVIEW
We believe that each of Vertical Computer's business units has distinct
marketing advantages for their niche markets. Vertical Computer plans to find
national marketers who can commercially exploit Vertical Computer's products in
the respective niche market. By utilizing the strategic elements each individual
business unit offers, Vertical Computer plans to leverage each other's strengths
in their segments, as well as to exploit the network of customers, vendors, and
support agencies that Vertical Computer has built.
Although Vertical Computer's current marketing effort focuses upon
several sectors, it has recently concentrated on the United States government
for the following reasons: (i) companies which it either controls or is
affiliated with have government clients which has created the potential to
cross-promote our Web services; (ii) the Underpinning Web Technologies are
suited to the emerging governmental environment that demands the capability for
cross-agency and federal, state and local interface; and (iii) the increased
security environment caused by the terrorist attacks of September 11, 2001
necessitates improvements in secure communications and agency-to-agency contacts
that can be facilitated by its technology.
Vertical Computer's current strategy is to obtain federal government
contracts through its existing relationships or to be a subcontractor for a
particular service to one of the major federal government prime contractors, as
warranted under the circumstances. For local and state government entities,
Vertical Computer believes it can cross-market to its existing client base of
its partners, affiliates, and subsidiaries. Overall, the marketing strategy
entails building a strong international distribution base by which Vertical
Computer hopes to attract the best-of-breed smaller Web services from companies
without international distribution. In that way, Vertical Computer can market
and commercially exploit their Web services on Vertical Computer's own platform
and as well as for distribution to governmental entities.
In the past two years, Vertical Computer has built an international
distribution system offering Web Services and Underpinning Web Technologies from
its own platforms. Vertical Computer intends to incorporate third party products
and services into its worldwide distribution platform while selling its own
services to these third parties. Vertical Computer has obtained a base of Web
Services and Underpinning Web Technologies that it believes are ready to proceed
to market.
DEVELOPMENT
Vertical Computer continues to seek local country partners who are
established suppliers of Internet infrastructure and content, top management and
local authorities and who manifest diverse strengths in their regions, such as
extensive marketing abilities, a stable local presence and local and national
government contacts, expertise and familiarity with the financial and business
communities. Such partners are expected to help bring existing and new Vertical
Computer technologies to their markets, and it believes will also enhance the
prospects for local equity offerings and investment, thereby creating a better
overall value. In general, the companies in each area will attempt to raise
their own funding and operate as separate firms.
PROPRIETARY RIGHTS
Vertical Computer relies upon a combination of contract provisions and
patent, copyright, trademark and trade secret laws to protect its proprietary
rights in its products and services. Vertical Computer distributes its products
and services under agreements that grant users or customers a license to use its
products and services and relies on the protections afforded by the copyright
laws to protect against the unauthorized reproduction of its products. In
addition, Vertical Computer moves to protect its trade secrets and other
proprietary information through agreements with employees and consultants.
Vertical Computer has also filed for a number of patents for various
technologies: (a) one patent application related to the Emily programming
language; (b) one patent application related to the Emily XML Enabler Agent; (c)
one patent application related to the Emily XML Broker used in the site
HTTP://XML.PUBLICBUY.NET; and (d) one patent application for transmitting images
on fiber optics that might improve in orders of magnitude today's capacity of
fiber optics to transmit images and data. There are also patent applications
related with the EnFacet acquisition and the purchase of certain assets of
Adhesive Software Inc. All of these patents are pending approval at this time.
Although Vertical Computer intends to protect its rights vigorously, there can
be no assurance that these measures will be successful. Policing unauthorized
use of its products and services is difficult and the steps taken may not
prevent the misappropriation of our technology and intellectual property rights.
In addition, effective patent, trademark, trade secret and copyright protection
may be unavailable or limited in certain foreign countries. Vertical Computer
seeks to protect the source code of its products as a trade secret and as an
unpublished copyright work. Source code for certain products has been or will be
published in order to obtain patent protection or to register copyright in such
13
source code. Vertical Computer believes that its products, trademarks and other
proprietary rights do not infringe on the proprietary rights of third parties.
There can be no assurance that third parties will not assert infringement claims
against us in the future with respect to current or future features or contents
of services or products or that any such assertion may not result in litigation
or require us to enter into royalty arrangements.
REGULATORY ENVIRONMENT; PUBLIC POLICY
In the United States and most countries in which Vertical Computer
conducts its operations, Vertical Computer is generally not regulated other than
pursuant to laws applicable to businesses in general or to value-added services
specifically. In some countries, Vertical Computer is subject to specific laws
regulating the availability of certain material related to, or to the obtaining
of, personal information. Adverse developments in the legal or regulatory
environment relating to the interactive on-line services and Internet industry
in the United States, Europe, Asia, Latin America or elsewhere could have a
material adverse effect on Vertical Computer business, financial condition and
operating results. A number of legislative and regulatory proposals from various
international bodies and foreign and domestic governments in the areas of
telecommunications regulation, particularly related to the infrastructures on
which the Internet rests, access charges, encryption standards and related
export controls, content regulation, consumer protection, advertising,
intellectual property, privacy, electronic commerce, and taxation, tariff and
other trade barriers, among others, have been adopted or are now under
consideration. Vertical Computer is unable at this time to predict which, if
any, of the proposals under consideration may be adopted and, with respect to
proposals that have been or will be adopted, whether they will have a beneficial
or an adverse effect on our business, financial condition and operating results.
EMPLOYEES
As of April 12, 2002, Vertical Computer had 49 full-time employees and
1 part-time employee. This total includes 37 full-time at Now Solutions, of
which 29 are employed in the United States and 8 are employed in Canada. In
addition, Vertical Computer utilizes various consultants. Vertical Computer is
not a party to any collective bargaining agreements.
ITEM 2. DESCRIPTION OF PROPERTY
Our headquarters are currently located at 6336 Wilshire Boulevard, Los
Angeles, California, and comprise approximately 4,200 square feet. Additional
premises housing administrative and accounting personnel are currently located
at 6300 Wilshire Boulevard, Suite 1430, Los Angeles, California, and comprise
approximately 1,910 square feet. Our subsidiary, Globalfare.com, is also located
at 6336 Wilshire Boulevard, Los Angeles, California. Now Solutions is
headquartered at 201 Main Street, Suite 1455, Fort Worth, Texas, and comprises
approximately 3,223 sq ft. feet. In addition, Now Solutions has offices at 1001
Marina Village Parkway, Alameda, California and 6205 Airport Road, Building B,
Suite 100, Mississauga, Ontario, Canada, which comprise 2,895 and 2,600 square
feet, respectively. All of the locations are leased from third parties and the
premises are in good condition. We believe that our facilities are adequate for
our present needs and our near term growth, and that additional facilities will
be available at acceptable rates as we need them.
ITEM 3. 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 Vertical Computer.
In addition, we are involved in the following 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 that the plaintiffs
sustained damage as a result of an alleged improper rescission of a subscription
agreement based on a November 1999 private placement memorandum. Plaintiffs seek
in excess of $18 million in damages based on the alleged increase in value of
the stock since the private placement. We believe this matter is without merit
and we intend to vigorously defend this action.
A second matter, entitled LE SOCIETE FRANCAISE DE CASINOS V. VERTICAL
COMPUTER SYSTEMS, INC., was filed in Los Angeles County, California, Superior
Court, on January 19, 2001. This action was filed by a former customer ("Le
Societe") of Externet World, Inc., a wholly owned subsidiary, which claimed that
Vertical Computer was liable to it for in excess of $500,000 in costs allegedly
paid for an Internet casino software package to be developed and maintained by
Externet World, Inc. The plaintiff also alleged that Vertical Computer has
breached an agreement to pay the disputed sums flowing out of its October 2000
settlement of litigated matters with two former shareholders of Vertical
Computer. A settlement agreement has been executed and a dismissal was filed in
January 2002. As part of the settlement agreement, the parties agreed that Le
14
Societe received $400,000 and the remaining $100,000 held in escrow, net of
approximately $35,000 in other costs, was distributed 60% to Vertical Computer
and 40% to Externet World, Inc.
On April 10, 2002, Vertical Computer appointed a fifth representative
to the Now Solutions' Executive Committee. On April 12, 2002, Vertical Computer
received a letter from Arglen Acquisitions LLC, a member of Now Solutions LLC,
accusing Vertical Computer 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 Vertical Computer's ownership interest in Now Solutions at a
discounted price. On May 8, 2002, Vertical Computer demanded arbitration from
Arglen Acquisitions seeking to enforce its rights under the Operating Agreement,
including the appointment of the fifth representative to the Now Solutions'
Executive Committee. On May 9, 2002, Arglen Acquisitions filed a Demand for
Arbitration and Statement of Claim against Vertical Computer. In its demand,
Arglen Acquisitions alleged that Vertical Computer is in default of its
obligations under the Operating Agreement. Arglen is seeking to enjoin Vertical
Computer 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
Vertical Computer's interest in Now Solutions. Vertical Computer believes these
allegations are without merit. Vertical Computer intends to defend its rights
and to assert its own claims against Arglen Acquisitions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the three
months ended December 31, 2001.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common equity is traded on the Over-The-Counter Bulletin Board
("OTCBB") under the symbol "VCSY." Initial trading on the OTCBB commenced in
October 1999. Vertical Computer's common stock traded on the `pink sheets' prior
to that date.
The following is the range of high and low closing prices of our stock,
for the periods indicated below. As of April 16, 2002, there were approximately
973 holders of record of our common stock. This information was obtained from
the Pink Sheets, LLC.
HIGH LOW
---- ---
Quarter Ended March 31, 2002 $0.027 $0.0101
Quarter Ended December 31, 2001 $0.0175 $0.0100
Quarter Ended September 30, 2001 $0.0380 $0.0120
Quarter Ended June 30, 2001 $0.0910 $0.0350
Quarter Ended March 31, 2001 $0.1200 $0.0550
Quarter Ended December 31, 2000 $0.2250 $0.0440
Quarter Ended September 30, 2000 $0.6200 $0.1750
Quarter Ended June 30, 2000 $1.0700 $0.3800
Quarter Ended March 31, 2000 $0.6500 $0.0375
The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
Vertical Computer paid dividends on outstanding Series A Preferred
Shares in the amounts of $111,111 and $100,000 in 2000 and 2001, respectively.
Vertical Computer presently intends to retain future earnings, if any, to
provide funds for use in the operation and expansion of its businesses.
Accordingly, Vertical Computer does not anticipate paying cash dividends on its
common stock in the near future.
UNREGISTERED SALES OF SECURITIES
During January and February of 2000, Vertical Computer raised $700,000
upon the exercise of 20,000,000 outstanding warrants to purchase an equal number
of shares of common stock (based on Vertical Computer's post-split in February,
2000). The warrants were issued in connection with Vertical Computer's Private
Placement that took place during November 1999.
15
In February 2000, Vertical Computer completed a 20-for-1 forward stock
split. All shares have been adjusted to reflect the stock split.
In February 2000, Vertical Computer reached an agreement with Marc
Elalouf, a shareholder of Externet World, in which 246,470,580 shares of common
stock were cancelled. Vertical Computer also recorded an additional $11,000 for
a receivable due from the former owner.
In February 2000, Vertical Computer raised $10,000,000, less $1,000,000
in offering costs received by Avenel Financial Group ("Avenel") through the
issuance of 50,000 shares of Series A 4% Convertible Preferred Stock of Vertical
Computer to International Internet and Lakewood Development Corporation. Each
share of Series A 4% Convertible Preferred Stock is convertible into 500 shares
of Vertical Computer common stock after February 28, 2001. In connection with
the issuance of the Series A 4% Convertible Preferred Stock, Vertical Computer
also granted Avenel warrants to acquire 1,000,000 common stock shares of
Vertical Computer at a strike price of $1.00.
In March 2000, Vertical Computer raised $1,000,000 from the sale of
1,000,000 shares of common stock upon the exercise of 1,000,000 common stock
purchase warrants at an exercise price of $1.00 per share by Avenel Financial
Group.
In April 2000, Vertical Computer acquired Globalfare.com ("GFI"), an
on-line travel agency formerly based in Las Vegas, Nevada. Vertical Computer
issued 5,945,299 shares of its common stock to the former GFI shareholders to
acquire all of the outstanding common stock of GFI.
In May 2000, Vertical Computer acquired, by merger, Scientific Fuel,
Inc., ("SFI"), a public shell company. Vertical Computer issued 2,000,000 shares
of its common stock to the former SFI shareholders to acquire all of the
outstanding common stock of SFI.
In June 2000, Vertical Computer acquired Pointmail.com, Inc. ("PMI"), a
company that was in the process of developing an Internet e-mail system.
Vertical Computer issued 1,000,000 shares of its common stock to the former PMI
shareholders to acquire all of the outstanding common stock of PMI.
In September 2000, Vertical Computer entered into a agreement with
Avenel Alliance in which "Avenel" provided business development and marketing
services to Vertical Computer in exchange for $5,000 per month, a commission of
6% of all profits created by Avenel marketing efforts, the issuance of 500,000
shares of Vertical Computer's common stock and 4 year warrants to purchase
7,000,000 shares of common stock. The warrants have a strike price of $0.35 per
share and vested at the rate of 583,333 per month, beginning in September 2000.
All warrants have vested. This agreement has expired.
In October 2000, Vertical Computer sold its wholly owned subsidiary,
Externet World, Inc., for $1,200,000 to Eurovest, Inc., a company of which Terry
Washburn, a former member of Vertical Computer's Board of Directors, is an
executive officer. Eurovest subsequently sold Externet World to two former
shareholders of Vertical Computer and received 147,350,980 shares of Vertical
Computer's common stock. As part of a settlement agreement, 144,850,000 common
stock shares were cancelled and 2,000,980 shares were retained in trust for
Vertical Computer. As part of the transaction, Eurovest received fees of $72,000
and 500,000 shares of Vertical Computer's common stock.
In October 2000, Vertical Computer entered into a marketing agreement
with Xatnu, Inc. in which "Xatnu" was to provide a national television and radio
campaign in exchange for commencement fees of $92,750 and the issuance of
379,688 shares of Vertical Computer's common stock at $0.16 a share. Per the
agreement, all of the shares issued were to be sold into the market within 6
months of grant and if the total proceeds were less than $60,750, Vertical
Computer was required to pay the remaining amount to Xatnu. Vertical Computer
also issued 1-year warrants to acquire 250,000 shares of common stock and
250,000 shares with 5-year warrants to Michael Blum and Phil Alexander, at a
strike price of $0.16 a share. Two thirds of the options were issued to Blum and
one third of the options were issued to Alexander. The 1-year warrants for
250,000 shares of common stock expired in October 2001.
In December 2000, Vertical Computer entered into a month-to-month
agreement with Strategic Media Alliance, Inc., whereby Vertical Computer would
pay a monthly retainer fee of $10,000 in cash and would issue 3-year warrants
for 45,455 shares of common stock at a strike price of $0.11 per share for
marketing services. As of December 2001, 590,915 warrants have been issued and
the agreement is still in effect. In January 2002, Vertical Computer and
Strategic Marketing Alliance agreed to terminate Vertical Computer's interest in
the WorldBridge Webcasting LLC in consideration for credit on Vertical
Computer's account with Strategic Media Alliance whereby it will continue to
provide consulting services through 2002. In addition, Strategic Media Alliance
will receive 3-year warrants to purchase stock equal to $5,000 per month, based
16
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 with Strategic Media
Alliance beginning in February 2002.
In January 2001, Vertical Computer issued warrants to purchase 45,704
shares of common stock at a strike price of $0.1094 per share to Mark Kellner
for business services.
In February 2001, Vertical Computer issued 5-year warrants to purchase
500,000 shares of common stock at a strike price of $0.086 to Coffin
Communications Group for investment relations' services.
In February 2001, Vertical Computer issued 3-year warrants to purchase
250,000 shares of common stock at a strike price of $0.086 per share to Gary
Blum for legal services.
In February 2001, Vertical Computer agreed to pay Donald Hateley, a
financial advisor, for services rendered in connection with the purchase of
Vertical's purchase of 60% of Now Solutions, LLC, a fee in the amount of 5% of
the aggregate consideration in connection with the transaction and 5-year
warrants to purchase 1,000,000 shares at a strike price of $0.076 per share. The
warrants were issued in March 2001.
In March 2001, Arglen Acquisitions, LLC, which facilitated the Now
Solutions' transaction and acquired a 30% interest in Now Solutions for services
provided, received warrants of Vertical Computer to purchase 5% of the total
outstanding stock of Vertical Computer or the initial grant of 30,763,943
shares. If, during the last 90 trading day period of the first year from the
date the issuance of the initial set of options, the per share value of Vertical
Computer's shares, adjusted for any forward or reverse splits and any other
dilutive effect, is less than $0.50, then Arglen will be entitled to an
additional 25,000,000 warrants to purchase common shares. If, during the last 90
trading day period of the second year from the date the issuance of the initial
set of options, the per share value of Vertical Computer, adjusted for any
forward or reverse splits and any other dilutive effect, is less than $1.00,
then Arglen, provided it has not exercised and sold more than 25% of the
55,763,943 shares underlying the previous stock warrants, shall be entitled to
an additional 25,000,000 warrants to purchase common shares. The exercise price
of the warrants will be $0.08, and the warrants shall be exercisable for a
period of 5 years from the date the shares underlying the warrants are
registered with the Securities and Exchange Commission or an exemption from
registration becomes available. Pursuant to the terms of the operating agreement
of NOW Solutions, Vertical Computer's interest in NOW Solutions will be reduced
to 51% over three years as employees of NOW Solutions will be entitled to
receive shares of NOW Solutions' common stock. The NOW Solutions' purchase was
accounted for under the purchase method of accounting, with cash of $5,100,000
paid to Ross and a note payable of $1,000,000 due to Ross. Vertical Computer
Systems incurred $667,000 for Arglen's 30% interest in NOW Solutions, $798,000
for the value of the Vertical Computer warrants issued to Arglen (valued using
the Black-Scholes valuation model), $3,800,000 for intangible assets, and
$229,000 in a finders fee and professional charges, $1,800,000 in goodwill, all
included as part of the purchase price. Vertical Computer and NOW Solutions
recognized approximately $7,294,000 of goodwill and other intangible assets in
connection with the purchase, which were being amortized over a three to eight
year period.
In May 2001, Vertical Computer agreed to pay $1,000 in cash and
warrants to purchase 16,667 shares of common stock per month to Robert Wagman to
provide managing editor services for on-line content on a month-to-month basis.
As of December 2001, 133,336 warrants have been issued. The Agreement terminated
in December 2001.
In May 2001, Vertical Computer issued 3-year warrants to purchase
1,000,000 shares of common stock at a strike price of $0.05 per share for an
exclusive license of a patent-pending fiber optic image encoding technology
created and owned by Aluizio Cruz.
In April 2001, Vertical Computer issued Stephen Gunn 3-year warrants to
purchase 250,000 shares of common stock at a strike price of $0.06 per share in
consideration for services provided as the Chief Financial Officer of Vertical
Computer.
In June 2001, Vertical Computer issued 3-year warrants to purchase
846,000 shares of common stock at a strike price of $0.050 per share to the
three individuals in connection with the formation of the Wireless Learning LLC.
The holders of these warrants are Robert Langworthy, Igo Shoifot, and Alexander
Sergeev in equal amounts. In addition, Vertical Computer issued 3-year warrants
to purchase 54,000 shares of common stock at a strike price of $0.05 per share
to Taurus Global in connection with the formation of the Wireless Learning LLC.
In June 2001, Vertical Computer issued 3-year warrants to purchase
5,000,000 shares of common stock at a strike price of $0.037 per share for legal
services performed by Gary Blum.
17
In June 2001, Vertical Computer issued 3-year warrants to purchase
5,000,000 shares of common stock at a strike price of $0.05 per share to Chuck
Ashman for business and marketing consulting services.
In July 2001, Vertical Computer agreed to pay $4,500 per month to
Stephen Rossetti to provide government business consultation services on a
month-to-month basis. In addition, the consultant is entitled to receive 3-year
warrants to purchase common stock equal to $5,500 per month based on a strike
price of the previous average five day market price on the date of issuance. As
of December 2001, 1,732,288 warrants have been issued and the agreement was
still in effect.
In July 2001, Vertical Computer entered into two consulting agreements
with Taurus Global, LLC and M.S. Farrell & Co., Inc., in which Vertical Computer
agreed to issue approximately $200,000 in common stock to each consultant for
business advisory services. Twenty percent of the common stock was due on the
agreement date, with an additional 20% due on the 30th and 60th day subsequent
to the agreement date and the remaining 40% due on the 90th day subsequent to
the agreement date. The number of shares to be issued to each consultant will be
determined on the date each consulting fee is due. These shares were registered
pursuant to the Form S-8 filed on July 13, 2001 and November 2001. Vertical
Computer is also obligated to issue warrants to purchase 500,000 shares of
common stock to each consultant. As of December 31, 2001, Vertical Computer had
issued 10,081,152 shares of its common stock in exchange for the consulting
services provided and 1,000,000 warrants. The warrants have vested and are
exercisable for five years from issuance at a strike price equal to the fair
market value of Vertical Computer's common stock on the day of grant. As of
December 31, 2001, Vertical Computer recognized approximately $248,000 in
consulting expenses in relation to the common stock issued and $10,000 for the
value of the warrants (the warrants were valued using the Black-Scholes
valuation model).
In August 2001, Vertical Computer entered into an Equity Line of Credit
agreement, whereby up to $10,000,000 of common stock may be purchased. The
shares must be registered before sale and the shares can be purchased at 95% of
the closing bid price, on the date of purchase. The equity line of credit
contains a fee of $392,000 payable in common stock. In September 2001, Vertical
Computer issued 7,142,857 shares of common stock or $200,001 (fair market value
of shares issued) of the fee. 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. To date, no shares have been purchased under the Equity Line of
Credit.
In August 2001, Vertical Computer issued 30,000 shares of its Series C
4% Cumulative Convertible Preferred Stock to acquire all of the outstanding
common stock of EnFacet, Inc. ("EnFacet"), a company involved in the development
of Website management software. The Series C 4% convertible stock eliminates on
consolidation, since the shares were issued to EnFacet. As per the agreement,
EnFacet is required to distribute 15,000 shares to those employees still
employed by EnFacet, one year from the anniversary date of the agreement. At
that time the remaining shares may be used by EnFacet to acquire additional
funding. The fair value of the liabilities assumed by Vertical Computer
approximated $428,000, which was off set by assets with an approximate fair
value of the same amount. The Series C 4% Preferred Stock is convertible into
shares of common stock at a ratio of one to four hundred. Dividends on the stock
are cumulative and accrue on a quarterly basis. In the event of a voluntary or
involuntary liquidation, the Series C 4% shareholders are entitled to a
liquidation preference of $100 per share.
In September 2001, Vertical Computer issued 3-year warrants to purchase
2,500,000 shares of common stock at a strike price of $0.025 to individuals
affiliated with EnFacet, Inc. in order to retain their services. The holders of
these warrants are Chuck Kinsicki, Leroy Molock, Aubrey McAuley, Vasu Vijay,
Justin Davis, Jacob Stearns, Annette Keith and Allison Enderle.
In September and October 2001, Vertical Computer issued $125,000 and
$140,000 of convertible debentures, respectively. The debt accrues interest at
6% per annum and is due October 2006. The debentures are convertible into shares
of common stock at either 120% of the closing bid price on the date of agreement
or 80% of the 3 lowest closing bid prices 20 days prior to the conversion. The
debenture is convertible at the option of the holder, any time after purchase.
Vertical Computer has recognized $66,250 as interest expense in relation to the
beneficial feature conversion of the debentures. As of December 31, 2001, no
conversions have taken place.
In October 2001, Vertical Computer executed a $100,000 promissory note
with an unrelated party. The note bears interest at 12% per annum and all unpaid
principal and interest was due February 2002. The note is secured by third party
securities owned by Vertical Computer, which it intends to sell in order to
repay the loan and by a pledge against the loan by the Mountain Reservoir Corp.,
to sell up to 5,225,000 shares of common stock owned by Mountain Reservoir Corp.
to cover any shortfall. 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. In April 2002, Vertical Computer
entered into an amendment agreement whereby Vertical and the third party waived
any default and agreed to continue to sell the 400,000 shares of eResource
Capital Group stock, which Vertical pledged pursuant to the Stock Pledge
Agreement as collateral. Vertical Computer further agreed to use the proceeds of
18
the eResource Capital Group sales of stock to reduce the obligations under the
note accordingly. Pursuant to this amendment, Vertical agreed to make a minimum
payment of no less than $31,500 by April 5, 2002, a payment of $8,500 by April
6, 2002, ten (10) weekly installment payments of $6,000 beginning on April 15,
continuing until all principal then outstanding with all interest, fees,
charges, and other amounts owing hereunder and then unpaid by June 2002. The
first $6,000 payment has not been paid and the Company is negotiating an
extension.
In November 2001, Vertical Computer executed a $100,000 promissory note
with an unrelated party. The note bears interest at 12% per annum and all unpaid
principal and interest was due February 2002. The note is secured by third party
securities owned by Vertical Computer, which it intends to sell to repay the
loan, and by a pledge against the loan by Mountain Reservoir Corp., to sell up
to 5,225,000 shares of common stock owned by Mountain Reservoir to cover any
shortfall. In January 2001, Vertical Computer executed indemnity and
reimbursement agreements with Mountain Reservoir Corporation to cover the
10,450,000 shares of stock pledged by Mountain Reservoir with regard to the
October and November 2001 notes, whereby Vertical Computer would reimburse
Mountain Reservoir with an 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. Mr. Wade, the President and CEO
of Vertical Computer Systems, is the trustee of the W5 Family Trust. In April
2002, Vertical Computer entered into an amendment agreement concerning the note,
whereby Vertical and the third party agreed waive any default and Vertical
agreed to make monthly installment payments in the amount of $7,500 each on the
fifteenth day of each month, beginning in May 2002. Pursuant to this amendment,
all principal then outstanding, and all interest, fees, charges, and other
amounts owing hereunder and then unpaid shall be paid by the end of September
2002. The first $7,500 payment has not been paid and the Company is negotiating
an extension.
Also in November 2001, Vertical Computer purchased various assets of
Adhesive Software, Inc. for $100,000, 50,000 shares of Series C 4% Convertible
Preferred Stock and a promissory note for $280,000, which was issued in October
2001. The note bears interest at 4% per annum and has average monthly principal
and interest payments of $9,375 through out the term of the note. All unpaid
amounts are due September 2004. The note is secured by certain assets of
Vertical Computer. In April 2002, Vertical Computer entered into an amendment
agreement concerning the note, whereby Vertical and the third party agreed to
extend the date for which the remaining three (3) $5,000 installment payments
would be due to the first day of each month, beginning in May 2002 and the time
to pay all remaining $10,000 installments was extended so that each $10,000
installment would be due and payable on the first day of each month beginning on
August 1, 2002, and will continue until the principal has been paid in full.
In November 2001, Vertical Computer issued 3-year warrants to purchase
300,000 shares of common stock at a strike price $0.014 to Parker, Mills &
Patel, LLP, in consideration for making loans to advance funds to certain
vendors on behalf of Vertical Computer.
In December 2001, Vertical Computer executed an employment agreement
with Richard Wade to become CEO and President of Vertical Computer. Pursuant to
the terms of the agreement, Mr. Wade will receive an annual base salary of
$300,000, and the issuance of 5-year warrants to purchase 20,000,000 shares of
common stock at a strike price of $0.10 per share and 5-year warrants to
purchase 600,000 shares of stock at a strike price of $0.10 per share.
In December 2001, Vertical Computer executed a $425,000 note payable
with a third party. Vertical Computer received proceeds of $300,000 and paid a
commitment fee of $125,000. The note accrues interest at 12% per annum and was
due January 31, 2002. The note is secured by 36,303,932 shares of common stock
of Vertical Computer that is owned by Mountain Reservoir Corporation, and
15,000,000 shares of common stock of Vertical Computer that is owned by Mr.
Valdetaro, Vertical Computer'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 Vertical Computer
Systems, is the trustee of the W5 Family Trust. In January 2001, Vertical
Computer 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,
Vertical Computer agreed to reimburse Mountain Reservoir and Mr. Valdetaro for
any shares sold as collateral to cover the default of any loan. The Note is
currently in default and the collateral is currently being transferred to
Vertical Computer's account to cover the amounts currently due.
In December 2001, Vertical Computer entered into an option agreement
with iNet Purchasing ("iNet") to purchase an additional interest in iNet in
April 2002 (Vertical Computer is currently negotiating to extend this date),
whereby Vertical Computer would obtain an aggregate 56% ownership interest in
iNet pursuant to the Stock Purchase Agreement and the Stockholder's Agreements.
In accordance with the option agreement, Vertical Computer shall 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.
Vertical Computer has paid a total of $112,500 and intends to offset the
19
remaining balance against amounts owed by iNet pending a final accounting. The
options are vested, have a strike price of $0.01, and are exercisable for a
three year period. Pursuant to the terms of the Stock Purchase Agreement and the
Stockholders Agreements, if Vertical Computer exercises its option to obtain a
majority interest in iNet in April 2002 (Vertical Computer is currently
negotiating to extend this date), Vertical Computer shall pay to iNet $860,000
in cash or marketable securities, 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 shares of common stock each to Nikas and
Mattern and 2,000,000 common stock shares to Savage. The strike price is the
closing price of Vertical Computer common stock on the date of January 6, 2002,
and, in the event that Vertical Computer does not acquire a majority interest in
iNet, these options and warrants will be automatically cancelled.
In January 2002, Vertical Computer and Taurus Global LLC agreed to
extend the July 2001 consulting services agreement for 6 months. In
consideration of Taurus Global services, Vertical Computer 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 Vertical Computer's common stock on the date of grant. Vertical
Computer 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 Vertical Computer shall pay the difference in profit or
loss, as applicable, at the end of the term.
In January 2002, Vertical Computer executed indemnity and reimbursement
agreements with Mountain Reservoir Corporation to cover the 10,450,000 shares of
stock pledged by Mountain Reservoir Corporation with regard to the October and
November 2001 notes, whereby Vertical Computer 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. is a
corporation controlled by the W5 Family Trust, of which Mr. Wade is a trustee.
Mr. Wade is President and a Director of Vertical Computer.
In January 2002, Vertical Computer 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 Vertical Computer would reimburse
Mountain Reservoir Corporation and Valdetaro with the respective number of
shares equal to any shares sold as collateral to cover the default of any loan.
The Note is currently in default and the collateral is currently being sold by
the lender account to cover the amounts currently due. Mountain Reservoir Corp.
is a corporation controlled by the W5 Family Trust, of which Mr. Wade is a
trustee. Mr. Wade is President and a Director of Vertical Computer.
In March 2002, Vertical Computer issued a $100,000 convertible
debenture. The debt accrues interest at 5% per annum and is due April 2004. The
debenture is convertible into shares of common stock at either 120% of the
closing bid price on the date of agreement or 80% of the lowest closing bid
prices 5 days prior to the conversion. The debenture is convertible at the
option of the holder, any time after purchase. The holder of the debentures is a
third-party individual. As of April 15, 2002, no conversions have taken place.
In April 2002, a $180,000 note that bears interest at 12% per annum,
which Vertical issued in August 2001 and which was due February 2002, was
amended such that the amount on the note was increased to $211,136 and the
maturity date was extended so that the note will be payable in August 2002. In
addition, interest on $146,420 will accrue beginning on August 17, 2001 and
interest on the remaining $64,716 will accrue beginning on September 27, 2001.
In connection with the note, Vertical Computer issued warrants to purchase
500,000 shares of its common stock. Vertical Computer pledged third party
securities of eResource Capital Group that is holds. These shares are available
for sale as collateral for the note. The warrants vested immediately, have a
strike price of $0.028 per share and are exercisable for three years from
issuance. The value of the warrants, $5,000 (valued using the Black-Scholes
valuation model) has been deferred and will be amortized over the term of the
loan.
Unless otherwise noted, the sales set forth above involved no
underwriter's discounts or commissions and are claimed to be exempt from
registration with the Securities and Exchange Commission pursuant to Section 4
(2) of the Securities Act of 1933, as amended, as transactions by an issuer not
involving a public offering, the issuance and sale by Vertical Computer of
shares of its common stock to financially sophisticated individuals who are
fully aware of Vertical Computer's activities, as well as its business and
financial condition, and who acquired said securities for investment purposes
and understood the ramifications of same.
20
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS OF VERTICAL COMPUTER AND THE NOTES THERETO
APPEARING ELSEWHERE IN THIS FILING. STATEMENTS IN THIS MANAGEMENT'S DISCUSSION
AND ANALYSIS OR PLAN OF OPERATION AND ELSEWHERE IN THIS PROSPECTUS THAT ARE NOT
STATEMENTS OF HISTORICAL OR CURRENT FACT CONSTITUTE "FORWARD-LOOKING
STATEMENTS."
OVERVIEW
Vertical Computer is a multinational provider of Web services,
underpinning Web technologies, and administrative software services through a
global partner distribution network. Web services involve the outsourcing of the
daily information technology requirements of consumer, business and governmental
entities via the Internet. Underpinning Web technologies are the foundation
technologies used to build Web services, permitting the rapid development and
deployment of all systems. Administrative software services are software
products, such as human resources or procurement, that provide basic
functionality to any operational entity.
Vertical Computer attempts to acquire and operate companies whose
products, in Vertical Computer's belief: are proven and best of the breed; are
profitable or on the path to profitability; complement each other; and provide
cross-product distribution channels. Vertical Computer's business model combines
complementary, integrated Web services, a multinational distribution system of
local partners, and underpinning Web technologies to create a distribution
matrix that it believes are capable of penetrating multiple sectors through
cross promotion.
WEB SERVICES
Web services encompass a full range of services from the simple
Web-unique application of instant messaging to complex administrative services,
such as converting accounting software into an application service provider. An
application service provider is a company that offers individuals or enterprises
access over the Internet to applications and related services that would
otherwise have to be located in their own person or enterprise computers.
Vertical Computer's Web services derive from a full range of
administrative software services controlled by Vertical Computer that will be
converted into specialized Web services that Vertical Computer has developed
independently or acquired. Vertical Computer's ownership interest is typically a
controlling interest. In most cases, the administrative software services will
retain their historic client-server based customers even though a Web service
has been developed for those customers and new customers. Vertical Computer's
current Web services address the following market segments:
[Enlarge/Download Table]
WEB VERTICAL
MARKET PRODUCT SERVICES OWNERSHIP COMPUTER %
------ ------- -------- --------- ----------
Application Platform Bridges Yes Vertical Computer 100%
Database connect XML Emily Agent Yes Vertical Computer 100%
Emily XML Scripting Language EMILY Yes Vertical Computer 100%
Publishing Content NewsFlash No Vertical Computer 100%
Higher Education UniversityFlash No Vertical Computer 100%
Franchises/Independent Agent AffiliateFlash Yes Vertical Computer 100%
Emergency Management ResponseFlash Yes Vertical Computer 100%
Public Sector e-Procurement Service INet Yes iNetPurchasing 2.5%
Human Resources HRIS No Now Solutions 60%
Travel Globalfare Yes Vertical Computer 100%
Smart Cards ApolloSmart Yes Vertical Computer 30%
UNDERPINNING WEB TECHNOLOGIES
Underpinning Web technologies provide the software foundation to
support: Internet-based platforms for the delivery of Web services; individual
software products that can be sold independently or combined with another
software product; and rapid deployment of all Web services and software products
throughout Vertical Computer's distribution system.
21
Vertical Computer's first underpinning Web technology is the patent
pending Emily XML scripting language. XML (Extensible Markup Language) is a
flexible way to create common information formats and share both the format and
the date on the World Wide Web, intranets, and elsewhere. For example, computer
makers might agree on a standard or common way to describe the information about
a computer product (processor speed, memory size, and so forth) and then
describe the product information format with XML. Such a standard way of
describing data would enable a user to send an intelligent agent (a program) to
each computer maker's Web site, gather data, and then make a valid comparison.
XML can be used by any individual or group of individuals or companies that want
to share information in a consistent way. Emily Scripting Language has recently
been upgraded to be Java compatible. Java is a programming language expressly
designed for use in the distributed environment of the Internet. Java can be
used to create complete applications that may run on a single computer or be
distributed among servers and clients in a network. The Emily XML Automation
Toolkit for Java is currently in its final testing phase, in preparation for
release in the first quarter of 2002. Utilizing Emily, Vertical Computer
developed two products, the Emily Agent and Broker, which are now jointly
marketed with iNetPurchasing, Inc. as part of the State of Texas' new
e-procurement system. Dr. Charles Goldfarb, recognized authority of Markup
Languages, has included a chapter on Emily and its application, relative to the
State of Texas procurement system, in the 4th Edition of the XML Handbook.
Vertical Computer's second underpinning Web technology is SiteFlash.
The SiteFlash technology utilizes XML and publishes on the Web, enabling the
user to build and efficiently operate Web services with the unique ability to
separate form, function, and content on the Web. This unique ability is patent
pending and has many applications in the Web arena. SiteFlash technology focuses
on content management, e-commerce, and workflow and has led to the development
of four additional products: NewsFlash, UniversityFlash, AffiliateFlash, and
ResponseFlash. ResponseFlash is currently being implemented with the
Metropolitan Emergency Communications Agency in Indianapolis and Marion County,
Indiana. UniversityFlash is being used in higher education (e.g., California
State University), NewsFlash can be used for newspapers (e.g., LA OPINION), and
SiteFlash is for use by consulting organizations (e.g., Infotec). SiteFlash
architectural concepts enable integration with existing technological components
within many organizations. Additional key features that differentiate SiteFlash
from other products are its affiliation/syndication capability, its
multi-lingual capability and its multi-modal (any output device including PDAs,
wireless phones, etc) framework. Vertical Computer offers SiteFlash as a
stand-alone product and also as a technology platform for products designed for
specific vertical markets.
ADMINISTRATIVE SOFTWARE SERVICES
Administrative software services as adapted to an application service
provider on the Web are a sub-set of Web services. These services include
procurement, scheduling, travel management, payroll, financial and other common
functions. A majority of Vertical Computer's administrative software services
are Web-enabled, meaning that they can be accessed on the Internet. Exploratory
analysis is being done to develop an application service provider application
for human resource information service software. Vertical Computer believes that
its administrative software services provide upfront cost savings and
productivity increases for everyday operations with competitive set-up charges
and implementation times.
GLOBAL PARTNERS SYSTEM
Vertical Computer's Global Partners System is intended to create export
markets for Web services, administrative software services and Web technologies
through the use of Websites with local country partners. The Global Partners
System is currently composed of three countries, India, Brazil and Korea.
Vertical Computer's initial strategy is to develop Web services in one of the
original Global Partner's countries to demonstrate the strength of the
distribution system. The foreign partner has the option either to market the Web
services directly or to subcontract the Web services to a local entity with
particular expertise in that specific field. The ultimate objective of the
Global Partners System is to demonstrate the strength of the local partner when
marketing the best-of-breed Web service in that respective country by selling
its products against those offered by competing companies.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
TOTAL REVENUES. Vertical Computer had total revenues of $4,156,088 in
the year ended December 31, 2001. Total revenues primarily consist of software
license, consulting and maintenance fees. Substantially all of these revenues
relate to the business operations of NOW Solutions, a subsidiary in which
Vertical Computer owns a 60% interest. Vertical Computer acquired the 60%
interest in NOW Solutions in February 2001. As a result, Vertical Computer's
operating results for the corresponding period in the prior year excluded the
results of operations of NOW Solutions. Vertical Computer had other revenues of
$137,451 for the year ended December 31, 2000.
22
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Vertical Computer had
selling, general and administrative expenses of $13,296,508 and $5,865,898 in
the years ended December 31, 2001 and 2000, respectively. This increase of
$7,430,610 was primarily attributable to $4,608,000 from the operations of NOW
Solutions, the amortization of $1,252,000 for goodwill and software costs, an
increase in the write off of certain investments of $610,000, an increase in
attorney fees of approximately $560,000 primarily related to fund raising
activities, patents and trademarks and settlements of lawsuits, and $400,000
related to administrative fees associated with the Cornell Capital Line of
Credit Agreement.
OPERATING LOSS. Vertical Computer had an operating loss of $9,140,420
and $5,728,447 in the years ended December 31, 2001 and 2000, respectively. This
increase of $3,411,973 was primarily attributable to the $7,430,610 increase in
selling, general and administrative expenses partially offset by the $4,018,637
increase in revenues in the current period.
INTEREST EXPENSE. Vertical Computer had an interest expense of $724,489
in the year ended December 31, 2001. This increase expense related to the
increase in long and short term financing of approximately $7,500,000 which was
used to acquire NOW Enfacet and the Adhesive software assets and to fund ongoing
operations during the current period.
MINORITY INTEREST IN LOSS OF SUBSIDIARY. The minority interest in loss
of subsidiary was $667,667 for the year December 31, 2001. This increase was
primarily attributable to Vertical Computer's acquisition of a 60% interest in
NOW. The $667,667 represents the minority shareholder's 40% share of the net
loss from NOW limited to the total amount of their investment.
NET LOSS. Vertical Computer had a net loss of $9,032,895 and $4,865,195
in the years ended December 31, 2001 and 2000, respectively. This increase of
$4,167,700 was primarily attributable to the increase of $7,430,610 in selling,
general and administrative expenses, as well as interest expense of $724,489.
These expenses were partially offset by increased revenue of $4,018,637 in the
current year.
DIVIDENDS APPLICABLE TO PREFERRED STOCK. Vertical Computer has
outstanding Series A 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 was $513,712 in the year ended December 31, 2001. Vertical
Computer has outstanding preferred stock that accrues dividends at a rate of
four percent on a quarterly basis. These dividends are cumulative. These accrued
dividends are reflected in the dividends applicable to preferred stock.
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS. Vertical Computer had a net
loss available to common stockholders of $9,546,607 and $15,053,907 in the years
ended December 31, 2001 and 2000, respectively. This decrease of $5,507,300 is
primarily attributable to a deemed dividend of $10,000,000 on the issuance of
Series A Preferred Stock in the comparable period in the prior year. Excluding
the deemed dividend, net loss available to common stockholders increased
$4,492,700 in the year ended December 31, 2001 over the comparable period in the
prior year. This increase was primarily attributable to the increase of
$7,430,610 in selling, general and administrative expenses, as well as interest
expense of $724,489. These expenses were partially offset by increased revenue
of $4,018,637 in the current year.
23
Vertical Computer primarily used the cash received from financing
arrangements to fund investing activities for the fiscal year 2001. During 2001,
Vertical Computer acquired a 60% interest in NOW, 100% of Enfacet, certain
assets of Adhesive Software, Inc, and suspended operations of Globalfare.com. As
a result, Vertical Computer believes that period-to-period comparisons of our
results of operations are not necessarily meaningful and should not be relied
upon as any indication of future performance. Operating results may also
fluctuate due to the following factors:
o Demand for products and services;
o Mix of products sold;
o Introduction, localization or enhancement of Vertical Computer's
products and competitors' products;
o General economic conditions;
o Market acceptance of existing and new products; or
o Changes or anticipated changes in Vertical Computer's pricing or
that of our competitors.
o Reviews in industry press concerning our products or our
competitors; and
o Mix of distribution channels through which products are sold.
FINANCIAL CONDITION, LIQUIDITY, CAPITAL RESOURCES AND RECENT DEVELOPMENTS
Presently, Vertical Computer is entirely dependent on external cash to
fund its operations. In the past, Vertical Computer has financed its operations
through the sale of securities, including, without limitation, common and
preferred stock and convertible securities, and loans. Vertical Computer's cash
position remains uncertain. At December 31, 2001, Vertical Computer had
cash-on-hand of $845,459. Since December 31, 2001, Vertical Computer has
received gross proceeds of $280,000 from the sale of convertible debentures. As
of the date of this filing, Vertical Computer believes that it has sufficient
funds available to fund its operations for two months. Thereafter, Vertical
Computer will need to raise additional funds from the sale of securities or
loans. Vertical Computer's inability to raise such funds will jeopardize its
ability to continue operations. Vertical Computer's primary need for cash is to
fund its ongoing operations until such time that the sale of its products and
services generate enough revenue to fund operations. Vertical Computer's monthly
cost of operations is approximately $250,000 (excluding the operations of Now
Solutions, LLC). In addition to the monthly operating cost, Vertical Computer
24
has principal and interest payments due on notes payable. Below are the minimum
principal payments on notes payable of Vertical Computer, including the year of
payment:
AMOUNT AMOUNT
(INCLUDING NOW (EXCLUDING NOW
YEAR ENDING DECEMBER 31, SOLUTIONS) SOLUTIONS)
------------------------ ------------------ --------------------
2002 $ 5,908,662 $ 1,231,843
2003 1,220,000 299,042
2004 85,000 85,000
----------- -----------
Total $ 7,213,662 $ 1,615,885
=========== ===========
At December 31, 2001, Vertical Computer also had outstanding
convertible debentures with an original principal balance of $265,000. Interest
accrues at a rate of 6% per year. Outstanding principal and interest are due at
maturity in 2006. These debentures are convertible into common stock at a
conversion price of 120% of the closing bid price on the date of agreement or
80% of the 3 lowest closing bid prices 20 days prior to the conversion. The
debentures are convertible at the option of the holder at any time after the
purchase.
Vertical Computer does not have sufficient funds available to meet
these obligations. Vertical Computer will need to raise significant funds to
meet these obligations. Other than the Equity Line of Credit discussed below,
Vertical Computer does not have any commitments for funding. Vertical Computer's
independent accountants have issued a going concern opinion on its financial
statements that raise substantial doubt about Vertical Computer's ability to
continue as a going concern. This going concern opinion was issued due to
Vertical Computer's significant recurring operating losses, the substantial
funds used in its operations and the need to raise additional funds to meet its
obligations. Vertical Computer's ability to continue as a going concern is
dependent on its ability to raise additional funds and to establish profitable
operations.
Effective August 2001, Vertical Computer entered into an Equity Line of
Credit Agreement. Under this agreement, Vertical Computer may issue and sell to
Cornell Capital Partners common stock for a total purchase price of up to $10.0
million. Subject to certain conditions, Vertical Computer will be entitled to
commence drawing down on the equity line of credit when the common stock under
the Equity Line of Credit is registered with the Securities and Exchange
Commission and will continue for two years thereafter. The purchase price for
the shares will be equal to 95% of the market price, which is defined as the
lowest closing bid price of the common stock during the five trading days
following the notice date. The amount of each advance is subject to an aggregate
maximum advance amount of $416,667 in any thirty-day period. Cornell Capital
Partners will retain 4% of each advance. In addition, Vertical Computer entered
into a placement agreement with Westrock Advisors, Inc., a registered
broker-dealer. Pursuant to the placement agent agreement, Vertical Computer will
pay a one-time placement agent fee of 500,000 shares of common stock.
In connection with the purchase of the Human Resource Information
Application Software assets of Ross Systems, Inc., Now Solutions issued a
promissory note to Ross Systems for $1 million and obtained $5.5 million of
notes payable. The $1 million note is due in two payments, the first payment of
$250,000 was due in February 2002 and the final payment of $750,000 is due in
February 2003. The $5.5 million note is due on the earlier of February 2006 or
if terminated, by either party, in accordance with the terms of these
obligations. Vertical Computer had pledged a $1.5 million deposit as collateral
pursuant to a deposit pledge agreement to guarantee the first 24 payments of the
loan to finance the purchase of HRIS. Now Solutions has been notified by the
lender that it is in default of certain covenants contained in these
obligations. Although Vertical Computer believes it is entitled to a portion of
its $1.5 million deposit, it is currently in discussions with the lender to
resolve Now Solutions' default. Until a settlement is reached, the default by
Now Solutions is cured, or Now Solutions continues to makes its payments through
February 2003, or Vertical Computer pursues legal action, Vertical Computer will
not obtain a return of its deposit, or any portion thereof.
Net cash used in operating activities for the year ended December 31,
2001 was $3,693,906. This primarily related to a net loss of $9,032,895, an
increase in accounts receivable of $1,118,623 and a minority interest in loss of
subsidiary of $667,667. These items were partially offset by depreciation and
amortization expense of $1,433,440, non-cash expenses of 2,156,771, an increase
in accounts payable of $1,395,728 and deferred revenue of $2,243,375.
Significant items in net loss included approximately $6,110,000 cost of funding
product development by Vertical Computer, the costs of suspending the operations
of Pointmail and Globalfare, and the costs of supporting the start-up NOW, net
of approximately $2,416,000. Net cash used in investing activities for the year
ended December 31, 2001 was $1,894,109, consisting primarily of the restriction
of cash for a debt guarantee to Coast Bank of $1,500,000, as well as the
purchase of equipment and software of $900,528. These items were partially
25
offset by proceeds received from release of restricted cash from the sale of a
subsidiary of $506,419. Net cash provided by financing activities for the year
ended December 31, 2001 were $834,662, consisting primarily of proceeds from the
issuance of notes payable of $1,572,266 and convertible debt of $265,000. These
items were partially offset by the payment of cash dividends of $100,000 and the
payment of notes payable of $902,604. All of these items resulted in a net
decrease in cash and cash equivalents of $4,753,353 for the year ended December
31, 2001.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board finalized FASB
statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and
Other Intangible Assets (SFAS 142). SFAS 141 also requires the use of the
purchase method of accounting and prohibits the use of the pooling-of-interests
method of accounting for business combinations initiated after June 30, 2001.
SFAS 141 also requires that Vertical Computer recognize acquired intangible
assets meet certain criteria. SFAS 141 applies to all business combinations
initiated after June 30, 2001 and for the purchase of business combinations
completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142,
that Vertical Computer reclassify the carrying amounts of intangibles assets and
goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS 142 requires that Vertical Computer identify reporting units
for the purposes of assessing potential future goodwill, reassess the useful
lives of other existing recognized intangible assets, and cease amortization of
intangible assets with an indefinite useful life. An intangible asset with an
indefinite useful life should be tested for impairment in accordance with the
guidance in SFAS 142 is required to be applied in fiscal years beginning after
December 15, 2001 to all goodwill and other intangible assets recognized at that
date, regardless of when those assets were initially recognized. SFAS 142
requires Vertical Computer to complete a transitional goodwill impairment test
six months from the date of adoption. Vertical Computer is also required to
reassess the useful lives of other intangible assets within the first interim
quarter after adoption of SFAS 142.
During 2001, Vertical Computer's business combinations were accounted
for using the purchase method. As of December 31, 2001, the net carrying amount
of goodwill is $4,277,143 and software costs is $4,018,637. Amortization expense
during the year ended December 31, 2001 was $1,323,221. Currently, Vertical
Computer is assessing but has not yet determined how the adoption of SFAS 141
and SFAS 142 will impact its financial position and results of operations.
26
FACTORS AFFECTING VERTICAL COMPUTER'S BUSINESS, OPERATING RESULTS AND FINANCIAL
CONDITION
We are subject to various risks that may materially harm our business,
financial condition and results of operations. You should carefully consider the
risks and uncertainties described below and the other information in this filing
before deciding to purchase our common stock. If any of these risks or
uncertainties actually occurs, our business, financial condition or operating
results could be materially harmed. In that case, the trading price of our
common stock could decline and you could lose all or part of your investment.
WE HAVE HISTORICALLY LOST MONEY AND LOSSES MAY CONTINUE IN THE FUTURE
We have historically lost money. In the year ended December 31, 2001
and 2000, we had net losses applicable to common shareholders of $(9,546,607)
and $(15,053,907), respectively. Future losses are likely to occur. Accordingly,
we have and may continue to experience significant liquidity and cash flow
problems because our operations are not profitable. No assurances can be given
that we will be successful in reaching or maintaining profitable operations.
WE HAVE A LIMITED OPERATING HISTORY ON WHICH TO EVALUATE US
We have a limited operating history upon which an evaluation of our
business prospects can be based. Our business operations commenced in October
1999. Our prospects must be considered in light of the risks, expenses,
difficulties and uncertainties frequently encountered by emerging growth
companies in new and rapidly evolving markets for Internet based products and
services. Our success will depend, in part, on our ability to:
o attain profitable operations;
o enter into distribution relationships and strategic alliances to
sell our Emily and SiteFlash technology products and applications
and build traffic to our Web sites;
o effectively establish, develop and maintain relationships with
sponsors and other third parties;
o provide original and compelling products and services to Internet
users;
o develop and upgrade our technology;
o effectively respond to competitive developments;
o continue to develop and extend our brand;
o effectively generate revenues through sponsored services and
placements; and
o attract and retain new qualified personnel.
We may not succeed in addressing these risks.
OUR AFFILIATE, NOW SOLUTIONS, IS IN DEFAULT ON CERTAIN INDEBTEDNESS IN
WHICH WE HAVE PLEDGED A $1.5 MILLION DEPOSIT AS COLLATERAL. THE
INABILITY OF OUR AFFILIATE TO CURE THIS DEFAULT OR TO REPAY THE
INDEBTEDNESS WOULD JEOPARDIZE OUR AFFILIATE'S ABILITY TO CONTINUE
OPERATIONS, WOULD RESULT IN THE LOSS OF A PORTION OF OUR $1.5 MILLION
DEPOSIT AND RESULT IN A DECLINE IN OUR STOCK PRICE
In connection with the purchase of the Human Resource Information
Application Software assets of Ross Systems, Inc., Now Solutions issued a
promissory note to Ross Systems for $1 million and assumed $5.5 million of notes
payable. The $1 million note is due in two payments, the first payment of
$250,000 was due in February 2002 and the final payment of $750,000 is due in
February 2003. The $5.5 million note is due on the earlier of February 2006 or
if terminated, by either party, in accordance with the terms of these
obligations. Vertical Computer had pledged a $1.5 million deposit as collateral
pursuant to a deposit pledge agreement to guarantee the first 24 payments of the
loan to finance the purchase of HRIS. Now Solutions has been notified by the
lender that it is in default of certain covenants contained in these
obligations. Although Vertical Computer believes it is entitled to a portion of
its $1.5 million deposit, it is currently in discussions with the lender to
27
resolve NOW Solution's default. Until a settlement is reached, the default by
Now Solutions is cured, or Now Solutions continues to makes its payments through
February 2003, Vertical Computer will not obtain a return of its deposit, or any
portion thereof.
OUR SUCCESS DEPENDS ON OUR ABILITY TO GENERATE SUFFICIENT REVENUES TO
PAY FOR THE EXPENSES OF OUR OPERATIONS
We believe that our success will depend upon our ability to generate
revenues from sales of our Emily and SiteFlash technology products and
sponsorship and e-commerce fees from our Internet sites and increased revenues
from Now Solutions products, none of which can be assured. Our ability to
generate revenues is subject to substantial uncertainty and our inability to
generate sufficient revenues to support our operations could require us to
curtail or suspend operations. Such an event would likely result in a decline in
our stock price.
OUR SUCCESS DEPENDS ON OUR ABILITY TO OBTAIN ADDITIONAL CAPITAL
Vertical Computer has funding that is expected to be sufficient to fund
its present operations for two months. After two months, Vertical Computer'
operations may need to be curtailed or suspended if additional funding is not
received. Vertical Computer, however, will need significant additional funding
in order to complete its business plan objectives. Accordingly, Vertical
Computer will have to rely upon additional external financing sources to meet
its cash requirements. Management will continue to seek additional funding in
the form of equity or debt to meet its cash requirements. However, there is no
guarantee Vertical Computer will raise sufficient capital to execute its
business plan. In the event that Vertical Computer is unable to raise sufficient
capital, our business plan will have to be substantially modified and our
operations curtailed or suspended.
WE HAVE A WORKING CAPITAL DEFICIT, WHICH MEANS THAT OUR CURRENT ASSETS
ON DECEMBER 31, 2001 WERE NOT SUFFICIENT TO SATISFY OUR CURRENT
LIABILITIES ON THAT DATE
We had a working capital deficit of approximately $6,500,000 at
December 31, 2001, which means that our current liabilities exceeded our current
assets by $6,500,000. Current assets are assets that are expected to be
converted into cash within one year and, therefore, may be used to pay current
liabilities as they become due. Our working capital deficit means that our
current assets on December 31, 2001 were not sufficient to satisfy all of our
current liabilities on that date.
WE HAVE BEEN SUBJECT TO A GOING CONCERN OPINION FROM OUR INDEPENDENT
AUDITORS, WHICH MEANS THAT WE MAY NOT BE ABLE TO CONTINUE OPERATIONS
UNLESS WE OBTAIN ADDITIONAL FUNDING
The report of our independent certified public accountants included an
explanatory paragraph in connection with our financial statements for the year
ended December 31, 2001. This paragraph states that our recurring operating
losses, the substantial funds used in our operations and the need to raise
additional funds to accomplish our objectives raise substantial doubt about our
ability to continue as a going concern. Our ability to develop our business plan
and to continue as a going concern depends upon our ability to raise capital and
to achieve improved operating results. Our financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
OUR OPERATING RESULTS MAY FLUCTUATE BECAUSE OF A NUMBER OF FACTORS,
MANY OF WHICH ARE OUTSIDE OF OUR CONTROL
Our operating results may fluctuate significantly as a result of
variety of factors, many of which are outside of our control. These factors
include, among others:
o the demand for our Emily and SiteFlash technology;
o the level of usage of the Internet;
o the level of user traffic on our Web sites;
o seasonal trends and budgeting cycles in sponsorship;
o incurrence of costs relating to the development, operation and
expansion of our Internet operations;
28
o introduction of new products and services by us and our
competitors;
o costs incurred with respect to acquisitions;
o price competition or pricing changes in the industry;
o technical difficulties or system failures; and
o general economic conditions and economic conditions specific to
the Internet and Internet media.
OUR FAILURE TO PROVIDE SECURE TRANSMISSIONS OF INFORMATION OVER THE
INTERNET MAY DISCOURAGE USERS OF OUR ON-LINE OFFERINGS
A requirement of the continued growth of e-commerce is the secure
transmission of confidential information over public networks. We rely on public
key cryptography and digital certificate technology to provide the security and
authentication necessary for secure transmission of confidential information.
Various regulatory and export restrictions may prohibit us from using the
strongest and most secure cryptographic protection available and thereby expose
us to a risk of data interception. A party who is able to circumvent our
security measures could misappropriate proprietary information or interrupt our
operations. Any such compromise or elimination of our security could reduce
demand for our services. We may be required to expend significant capital and
other resources to protect against these security breaches or to address
problems caused by these breaches. Concerns over the security of the Internet
and other on-line transactions and the privacy of users may also inhibit the
growth of the Internet and other on-line services generally, and our on-line
business offerings in particular, especially as a means of conducting commercial
transactions. Our security measures may not prevent security breaches, and
failure to prevent these security breaches may disrupt our operations and
discourage users of our on-line business offerings.
THE MARKET FOR OUR PRODUCTS AND SERVICES IS NEW AND EVOLVING, AND THE
MARKET DEMAND AND ACCEPTANCE OF OUR PRODUCTS AND SERVICES IS HIGHLY
UNCERTAIN
The market for our products and services is new and evolving, and
market demand and acceptance of our products and services is highly uncertain.
We cannot assure you that our products and services will be attractive enough to
a sufficient number of Internet users to generate sponsor revenues or to allow
the charging of a subscription fee for our products and services. There also can
be no assurance that we will be able to anticipate, monitor and successfully
respond to rapidly changing consumer tastes and business preferences so as to
attract a growing number of users to our Internet sites with characteristics
desirable to advertisers and advertising agencies or those users who are
otherwise willing to pay to access specific portions of our products and
services. Internet users can freely navigate and instantly switch among a large
number of Internet sites, many of which offer competitive products and services,
making it difficult for us to distinguish our product offerings and attract
users. In addition, many other Internet sites offer very specific, highly
targeted products and services that may have greater appeal than the products
and services offered on our Internet sites. If we are unable to develop original
and compelling Internet-based products and services, we will be unable to
generate sufficient advertising revenues to support our business operations.
OUR COMPETITORS HAVE GREATER RESOURCES THAN WE DO, WHICH MAY MAKE IT
MORE DIFFICULT FOR US TO COMPETE AGAINST THEM
Many, if not all, of our competitors have significantly greater
resources than we do. In particular, our competitors have greater financial,
editorial, technical and marketing resources, longer operating histories,
greater name recognition, and greater experience than we do. Additionally, our
competitors are able to undertake more extensive marketing campaigns and devote
substantially more resources to developing products and services than we are.
There can be no assurance that we will be able to compete successfully against
current or future competitors. Our failure to compete would jeopardize our
ability to generate revenues sufficient to support our business operations.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH AND INTEGRATING RECENTLY
ACQUIRED COMPANIES
Our recent growth has placed a significant strain on our managerial,
operational, and financial resources. To manage our growth, we must continue to
implement and improve our operational and financial systems and to expand,
train, and manage our employee base. Any inability to manage growth effectively
could have a material adverse effect on our business, operating results, and
financial condition. As part of our business strategy, we have completed several
acquisitions and expect to enter into additional business combinations and
29
acquisitions. Acquisition transactions are accompanied by a number of risks,
including:
o the difficulty of assimilating the operations and personnel of
the acquired companies;
o the potential disruption of our ongoing business and distraction
of management;
o the difficulty of incorporating acquired technology or content
and rights into our products and media properties;
o the correct assessment of the relative percentages of in-process
research and development expense which needs to be immediately
written off as compared to the amount which must be amortized
over the appropriate life of the asset;
o the failure to successfully develop an acquired in-process
technology resulting in the impairment of amounts currently
capitalized as intangible assets;
o unanticipated expenses related to technology integration;
o the maintenance of uniform standards, controls, procedures and
policies;
o the impairment of relationships with employees and customers as a
result of any integration of new management personnel; and
o the potential unknown liabilities associated with acquired
businesses.
We may not be successful in addressing these risks or any other
problems encountered in connection with these acquisitions. Our failure to
address these risks could negatively affect our business operations through lost
opportunities, revenues or profits, any of which would likely result in a lower
stock price.
WE DEPEND UPON THIRD PARTIES FOR CRITICAL ELEMENTS OF OUR BUSINESS
We depend upon third parties in order to advertise our on-line business
offerings on other Internet sites. There can be no assurance that we will
establish or maintain such arrangements in the future. We are dependent on third
parties for uninterrupted Internet access. In addition, we are dependent on
various third parties for substantially all of our news and information. Loss of
these services from any one or more of third parties would impair our ability to
provide our on-line offerings and would likely result in the loss of any users
of our offerings. No assurance can be given as to whether, or on what terms, we
would be able to obtain these services from other third parties in the event of
the loss of any of these services.
WE ARE SUBJECT TO SYSTEM DISRUPTIONS AND CAPACITY CONSTRAINTS
The satisfactory performance, reliability and availability of our
Internet sites and our computer network infrastructure are critical to
attracting Internet users and maintaining relationships with partners and
potential sponsors. System interruptions that result in the unavailability of
our Internet sites or slower response times for users would reduce the number of
advertisements delivered and reduce the attractiveness of our Internet sites to
users and sponsors. We may experience periodic system interruptions from time to
time in the future. Additionally, any substantial increase in traffic on our
Internet sites may require us to expand and adapt our computer network
infrastructure. Our inability to add additional computer software, hardware and
bandwidth to accommodate increased use of our Internet sites may cause
unanticipated system disruptions and result in slower response times. We cannot
assure you that we will be able to expand our computer network infrastructure on
a timely basis to meet increased use. Any system interruptions or slower
response times resulting from these factors could discourage advertisers and
users from our on-line offerings. Our Internet operations are vulnerable to
interruption by fire, earthquake, power loss, telecommunications failure and
other events beyond our control. There can be no assurance that interruptions in
service will not materially adversely affect our operations in the future. While
we carry business interruption insurance, we cannot assure you that insurance
will be sufficient to provide for all losses or damages that we incur.
30
WE ARE SUBJECT TO U.S. AND FOREIGN GOVERNMENT REGULATION OF THE
INTERNET, THE IMPACT OF WHICH IS DIFFICULT TO PREDICT
There are currently few laws or regulations directly applicable to the
Internet. The application of existing laws and regulations to Vertical Computer
relating to issues such as user privacy, defamation, pricing, advertising,
taxation, gambling, sweepstakes, promotions, content regulation, quality of
products and services, and intellectual the property ownership and infringement
can be unclear. In addition, we will also be subject to new laws and regulations
directly applicable to our activities. Any existing or new legislation
applicable to us could expose us to substantial liability, including significant
expenses necessary to comply with these laws and regulations, and dampen the
growth in use of the Internet.
Other nations have taken actions to restrict the free flow of material
deemed to be objectionable on the Internet. The European Union has recently
adopted privacy and copyright directives that may impose additional burdens and
costs on our international operations. In addition, several telecommunications
carriers, including America's Carriers' Telecommunications Association, are
seeking to have telecommunications over the Internet regulated by the FCC in the
same manner as other telecommunications services. Many areas with high Internet
use have begun to experience interruptions in phone service, and local telephone
carriers, such as Pacific Bell, have petitioned the FCC to regulate Internet
providers and to impose access fees. A number of proposals have been made at the
federal, state and local level that would impose additional taxes on the sale of
goods and services through the Internet. If any such proposals are adopted, it
could substantially impair the growth of the Internet and adversely affect our
on-line offerings. Several recently passed federal laws could have an impact on
our business. The Digital Millennium Copyright Act is intended to reduce the
liability of on-line service providers for listing or linking to third-party Web
sites that include materials that infringe copyrights or other rights of others.
The Children's On-line Protection Act and the Children's On-line Privacy
Protection Act are intended to restrict the distribution of materials deemed
harmful to children and impose additional restrictions on the ability of on-line
services to collect user information from minors. In addition, the Protection of
Children From Sexual Predators Act of 1998 requires on-line service providers to
report evidence of violations of federal child pornography laws under some
circumstances. Such legislation may impose significant additional costs on our
business or subject us to additional liabilities.
Due to the global nature of the Web, it is possible that the
governments of other states and foreign countries might attempt to regulate its
transmissions or prosecute us for violations of their laws. We might
unintentionally violate these laws. These laws may be modified, or new laws
enacted, in the future. Any such developments could have a material adverse
effect on our business, results of operations, and financial condition.
WE MAY BE SUBJECT TO A VARIETY OF LEGAL UNCERTAINTIES THAT IMPAIR OUR
BUSINESS
As a distributor of content over the Internet, we face potential
liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the nature and content of the materials
that we publish or distribute. In addition, we could be exposed to liability
with respect to the content or unauthorized duplication of material indexed in
our search services. Although we carry liability insurance, our insurance may
not cover potential claims of this type or may not be adequate to indemnify us
for all liability that may be imposed.
We host a variety of services that enable individuals to exchange
information, generate content, conduct business and engage in various on-line
activities. The law relating to the liability of providers of these on-line
services for activities of their users is currently unsettled. Claims could be
made against us for defamation, negligence, copyright or trademark infringement,
unlawful activity, tort, including personal injury, fraud or other theories
based on the nature and content of information that we provide, links to or that
may be posted on-line or generated by our users. These types of claims have been
brought, and sometimes successfully prosecuted, against on-line service
providers in the past.
It is also possible that, if any information provided directly by us
contains errors or is otherwise negligently provided to users, third parties
could make claims against us. For example, we offer Web-based email services,
which expose us to potential risks, such as liabilities or claims resulting from
unsolicited email, lost or misdirected messages, illegal or fraudulent use of
e-mail, or interruptions or delays in email service.
We also periodically enter into arrangements to offer third-party
products, services, or content under Vertical Computer brand or via distribution
on our properties, including stock quotes and trading information. We may be
subject to claims concerning these products, services or content by virtue of
our involvement in marketing, branding, broadcasting or providing access to
them, even if we do not ourself host, operate, provide, or provide access to
these products, services or content. While our agreements with these parties
often provide that we will be indemnified against such liabilities, such
indemnification may not be adequate.
31
OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETARY
TECHNOLOGY
Our success is dependent, in part, upon our ability to protect and
leverage the value of our original Emily and SiteFlash technology products and
Internet content, as well as our trade secrets, trade names, trademarks, service
marks, domain names and other proprietary rights we either currently have or may
have in the future. Given the uncertain application of existing trademark laws
to the Internet and copyright laws to software development, there can be no
assurance that existing laws will provide adequate protection for our
technologies, sites or domain names. Policing unauthorized use of our
technologies, content and other intellectual property rights entails significant
expenses and could otherwise be difficult or impossible to do given the global
nature of the Internet and our potential markets.
OUR STOCK PRICE HAS HISTORICALLY BEEN VOLATILE, WHICH MAY MAKE IT MORE
DIFFICULT FOR YOU TO RESELL SHARES WHEN YOU CHOOSE TO AT PRICES YOU
FIND ATTRACTIVE
The trading price of our common stock has been and may continue to be
subject to wide fluctuations. The stock price may fluctuate in response to a
number of events and factors, such as quarterly variations in operating results,
announcements of technological innovations or new products and media properties
by us or our competitors, changes in financial estimates and recommendations by
securities analysts, the operating and stock price performance of other
companies that investors may deem comparable, and news reports relating to
trends in our markets. In addition, the stock market in general, and the market
prices for Internet-related and technology-related companies in particular, have
experienced extreme volatility that often has been unrelated to the operating
performance of such companies. These broad market and industry fluctuations may
adversely affect the price of our stock, regardless of our operating
performance.
OUR COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY MAKE IT MORE
DIFFICULT FOR INVESTORS TO SELL THEIR SHARES DUE TO SUITABILITY
REQUIREMENTS
Our common stock is deemed to be "penny stock" as that term is defined
in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Penny
stocks are stock:
o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o Whose prices are not quoted on the Nasdaq automated quotation
system (Nasdaq listed stock must still have a price of not less
than $5.00 per share); or
o In issuers with net tangible assets less than $2.0 million (if
the issuer has been in continuous operation for at least three
years) or $5.0 million (if in continuous operation for less than
three years), or with average revenues of less than $6.0 million
for the last three years.
Broker/dealers dealing in penny stocks are required to provide
potential investors with a document disclosing the risks of penny stocks.
Moreover, broker/dealers are required to determine whether an investment in a
penny stock is a suitable investment for a prospective investor. These
requirements may reduce the potential market for our common stock by reducing
the number of potential investors. This may make it more difficult for investors
in our common stock to sell shares to third parties or to otherwise dispose of
them. This could cause our stock price to decline.
WE ANTICIPATE INCREASED OPERATING EXPENSES AND MAY EXPERIENCE LOSSES
Our lack of an extensive operating history makes prediction of future
operating results difficult. We believe that a comparison of our quarterly
results is not meaningful. As a result, you should not rely on the results for
any period as an indication of our future performance. Accordingly, there can be
no assurance that we will generate significant revenues or that we will sustain
a level of profitability in the future. We currently intend to expand and
improve our Internet operations, fund increased advertising and marketing
efforts, expand and improve our Internet user support capabilities and develop
new Internet technologies, products and services. As a result, we may experience
significant losses on a quarterly and annual basis.
32
WE MUST CONTINUE TO DIVERSIFY OUR REVENUE STREAMS
From time to time, we may entertain new business opportunities and
ventures in a broad range of areas. Typically, these opportunities require
extended negotiations, the outcome of which cannot be predicted. If we were to
enter into such a venture, we could be required to invest a substantial amount
of capital, which could have a material adverse effect on our financial
condition and our ability to implement our existing business strategy. Such an
investment could also result in large and prolonged operating losses for us.
Further, these negotiations or ventures could place additional, substantial
burdens on our management personnel and our financial and operational systems.
There can be no assurance that such a venture would ever achieve profitability,
and a failure by us to recover the substantial investment required to launch and
operate such a venture would have a material adverse effect on our business,
financial condition and operating results.
33
ITEM 7. FINANCIAL STATEMENTS
34
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
-----------------------
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
-----------------------
F-1
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONTENTS
Report of Independent Certified Public Accountants...........................F-3
Consolidated Financial Statements:
Consolidated Balance Sheet..............................................F-4
Consolidated Statements of Operations and Other Comprehensive Loss......F-6
Consolidated Statements of Stockholders' Equity.........................F-7
Consolidated Statements of Cash Flows..................................F-11
Notes to Consolidated Financial Statements.............................F-13
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Vertical Computer Systems, Inc. and Subsidiaries
Los Angeles, California
We have audited the accompanying consolidated balance sheet of Vertical Computer
Systems, Inc. and Subsidiaries as of December 31, 2001 and the related
consolidated statements of operations and other comprehensive loss,
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in these financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Vertical Computer
Systems, Inc. and Subsidiaries as of December 31, 2001 and the results of their
operations and cash flows for each of the two years in the period ended December
31, 2001 in conformity with accounting principles generally accepted in the
United States of America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring
significant operating losses and used substantial funds in its operation.
Additionally, at December 31, 2001, the Company had negative working capital of
approximately $6,500,000 and had defaulted on several of its debt obligations.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/BDO Seidman, LLP
Los Angeles, California
April 15, 2002
F-3
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
Item 1. Consolidated Financial Statements
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December 31,
2001
-------------------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash $ 845,459
Restricted cash 1,500,000
Securities available for sale 176,000
Accounts receivable, net of allowance for bad debts of $83,460 1,041,601
Other receivable 419,489
Receivables from officers and employees 44,887
Prepaid expenses and other assets 77,884
-------------------------------------------------------------------------------------------------------------------
Total Current Assets 4,105,320
Property and equipment, net of accumulated depreciation 514,143
Goodwill, license and software costs, net 7,724,618
Deposits and other 20,506
-------------------------------------------------------------------------------------------------------------------
Total Assets $ 12,364,587
===================================================================================================================
Liabilities, Convertible Preferred Stock and Stockholder's Equity
Current liabilities
Accounts payable and accrued liabilities $ 1,925,893
Deferred Revenue 2,243,375
Accrued dividends 513,712
Current portion-notes payable, net of discount of $79,042 5,908,662
-------------------------------------------------------------------------------------------------------------------
Total current liabilities 10,591,642
Convertible debt 265,000
Notes payable, net of discount and current portion 1,305,000
-------------------------------------------------------------------------------------------------------------------
Total liabilities 12,161,642
===================================================================================================================
See accompanying notes to the consolidated financial statements.
F-4
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VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
Series B 10% Convertible Preferred stock; $0.001 Par Value; 375,000
Shares authorized; 7,200 shares issued and outstanding 45,000
Series D 15% Convertible Preferred stock; $0.001 Par Value; 300,000
Shares authorized; 25,000 shares issued and outstanding 156,250
Stockholders' Equity
Common Stock; $0.00001 par value; 1,000,000,000 shares authorized
615,191,422 issued and outstanding 6,153
Series A 4% Convertible Cumulative Preferred stock; $0.001 par value;
250,000 shares authorized; 50,000 shares issued and outstanding 50
Series A Preferred Stock; par value $0.001; 750,000 shares authorized;
no shares issued and outstanding 0
Series C 4% Convertible Preferred stock; $100 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;
no shares issued and outstanding 0
Subscription Receivable (2,000)
Additional paid-in-capital 24,670,149
Accumulated deficit (25,022,657)
-------------------------------------------------------------------------------------------------------------------
Total Stockholders' equity 1,695
-------------------------------------------------------------------------------------------------------------------
Total liabilities, convertible preferred stock and
stockholders' equity $ 12,364,587
===================================================================================================================
See accompanying notes to the consolidated financial statements.
F-5
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VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
For the years ended December 31,
2001 2000
------------------- ------------------
Revenues
Licensing and maintenance $ 2,239,736 $ -
Software Development 527,034 -
Consulting Services 1,290,719 -
Other 98,599 137,451
------------------- ------------------
Total Revenues 4,156,088 137,451
Selling, general and administrative expenses 13,296,508 5,865,898
------------------- ------------------
Operating loss (9,140,420) (5,728,447)
Other Income and (expenses)
Interest income 164,347 -
Interest expense (724,489) -
Gain on sale of subsidiary - 863,252
------------------- ------------------
Loss before minority interest (9,700,562) (4,865,195)
Minority interest in loss of subsidiary 667,667 -
------------------- ------------------
Net loss (9,032,895) (4,865,195)
------------------- ------------------
Dividend applicable to preferred stock (513,712) (188,712)
Deemed dividend on issuance of Series A Preferred Stock - (10,000,000)
---------------------------------------
Net loss applicable to common stockholders $ (9,546,607) $ (15,053,907)
=================== ==================
Basic and diluted loss per share $ (0.02) $ (0.02)
=================== ==================
Basic and diluted weighted average of common shares
Outstanding 585,745,315 745,784,714
=================== ==================
Comprehensive income (loss) and its components
consist of the following:
Net loss $ (9,032,895) $ (4,865,195)
Gain/(Loss) on securities available for sale (420,000) 420,000
------------------- ------------------
Comprehensive loss $ (9,452,895) $ (4,445,195)
=================== ==================
See accompanying notes to the consolidated financial statements.
F-6
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VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
Series A Preferred Series C Preferred
Common Stock Stock Stock Note Receivable
----------------------- ---------------------- -------------------------- Due From
Shares Amount Shares Amount Shares Amount Shareholder
----------- ----------- ---------- ---------- -------- --------------- ------------------
Balance, December 31, 1999 935,548,399 $ 9,355 - $ - - $ - $ (166,984)
Cancellation of Shares in
connection with a legal
settlement (246,470,580) (2,465) - - - - (11,802)
Issuance of Series A Preferred
Stock, value $0.001 net of
issuance cost of $1,000,000 - - 50,000 50 - - -
Shares issued for professional
services 879,688 9 - - - - -
Preferred stock dividends - - - - - - -
Shares cancelled in connection
with sale of Externet World,
Inc. (144,850,000) (1,449) - - - - 178,786
Stock options and warrants
exercised 59,310,000 594 - - - - -
Shares and subscription
receivable cancelled in
connection with stock
rescission (31,710,000) (317) - - - - -
Non-employee compensation
expense for stock options
issued - - - - - - -
Deemed dividend on issuance
of Series A Preferred Stock - - - - - - -
Comprehensive Loss:
Net loss - - - - - - -
Unrealized gain on securities
available for sale - - - - - - -
----------------- --------- ---------- ----------- ----------- ---------- -----------------
Balance, December 31, 2000 572,707,507 $ 5,727 50,000 $ 50 - $ - $ -
----------------- --------- ---------- ----------- ----------- ---------- -----------------
See accompanying notes to the consolidated financial statements.
F-7
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VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
Accumulated Other
Subscription Paid-in Comprehensive Accumulated
Receivable Capital Loss Deficit Total
------------------ ----------------- ----------------- ------------------- -----------------
Balance, December 31, 1999 $ - $ 389,953 $ - $ (245,923) $ (13,599)
Cancellation of Shares in connection
with a legal settlement - 2,465 - - (11,802)
Issuance of Series A Preferred Stock
par value $0.001 net of
issuance cost of $1,000,000 - 8,999,950 - - 9,000,000
Shares issued for professional
services - 238,335 - - 238,344
Preferred stock dividends - - - (364,932) (364,932)
Shares cancelled in connection
with sale of Externet World, Inc. - 1,449 - - 178,786
Stock options and warrants
Exercised (1,443,700) 3,235,310 - - 1,792,204
Shares and subscription
Receivable cancelled in
Connection with stock
Rescission 1,441,700 (1,345,758) - - 95,625
Non-employee compensation
expense for stock options
Issued - 1,303,264 - - 1,303,264
Deemed dividend on issuance
of Series A Preferred Stock - 10,000,000 - (10,000,000) 0
Comprehensive Loss:
Net loss - - - (4,865,195) (4,865,195)
Unrealized gain on securities
available for sale - - 420,000 - 420,000
------------- -------------- -------------- --- -------------- -- --------------
Balance, December 31, 2000 $ (2,000) $ 22,824,968 $ 420,000 $ (15,476,050) $ 7,772,695
------------- -------------- -------------- --- -------------- -- --------------
See accompanying notes to the consolidated financial statements.
F-8
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VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
Series A Preferred Series C Preferred
Common Stock Stock Stock Note Receivable
----------------------- ---------------------- -------------------------- Due From
Shares Amount Shares Amount Shares Amount Shareholder
----------- ----------- ---------- ---------- -------- --------------- ------------------
Balance, December 31, 2000 572,707,507 $ 5,727 50,000 $ 50 - $ - $ -
Issuance of warrants for the
acquisition of NOW Solutions - - - - - - -
Issuance of shares for the equity
line with Cornell Capital 7,142,857 72 - - - - -
Issuance of common stock shares
for professional services 35,341,058 354 - - - - -
Preferred stock dividends - - - - - - -
Issuance of series C preferred 4%
cumulative convertible
stock, par value $100 for the
acquisition of intellectual
property - 50,000 350,000
Non-employee compensation
expense for stock options issued - - - - - - -
Beneficial conversion feature on 6%
Convertible debentures issued - - - - - - -
Comprehensive Loss:
Net loss - - - - - - -
Unrealized loss on securities
available for sale - - - - - - -
-------------- ----------------------- ----------- ---------- --------------------------------
Balance, December 31, 2001 615,191,422 $ 6,153 50,000 $ 50 50,000 $ 350,000 $ -
============== ======================= =========== ========== ================================
See accompanying notes to the consolidated financial statements
F-9
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VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
Accumulated Other
Subscription Paid-in Comprehensive Accumulated
Receivable Capital Loss Deficit Total
---------------- ----------------- -------------- ----------------- ----------------
Balance, December 31, 2000 $ (2,000) $ 22,824,968 $ 420,000 $ (15,476,050) $ 7,772,695
Issuance of warrants for the
acquisition of NOW Solutions - 798,500 - - 798,500
Issuance of shares for the equity line
with Cornell Capital 199,928 200,000
Issuance of shares of common stock
for professional services - 572,596 - - 572,950
Preferred stock dividends - - - (513,712) (513,712)
Issuance of series C preferred 4%
cumulative convertible
stock, par value $100 for the
acquisition of intellectual property - - - - 350,000
Non-employee compensation
expense for stock options issued - 207,907 - - 207,907
Beneficial conversion feature on 6%
Convertible debentures issued - 66,250 - - 66,250
Comprehensive Loss:
Net loss - - - (9,032,895) (9,032,895)
Unrealized loss on securities
available for sale - - (420,000) - (420,000)
--------------- ----------------- ----------------- ------------------ ----------------
Balance, December 31, 2001 $ (2,000) $ 24,670,149 $ - $ (25,022,657) $ 1,695
=============== ================= ================= ================== ================
See accompanying notes to the consolidated financial statements
F-10
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VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
2001 2000
--------------------- ------------------
Cash flows from operating activities
Net loss $ (9,032,895) $ (4,865,195)
Adjustments to reconcile net loss to net cash used in operating activities:
Minority interest in loss of subsidiary (667,667) -
Realized gain on sale of subsidiary - (863,252)
Depreciation and amortization 1,433,440 100,702
Equity loss of unconsolidated affiliate - 31,453
Non-employee compensation expense for stocks options issued 207,907 1,303,264
Issuance of common shares for professional services 572,950 238,344
Issuance of common shares for the equity line with Cornell Capital 200,000 -
Beneficial conversion on 6% debentures 66,250 -
Compensation expense for stock rescission - 95,625
Allowance for bad debts 83,460 -
Write off of royalties 80,000 -
Write off of fixed assets 203,657 -
Write off of investments 618,547 -
Write down of marketable securities 124,000 -
Changes in operating assets and liabilities:
Accounts receivable (1,118,623) (7,781)
Other receivable (24,588) 25,000
Receivable related party (23,257) 38,343
Royalties Receivable 20,000 (100,000)
Prepaids (36,035) (41,849)
Deposits 48,557 (61,064)
Accounts payable 1,395,728 66,438
Deferred Revenue 2,243,375 -
Dividends payable (88,712) -
-------------------- ------------------
Net cash used in operating activities: (3,693,906) (4,039,972)
---------------------------------------
Cash flow from investing activities:
Restriction of cash for debt guarantee (1,500,000) -
Proceeds from release of restricted cash from
sale of Subsidiary, net of restricted cash - 575,779
Proceeds from release of restricted cash from sale of Subsidiary 506,419 -
Purchase of equipment (219,400) (734,012)
Purchase of software (681,128) -
Purchase of investments - (950,000)
-------------------- ------------------
Net cash used in investing activities (1,894,109) (1,108,233)
-------------------- ------------------
F-11
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VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flow from financing activities:
Proceeds from issuance of Series A Preferred Stock - 9,000,000
Proceeds from stock options exercised - 1,792,204
Payment of cash dividends (100,000) (211,111)
Proceeds from Convertible Debt 265,000 -
Payment of Notes Payable (902,604) (45,000)
Proceeds from issuance of Notes Payable 1,572,266 -
------------------ --------------
Net cash provided by financing activities 834,662 10,536,093
------------------ --------------
Net increase (decrease) in cash and cash equivalents, (4,753,353) 5,387,888
Cash and cash equivalents, beginning of year 5,598,812 210,924
------------------ -----------------
Cash and cash equivalents, end of year $ 845,459 $ 5,598,812
================== =================
See accompanying notes to the consolidated financial statements
F-12
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Vertical Computer Systems, Inc. (the "Company") was incorporated in the State of
Delaware in April 1993. On October 21, 1999, the Company acquired all the
outstanding capital stock of Externet World, Inc. ("EW"), with the issuance of
786,433,100 shares of the Company's common stock. 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
purpose. Therefore, this transaction has been accounted for as a "reverse
acquisition" for financial reporting 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. 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. In October 2000, Vertical Computer sold its wholly owned subsidiary
Externet World, Inc. to Eurovest, Inc., a company of which Terry Washburn, a
former member of Vertical Computer's Board of Directors, is an executive
officer. Eurovest subsequently sold Externet World to two former shareholders of
Vertical Computer and received 147,350,980 shares of Vertical Computer's common
stock. As part of a settlement agreement, 144,850,000 common stock shares were
cancelled and 2,000,980 shares were retained in trust for Vertical Computer.
Further, Eurovest received fees of $72,000 and 500,000 shares of Vertical
Computer's common stock.
The consolidated financial statements include the accounts of the Company and
its wholly subsidiaries, Enfacet, Inc. ("ENF"), Globalfare.com, Inc. ("GFI"),
Pointmail.com, Inc. ("PMI"), Scientific Fuel, Inc. ("SFI") and its 60% owned
subsidiary, NOW Solutions, Inc. ("NOW").
BUSINESS
Vertical Computer Systems, Inc. is a multinational provider of Web services,
underpinning Web technologies, and administrative software services through a
global partner distribution network. Web services involve the outsourcing of
administrative services software via the Internet, such as ResponseFlash,
UniversityFlash and the Emily Agent. Underpinning Web technologies are
foundation technologies like our SiteFlash and Emily technologies, which can be
used to build Web services. Administrative software services are software
products, such as human resources or procurement that provides basic
functionality to any operational entity.
F-13
NOTE 1. ORGANIZATION (CONTINUED)
GOING CONCERN UNCERTAINTY
The accompanying consolidated financial statements for the year ended December
31, 2001, have been prepared assuming that the Company will continue as a going
concern which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business.
The carrying amounts of assets and liabilities presented in the financial
statements do not purport to represent realizable or settlement values. The
Company has suffered significant recurring operating losses, used substantial
funds in its operations, and needs to raise additional funds to accomplish its
objectives. Additionally, at December 31, 2001, the Company had negative working
capital of approximately $6,500,000 and has defaulted on several of its debt
obligations. These conditions raise substantial doubt about the Company's
ability to continue as a going concern.
In August 2001, Vertical Computer entered into an Equity Line of Credit
Agreement. Under this agreement, Vertical Computer may issue and sell to Cornell
Capital Partners common stock for a total purchase price of up to $10.0 million.
The Company will be entitled to commence drawing down on the equity line of
credit upon the effectiveness of a Registration Statement registering the sale
of the shares to be issued under the equity line of credit. However the Company
will require additional capital to fund operations and pay down its liabilities,
as well as fund its expansion plans consistent with the Company's anticipated
changes in operations and infrastructure. The consolidated financial statements
contain no adjustment for the outcome of this uncertainty.
The Company is continuing its efforts to secure working capital for operations,
expansion and possible acquisitions, mergers, joint ventures, and/or other
business combinations. However, there can be no assurance that the Company will
be able to secure additional capital, or that if such capital is available,
whether the terms or conditions would be acceptable to the Company.
To date, the Company has primarily generated revenues from licensing and
maintenance agreements from NOW Solutions ("NOW"), its majority owned
subsidiary.
Furthermore, the Company is exploring certain opportunities with a number of
companies to participate in the marketing of its products. The exact results of
these opportunities are unknown at this time.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All intercompany accounts and transactions have been
eliminated.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid investments with original maturities of three months or less to be cash
equivalents.
CONCENTRATION OF CREDIT RISK
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any such losses
in these accounts.
F-14
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to operations as incurred, whereas, additions, renewals, and
betterments are capitalized. Depreciation is computed using the straight-line
method over the estimated useful lives of the related assets, ranging from one
to fifteen years.
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. At December 31, 2000, no costs have
been capitalized due to the insignificance of amounts. At December 31, 2001,
$3,800,000 of the purchase price of NOW Solutions, L.L.C. and $740,000 from the
purchase of the software assets of Adhesive Software Inc. were allocated to
software costs.
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.
F-15
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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".
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. As of December 31, 2001 and 2000, the Company had 251,247,275
and 67,658,338 potentially dilutive shares, respectively, which were not
included in the calculation of diluted loss per share because they were
anti-dilutive.
On February 7, 2000, the Company executed a 20-for-1 stock split of the
Company's Common Stock. Accordingly, all weighted average share and per share
amounts have been restated to reflect the stock split for all periods presented.
F-16
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company's instruments, including cash and cash equivalents,
accounts receivable and accrued expenses, the carrying amounts approximate fair
value due to the short maturity of these instruments. The carrying value of the
Company's long-term debt approximates its fair value based on the quoted market
prices for the same or similar issues or the current rates offered to the
Company for debt of the same remaining maturities. The fair value of the loan
from shareholder cannot be estimated due to its related party nature.
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could materially differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board finalized FASB statements
No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other
Intangible Assets (SFAS 142). SFAS 141 also requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets meet certain
criteria. SFAS 141 applies to all business combinations initiated after June 30,
2001 and for the purchase of business combinations completed on or after July 1,
2001. It also requires, upon adoption of SFAS 142, that the Company reclassify
the carrying amounts of intangibles assets and goodwill based on the criteria in
SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future goodwill, reassess the useful lives of
other existing recognized intangible assets, and cease amortization of
intangible assets with an indefinite useful life. An intangible asset with an
indefinite useful life should be tested for impairment in accordance with the
guidance in SFAS 142 is required to be applied in fiscal years beginning after
December 15, 2001 to all goodwill and other intangible assets recognized at that
date, regardless of when those assets were initially recognized. SFAS 142
requires the Company to complete a transitional goodwill impairment test six
months from the date of adoption. The Company is also required to reassess the
useful lives of other intangible assets within the first interim quarter after
adoption of SFAS 142.
During 2001, the Company's business combinations were accounted for using the
purchase method. As of December 31, 2001, the net carrying amount of goodwill is
$3,705,981 and software costs is $4,018,637. Amortization expense during the
year ended December 31, 2001 was $1,251,951. Currently, the Company is assessing
but has not yet determined how the adoption of SFAS 141 and SFAS 142 will impact
its financial position and results of operations.
F-17
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SFAS 143, Accounting for Asset Retirement Obligations, was issued in June 2001
and is effective for fiscal years beginning after June 15, 2002. SFAS 143
requires that any legal obligation related to the retirement of long-lived
assets be quantified and recorded as a liability with the associated asset
retirement cost capitalized on the balance sheet in the period it is incurred
when a reasonable estimate of the fair value of the liability can be made.
SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, was
issued in August 2001 and is effective for the fiscal years beginning after
December 15, 2001. SFAS 144 provides a single, comprehensive accounting model
for impairment and disposal of ling-lived assets and discontinued operations.
SFAS 143 and SFAS 144 will be adopted on their effective dates, material effects
of the adoption, if any, cannot be determined at this time.
NOTE 3. BUSINESS COMBINATIONS
In February 2001, Vertical Computer acquired a 60% interest in NOW Solutions,
LLC, a company that develops and maintains human resource software, in exchange
for $1,000,000. Also in February 2001, NOW Solutions purchased the Human
Resource Information Service Application Software assets ("HRIS") of Ross
Systems, Inc. ("Ross") in exchange for $5,100,000 in cash and a promissory note
due to Ross for $1,000,000. In addition, the agreement calls for various
earn-out provisions to be paid to Ross if certain sales levels are achieved by
NOW Solutions during the two years subsequent to the purchase. NOW Solutions
acquired a $5,500,000 note payable to finance the Ross acquisition and used the
excess amount for working capital. Vertical Computer had pledged a $1.5 million
deposit as collateral pursuant to a deposit pledge agreement to guarantee the
first 24 payments of the loan to finance the purchase of HRIS. Although Vertical
Computer believes it is entitled to a portion of its $1.5 million deposit, it is
currently in discussions with the lender to resolve NOW Solution's default.
Until a settlement is reached, the default by NOW Solutions is cured, Vertical
Computer pursues legal action, or NOW Solutions continues to makes its payments
through February 2003, Vertical Computer will not obtain a return of its
deposit, or any portion thereof.
F-18
NOTE 3. BUSINESS COMBINATIONS (CONTINUED)
Arglen Acquisitions, LLC, ("Arglen") facilitated the NOW Solutions transactions
and acquired a 30% interest in NOW Solutions for services provided and received
warrants of the Company to purchase 5% of the total outstanding stock of the
Company, initially equal to 30,763,943 shares. If, during the last 90 trading
day period of the first year from the date of the issuance of the initial set of
warrants, the per share value of Vertical Computer's shares, adjusted for any
forward or reverse splits and any other dilutive effect, is less than $0.50,
then Arglen will be entitled to additional warrants to purchase 25,000,000
common shares. If, during the last 90 trading day period of the second year from
the date the issuance of the initial set of warrants, the per share value of the
Company, adjusted for any forward or reverse splits and any other dilutive
effect, is less than $1.00, then Arglen, provided it has not exercised and sold
more than 25% of the 55,763,943 shares underlying the previous stock warrants,
shall be entitled to additional warrants to purchase 25,000,000 common shares.
The exercise price of the warrants is $0.08, and the warrants are exercisable
for a period of 5 years from the date the warrants are registered for resale or
an exemption from registration becomes available. Pursuant to the terms of the
operating agreement of NOW Solutions, the Company's interest in NOW Solutions
will be reduced to 51% over three years as employees of NOW Solutions will be
entitled to receive shares of NOW Solutions' common stock. The NOW Solutions'
purchase was accounted for under the purchase method of accounting, with cash of
$5,100,000 paid to Ross and a note payable of $1,000,000 due to Ross. Vertical
Computer Systems incurred $667,000 for Arglen's 30% interest in NOW Solutions,
$798,000 for the value of the Vertical Computer warrants issued to Arglen
(valued using the Black-Scholes valuation model), $3,800,000 for intangible
assets, and $229,000 in a finders fee and professional charges, $1,800,000 in
goodwill, all included as part of the purchase price. The Company and NOW
Solutions recognized approximately $7,294,000 of goodwill and other intangible
assets in connection with the purchase, which were being amortized over a three
to eight year period.
In August 2001, the Company acquired 100% of EnFacet, Inc. for 30,000 shares of
Series C 4% Cumulative Convertible preferred stock, which eliminate in
consolidation, an assumption of approximately $642,000 in accrued liabilities
and notes payable, and direct costs of $115,000.
Additionally, in December 2001, the Company entered into an option agreement
with iNet Purchasing ("iNet") to purchase an additional interest in iNet in
April 2002 (the Company is currently negotiating to extend this date), whereby
Vertical Computer would obtain an aggregate 56% ownership interest in iNet
pursuant to the Stock Purchase Agreement and the Stockholder's Agreements. In
accordance with the option agreement, the Company shall 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 options
are vested, have a strike price of $0.01, and are exercisable for a three year
period. Pursuant to the terms of the Stock Purchase Agreement and the
Stockholders Agreements, if the Company exercises its option to obtain a
majority interest in iNet in April 2002 (the Company is currently negotiating to
extend this date), the Company shall pay to iNet $860,000 in cash or marketable
securities, 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 shares of common stock each to Nikas and Mattern and 2,000,000 common
stock shares to Savage. The strike price is the closing price of the Company
common stock on the date of January 6, 2002, and, in the event that the Company
does not acquire a majority interest in iNet, these options and warrants will be
automatically cancelled.
F-19
NOTE 4. INVESTMENTS
During 2000, the Company paid $400,000 to acquire securities in iNet Purchasing,
Inc. ("iNET"). The Company accounts for the investment at cost. In addition, the
Company paid $100,000 to receive a royalty of 1% on all iNET sales up to
$500,000 and .5% on all sales thereafter. The royalty period is twenty years and
all payments are to be made on a quarterly basis. Vertical has not received any
payments.
During 2000, the Company made immaterial investments in four joint ventures,
which the Company intends to assist in development of software products. The
Company owns 50% of all the joint ventures and accounts for the investments
using the equity method of accounting. As of December 31, 2000, the Company
fully reserved for the carrying value of all joint venture investments, since
they were still in the developmental stages, had not begun to recognize any
revenue, and recovery of the investment was not considered likely.
During 2000, the Company paid $300,000 to acquire 800,000 shares of common stock
of Flightserv.com, Inc. ("FSI"). The Company accounts for the investment as
securities available for sale with all unrealized gains and losses recognized as
other comprehensive income/(loss), a component of stockholders' equity.
During 2000, the Company paid $250,000 to acquire a 30% interest in Apollo
Industries, Inc. ("Apollo"), a company that is in the process of developing
smart card technology. The Company accounts for the investment under the equity
method of accounting and recognized a $31,453 equity loss in the unconsolidated
affiliate for the year ended December 31, 2000. In addition the Company paid
$25,000 to receive a royalty of 2% on all Apollo sales until the original
investment is recouped. After the original investment is recouped, the Company
shall receive 1% of all Apollo sales, up to a maximum of $30,000 per year. The
royalty agreement expires October 2020. At December 31, 2000, due to the
uncertainty regarding the recovery of the royalty, the Company wrote off the
$25,000. In 2001, Vertical Computer loaned Apollo $24,000, which was due on June
30, 2001 and 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 of Apollo for
each of the two loans. Apollo is in default of the two loans and since repayment
is uncertain the Company has fully reserved the investment and the outstanding
notes receivable balances at December 31, 2001.
NOTE 5. RELATED PARTY TRANSACTIONS
During the years ended December 31, 2001 and 2000, the Company paid Parker,
Mills & Patel LLP ("PMP"), its general legal counsel, approximately $182,000 and
$4,000 in consideration for legal services rendered. William Mills, a partner at
PMP, is also a director of the Company. During 2001, we issued 4,182,000 shares
of common stock with a value of $121,000 to William Mills of Parker, Mills &
Patel LLP for partial payment of legal services.
During 2001, PMP made advances of approximately $30,000 on behalf of the
Company. In exchange, PMP received a 6% promissory note due January 2002 and 3
year warrants to purchase 300,000 shares of common stock at a purchase price of
$0.014 per share. This note is currently in default.
In February 2000, Vertical Computer reached an agreement with Marc Elalouf, a
shareholder of Externet World, in which 246,470,580 common stock shares were
cancelled. Vertical Computer also recorded an additional $11,000 for a
receivable due from the former owner.
F-20
NOTE 5. RELATED PARTY TRANSACTIONS (CONTINUED)
In October 2000, Vertical Computer sold its wholly owned subsidiary Externet
World, Inc. for $1,200,000 to Eurovest, Inc., a company of which Terry Washburn,
a former member of Vertical Computer's Board of Directors, is an executive
officer. Eurovest subsequently sold Externet World to two former shareholders of
Vertical Computer and received 147,350,980 shares of Vertical Computer's common
stock. As part of a settlement agreement, 144,850,000 common stock shares were
cancelled and 2,000,980 shares were retained in trust for Vertical Computer. As
part of the transaction, Eurovest received fees of $72,000 and 500,000 shares of
Vertical Computer's common stock.
In October 2001, Vertical Computer executed a $100,000 promissory note with an
unrelated party. The note bears interest at 12% per annum and all unpaid
principal and interest was due February 2002. The note is secured by third party
securities owned by Vertical Computer, which it intends to sell in order to
repay the loan and by a pledge against the loan by the Mountain Reservoir Corp.,
to sell up to 5,225,000 shares of common stock owned by Mountain Reservoir Corp.
to cover any shortfall. 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. In April 2002, Vertical Computer
entered into an amendment agreement whereby Vertical and the third party waived
any default and agreed to continue to sell the 400,000 shares of eResource
Capital Group stock, which Vertical pledged pursuant to the Stock Pledge
Agreement as collateral. Vertical Computer 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, Vertical agreed to make a minimum
payment of no less than $31,500 by April 5, 2002, a payment of $8,500 by April
6, 2002, ten (10) weekly installment payments of $6,000 beginning on April 15,
continuing until all principal then outstanding with all interest, fees,
charges, and other amounts owing hereunder and then unpaid by June 2002. The
first $6,000 payment has not been paid and the Company is negotiating an
extension.
In November 2001, Vertical Computer executed a $100,000 promissory note with an
unrelated party. The note bears interest at 12% per annum and all unpaid
principal and interest was due February 2002. The note is secured by third party
securities owned by Vertical Computer, which it intends to sell to repay the
loan, and by a pledge against the loan by Mountain Reservoir Corp., to sell up
to 5,225,000 shares of common stock owned by Mountain Reservoir to cover any
shortfall. In January 2001, Vertical Computer executed indemnity and
reimbursement agreements with Mountain Reservoir Corporation to cover the
10,450,000 shares of stock pledged by Mountain Reservoir with regard to the
October and November 2001 notes, whereby Vertical Computer would reimburse
Mountain Reservoir with an 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. Mr. Wade, the President and CEO
of Vertical Computer Systems, is the trustee of the W5 Family Trust. In April
2002, Vertical Computer entered into an amendment agreement concerning the note,
whereby Vertical and the third party agreed waive any default and Vertical
agreed to make monthly installment payments in the amount of $7,500 each on the
fifteenth day of each month, beginning in May 2002. Pursuant to this amendment,
all principal then outstanding, and all interest, fees, charges, and other
amounts owing hereunder and then unpaid shall be paid by the end of September
2002. The first $7,500 payment has not been paid and the Company is negotiating
an extension.
In December 2001, Vertical Computer executed a $425,000 note payable with a
third party. Vertical Computer received proceeds of $300,000 and paid a
commitment fee of $125,000. The note accrues interest at 12% per annum and was
due January 31, 2002. The note is secured by 36,303,932 shares of common stock
of Vertical Computer that is owned by Mountain Reservoir Corporation, and
15,000,000 shares of common stock of Vertical Computer that is owned by Mr.
Valdetaro, Vertical Computer'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 Vertical Computer
Systems, is the trustee of the W5 Family Trust. In January 2001, Vertical
Computer 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,
Vertical Computer agreed to reimburse Mountain Reservoir and Mr. Valdetaro for
any shares sold as collateral to cover the default of any loan. The Note is
currently in default and the collateral is currently being transferred to
Vertical Computer's account to cover the amounts currently due.
F-21
NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following:
DECEMBER 31,
2001
----
Goodwill $ 4,478,397
Licenses and software costs purchased 4,477,743
------------
Total 8,956,140
Less accumulated amortization (1,231,522)
------------
$ 7,724,618
============
Amortization expense related to goodwill, licenses and software assets during
2001 and 2000 was $1,251,951 and $0 respectively.
In August 2001, the Company acquired the stock of Enfacet for $757,000,
excluding the fair market value of $312,000 of Series C stock issued and
eliminated in consolidation. The net liabilities acquired in 2001 related to
this acquisition are as follows:
Accounts payable and accrued expenses $198,075
Notes payable 444,000
----------------
Total Liabilities acquired $642,075
================
NOTE 7. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
2001
------------------
Equipment $ 691,912
Leasehold improvements 70,130
Furniture and fixtures 2,950
------------------
Total 764,991
Less accumulated depreciation (250,848)
------------------
$ 514,143
------------------
Depreciation expense for the year ended December 31, 2001 and 2000 was $181,490
and $100,702, respectively.
NOTE 8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued liabilities consist of the following:
December 31,
2001
-----------------
Accounts payable $ 1,263,257
Accrued payroll 165,701
Accrued liabilities 138,280
Accrued sales taxes 158,655
Accrued financing fees 200,000
-----------------
$ 1,925,893
-----------------
F-22
NOTE 9. OTHER RECEIVABLE
Other receivable is primarily comprised of $419,489 in amounts due from Ross for
NOW customer prepayments on maintenance contracts for the period subsequent to
the acquisition. NOW is withholding payment of $250,000 on the note payable to
Ross as an offset to this receivable.
NOTE 10. NOTES PAYABLE AND CONVERTIBLE DEBT
[Enlarge/Download Table]
Note payable in the amount of $5,500,000 to Coast Bank, bearing interest at prime plus 1.5% (prime
was 4.75% at December 31, 2001), monthly principal and interest payments of $91,500, due February
2004. NOW Solutions is in violation of certain of the loan covenants. The note is secured with
all of the assets of NOW Solutions, LLC, a 60% subsidiary and a $1,500,000 security deposit by the
Company. Vertical Computer had pledged a $1.5 million deposit as collateral pursuant to a deposit
pledge agreement to guarantee the first 24 payments of the loan to finance the purchase of HRIS.
Although Vertical Computer believes it is entitled to a portion of its $1.5 million deposit, it is
currently in discussions with the lender to resolve NOW Solution's default. Until a settlement is
reached, the default by NOW Solutions is cured, Vertical Computer pursues legal action, or NOW
Solutions continues to makes its payments through February 2003, Vertical Computer will not obtain
a return of its deposit, or any portion thereof. As such the entire balance is recorded as current. $ 4,676,819
Note payable, unsecured, in the amount of $1,000,000 to Ross, the note is non-interest bearing and
was recorded with a discount of $79,042, payments of $250,000 and $750,000 were due in February
2002 and 2003, respectively. The February 2002 payment has not been made, pending an offset to the
Ross receivable. 920,958
Note payable in the amount of $27,558 to Parker, Mills, Patel, a related party, bearing interest at
6%, unsecured, principal and interest due at January 2002. The note is delinquent. 27,558
Note payable in the amount of $28,190 to Luiz Valdetaro, an officer of the Company, bearing
interest at 10%, unsecured, principal and interest due on demand. 28,190
Note payable in the amount of $100,000 to Robert Farias, bearing interest at 12%, secured by
eResource Capital Group and Vertical Computer common stock, payable with a $46,000 principal
payment due by April 15, 2002, and any outstanding principal and interest is due June 10, 2002.
The payment is delinquent. 100,000
Note payable in the amount of $100,000 to Robert Farias, bearing interest at 12%, secured by
Vertical Computer common stock, payable with monthly principal payments of $7,500 commencing May
2002 and outstanding principal and interest is due September 30, 2002. 100,000
Note payable in the amount of $280,000 to Robert Farias, bearing interest at 4%, secured by the
SiteFlash technology, payable with three principal payments of $5,000 commencing in May 2002, and
$10,000 monthly payment commencing in August 2002 and outstanding principal and interest is due
September 1, 2004. The May 1, 2002 payment has not been made and the Company is negotiating an
extension. 280,000
Note payable in the amount of $211,137 to the Berche Family Trust, bearing interest at 12%,
secured by 400,000 shares of eResource (the marketable security available for sale), with principal
and interest due at maturity on July 31, 2002. 211,137
Note payable in the amount of $425,000, to Brighton Opportunity Fund, LP, bearing interest at 12%,
secured by 51,303,932 shares of the Company's common stock, with principal and interest due at
maturity on January 31, 2002. The note is delinquent. 425,000
F-23
NOTE 10. NOTES PAYABLE AND CONVERTIBLE DEBT (CONTINUED)
[Enlarge/Download Table]
Note payable in the amount of $350,000 to Robert Mokhtarian, bearing interest
at 8%, unsecured, principal and interest due at maturity on February 28, 2003. 350,000
Note payable in the amount of $84,000 to Robert Farias dated June 1, 2001,
bearing interest at 8%, unsecured, with principal and interest due at maturity
on June 1, 2002. 84,000
Note payable in the amount of $10,000 to Daniel Peterson, bearing interest at 8%, unsecured,
principal and interest due at maturity on June 1, 2002. 10,000
==========
Total notes payable 7,213,662
Less: current maturities, net of discount 5,908,662
----------
Long-Term portion of notes payable $1,305,000
==========
The minimum principal payments, including the discount of $79,042 required in
excess of one year at December 31, 2001 are as follows:
YEAR ENDING DECEMBER 31, AMOUNT
---------------
2002 $ 5,908,662
2003 1,220,000
2004 85,000
-----------
Total $ 7,213,662
===========
CONVERTIBLE DEBENTURES
[Enlarge/Download Table]
Convertible debentures dated September 11, 2001 payable to Cornell Capital Partners, LP,
bearing interest at 6%, convertible into shares of the Company's common stock at either 120%
of the closing bid price on the date of agreement or 80% of the 3 lowest closing bid prices
20 days prior to the conversion. The debentures are convertible at the option of the holder,
at any time after the purchase. Principal and interest are due at maturity on September 1,
2006 $ 125,000
Convertible debentures dated October 5, 2001 payable to Cornell Capital Partners, LP,
bearing interest at 6%, convertible into shares of the Company's common stock at either 120%
of the closing bid price on the date of agreement or 80% of the 3 lowest closing bid prices
20 days prior to the conversion. The debentures are convertible at the option of the holder,
at any time after the purchase. Principal and interest are due at maturity on October 5, 2006 140,000
---------
Total convertible debentures $ 265,000
=========
NOTE 11. INCOME TAXES
At December 31, 2001, the Company had available federal and state net operating
loss carryforwards of approximately $9,300,000 and $4,600,000 for income tax
purposes, which expire in varying amounts through 2021 and 2006, respectively.
Among potential adjustments which may reduce available loss carryforwards, the
Internal Revenue Code of 1986, as amended, (IRC), reduces the extent to which
net operating loss carryforwards may be utilized in the event there has been an
"ownership change" of a company as defined by applicable IRC provisions.
F-24
NOTE 11. INCOME TAXES (CONTINUED)
Our operations generate permanent and temporary differences for depreciation,
amortization, valuation allowances and expense reserves. The temporary
differences and the net operating loss carryforward generated deferred tax
assets of approximately $5,400,000. We have recorded a 100% valuation allowance
against our deferred tax assets, including net operating loss carryforwards, in
accordance with the provisions of Statement of Financial Accounting Standards
No. 109. Such allowance is recognized if, based on the weight of available
evidence, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
NOTE 12. COMMON STOCK OPTIONS/WARRANTS
The Company may issue a maximum of 60,000,000 options to acquire shares of its
common stock under its stock option plan. Most options issued are
non-assignable, non-transferable, have a vesting period of one year from the
date of grant and usually expire five years from the date of grant.
As of December 31, 2001, the Company had a subscription receivable of $2,000 due
in relation to warrants that were exercised.
On December 27, 2000, the Company executed a rescission agreement with a
majority of the individuals that exercised their stock options during fiscal
2000. As part of the rescission, the individuals returned the previously issued
shares in exchange for the cancellation of the notes they executed to purchase
the options. The Company recognized $95,625 compensation expense in connection
with the rescission. During fiscal 2000, the Company received proceeds of
$1,792,204 from the exercise of 59,310,000 options and warrants.
Option activity within each plan is as follows:
[Enlarge/Download Table]
Non- Weighted
Incentive Statutory Average
Stock Option Stock Price
Plans Options Warrants Per Share
---------------- -------------- -------------- ------------
Balance outstanding, December 31, 1999 10,200,000 21,400,000 24,000,000 $ 0.03
Options/warrants granted range from $2.00 to
$0.05 per share 2,300,000 2,400,000 9,836,364 0.36
Options/warrants exercised range from $0.50 to
$0.01 per share (10,710,000) (22,400,000) (26,200,000) (0.04)
Options/warrants rescinded range from $0.50 to
$0.01 per share 10,710,000 21,000,000 - 0.04
---------------- -------------- --------------
Balance/warrants outstanding, December 31, 2000 12,500,000 22,400,000 7,636,364 0.17
Options/warrants granted range from $0.01 to
$.11 per share 8,940,000 3,500,000 126,687,399 0.07
---------------- -------------- -------------- ------------
Options/warrants outstanding , December 31, 2001 21,440,000 25,900,000 134,323,763 0.10
================ ============== ============== ============
F-25
NOTE 12. COMMON STOCK OPTIONS/WARRANTS
Information relating to stock options/warrants at December 31, 2001 summarized
by exercise price are as follows:
[Enlarge/Download Table]
Outstanding Exercisable
---------------------------------------------- -----------------------------
Weighted Average Weighted Average
----------------------------------------------
Life Exercise Exercise
Exercise Price Per Share Shares (Months) Price Shares Price
-------------- ------------ ------------- ------------- ------------
Incentive Stock Options:
$0.01 - $0.50 19,940,000 27.5 $ 0.05 19,940,000 $ 0.050
$0.51 - $1.25 1,500,000 18.0 1.25 1,500,000 1.25
------------- ------------ ------------- ------------- ------------
21,440,000 26.8 $ 0.13 21,440,000 $ 1.30
============= ============ ============= ============= ============
Nonstatutory Stock Options:
$0.01 - $0.50 25,100,000 33.4 $ 0.06 25,100,000 $ 0.06
$0.58 - $2.00 800,000 19.9 1.11 800,000 1.11
------------- ------------ ------------- ------------- ------------
25,900,000 32.9 $ 0.09 25,900,000 $ 1.17
============= ============ ============= ============= ============
Warrants
$0.01 - $0.35 134,323,763 40.6 $ .009 51,992,953 $ 0.08
============= ============ ============= ============= ============
All stock options issued to employees have an exercise price not less than the
fair market value of the Company's common stock on the date of the grant, and in
accordance with accounting for such options utilizing the intrinsic value method
there is no related compensation expense recorded in the Company's consolidated
financial statements. Had compensation cost for stock-based compensation been
determined based on the fair value of the grant dates consistent with the method
of FASB 123, the Company's net loss and loss per share for the years ended
December 31, 2001 and 2000 would have been increased to the pro forma amounts
presented:
2001 2000
----------- -----------
Net loss attributable to common stockholders $(9,456,607) $ (15,053,907)
Pro forma $(9,527,592) $ (15,371,423)
Basic and diluted loss per common share $ (0.02) $ (0.02)
Pro forma $ (0.02) $ (0.03)
The fair value of option grants is estimated on the date of grant utilizing the
Black-Scholes option-pricing model with the following weighted average
assumptions for grants; expected life of options was 1.5 years, expected
volatility of 66%, risk-free interest rate of 5% and a 0% dividend yield. The
weighted average fair value on the date of grants for options granted during
2001 was $0.17 per option.
NOTE 13. STOCKHOLDERS' EQUITY
COMMON STOCK
During 2000 the Company issued 879,688 shares of common stock for various
marketing services. The Company recognized an expense of $238,344 for the
services, which was equal to the fair market value of the shares on the dates of
issuance.
In August 2001, the Company entered into an Equity Line of Credit agreement,
whereby up to $10,000,000 of the Company's common stock may be purchased. The
shares must be registered before the sale and the shares can be purchased at 95%
of the closing bid price, on the date of purchase. The equity line of credit
contains a fee of $400,000 payable in common stock in two installments. In
September 2001, Vertical Computer issued 7,142,857 shares of common stock valued
at $200,000 for the first installment and 12,500,000 shares as part of the
second installment, which was paid in March 2002.
F-26
NOTE 13. STOCKHOLDERS' EQUITY (CONTINUED)
During the year ended December 31, 2001, the Company issued 35,341,058 shares of
common stock for various services. The Company recognized an expense of $572,950
for the services, which is equal to the fair market value of the shares on the
dates of issuance.
PREFERRED STOCK
In February 2000, the Company raised $9,000,000, net of $1,000,000 in offering
costs, in connection with the issuance of 50,000 shares of Series A Preferred
stock. The Series A shares have cumulative dividends of 4% and are convertible
into 500 shares of common stock for every one share of Series A.
In connection with the Series A issuance, the Company recognized a deemed
dividend of $10,000,000, which is the beneficial conversion feature the Series A
shareholders received when they purchased the shares, limited to the maximum
amount of proceeds raised by the Company.
During fiscal 2001, the Company paid cash dividends of $100,000 or $4.22 per
share of Series A, in addition to having $513,712 and $364,932 of accrued
dividends at December 31, 2001 and 2000, respectively.
At December 31, 2001 and 2000, the Company had 7,200 shares of Series B 10%
cumulative convertible preferred stock outstanding. The Series B has a par value
of $0.001 and is convertible into 3.788 shares of common stock for every one
share of Series B. The Series B is not considered equity of the company, since
the Series B shareholders' are entitled to receive a portion of any securities
or assets that are the result of the Company executing a recapitalization,
consolidation, sale or merger ("Special Transactions").
At December 31, 2001 and 2000, the Company had 25,000 shares of Series D 15%
cumulative convertible preferred stock outstanding. The Series D has a par value
of $0.001 and is convertible into 3.788 shares of common stock for every one
share of Series D. The Series D is not considered equity of the Company, since
the Series D shareholders' are entitled to receive the same portion of any
securities or assets as the Series B shareholders' are entitled to on any
Special Transactions.
At December 31, 2001, the Company had issued 80,000 shares of Series C 4%
cumulative convertible preferred stock, of which 30,000 was issued to Enfacet
and, accordingly, was eliminated in consolidation. The remaining 50,000 shares
were issued at a value of $350,000 for the acquisition of intellectual property.
The Series C 4% Cumulative has a par value of $100 and is convertible into 400
shares of common stock for every one share of Series C. The dividend on the
Series "C" 4% Cumulative Convertible Preferred Stock has cumulative cash
dividends accruing at the annual rate of 4% of the Liquidation Value payable
quarterly on the first day of April, July, October and January in each year
beginning the later of July 1, 2000. The initial dividend paid after the
original issuance of any shares of the Series "C" Preferred Stock shall accrue
from such date of issuance on a pro rata basis. In the event of liquidation,
each share will be entitled to a preference of $100, plus accrued but unpaid
dividends, prior to the holders of any junior class of stock.
NOTE 14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Supplemental cash flow information for the years ended December 31, 2001 and
2000 are as follows:
DECEMBER 31,
------------
2001 2000
---- ----
Cash paid for interest $ 535 $ 196
======= =======
F-27
NOTE 14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (CONTINUED)
Non-cash financing activities for the years ended December 31, 2001 and 2000
were as follows:
[Enlarge/Download Table]
December 31,
------------------------------------
2001 2000
---------------- ---------------
Series A cumulative stock dividends $ 488,712 $ (153,821)
Series C cumulative stock dividends 25,000 -
Deemed dividend - 10,000,000
Exercise of 35,900,000 stock options for notes receivable - (1,443,700)
Rescission of 31,700,000 stock options and related notes receivable - 1,441,700
Cancellation of 246,470,580 shares of common stock in connection with litigation
settlement - (2,465)
Debt incurred to acquire NOW Solutions net of a discount of $79,042 6,020,958
Issuance of 30,764,943 warrants to purchase shares of the
Company's common stock for the acquisition of NOW Solutions 798,500 -
Liabilities in excess of assets acquired for the acquisition of Enfacet 757,075 -
Issuance of 7,142,857 shares of the Company's common stock
for the equity line of credit with Cornell Capital 200,000 -
Issuance of 35,341,058 shares of the Company's
common stock for professional services 572,950 238,344
Issuance of 50,000 shares of series C preferred 4% cumulative
convertible stock for the acquisition of intellectual property 350,000 -
Non-employee compensation expense for stock options issued 207,903 1,303,264
Beneficial Conversion on 6% convertible debentures issued 66,250 -
In addition the Company issued 30,000 shares of series C preferred 4% cumulative
convertible stock, with a fair market value of $312,000, for the acquisition of
Enfacet. The stock was issued in Enfacet's name and, accordingly, has been
eliminated in consolidation.
NOTE 15. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company leases a building expiring in December 2004. Future minimum rental
payments required in excess of one year at December 31, 2001 are as follows:
Year ending December 31, Amount
---------------------------------------------------
2002 $ 286,168
2003 480,890
2004 95,989
2005 7,596
---------------------------------------------------
Total $ 870,643
===================================================
F-28
NOTE 15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rental expense for the years ended December 31, 2001 and 2000 was approximately
$321,673 and $97,373, respectively.
In connection with the Company's joint venture investments, the Company has
pledged to fund up to $500,000 of an investment in India, of which $161,693 has
already been provided at December 31, 2001. There is also another commitment to
fund up to $100,000 of a software joint venture investment, of which $91,983 has
already been provided at December 31, 2001.
In connection with the Ross Acquisition (ROSS), NOW Solutions agreed to pay Ross
an additional $750,000 if new license sales, within the first year of the
purchase exceed $9,800,000 or if new license sales are less than $9,800,000 but
greater than $8,500,000, NOW Solutions will pay Ross an additional $250,000.
Within the second year from the purchase date of NOW Solutions, if new license
sales exceed $11,500,000, NOW Solutions will pay Ross an additional $250,000.
For each additional $500,000 of new license sales, in excess of the maximum
earnout amount, in either the first or second year from the purchase date, NOW
Solutions will pay Ross a bonus of $100,000, limited to a maximum of $250,000
for the first year and $500,000 for the second year.
ROYALTIES
On December 16, 1999, the Company acquired the software rights to EMILY, a
computer language, for $5,000. As part of the agreement, the Company agreed to
pay royalties every 6 months, based on the net sales of products sold that were
developed using the EMILY computer language. Royalties range from 1% to 5% of
net sales. There were no sales for the years ended December 31, 2001 and 2000,
respectively.
EMPLOYMENT CONTRACTS
In December 2001, Vertical Computer executed an employment agreement with
Richard Wade pursuant to which Mr. Wade serves as CEO and President of Vertical
Computer. This employment agreement replaces the previous employment agreement.
Pursuant to the terms of the December 2001 employment agreement, Mr. Wade will
receive an annual base salary of $300,000, and the issuance of 5-year warrants
to purchase 20,000,000 shares Vertical Computer common stock at a strike price
of $0.10 per share and 5-year warrants to purchase 600,000 shares of
non-dilutable stock Mr. Wade is also entitled to an annual bonus from a bonus
pool for executives equal to 5% of Vertical Computer's taxable income (without
deduction for depreciation Mr. Wade's share of the bonus pool is equal to the
percentage of his annual base compensation to the total of the combined annual
base compensation of all executives in the pool. In the event the agreement is
terminated by Mr. Wade's death, his estate shall be entitled to compensation
accrued to the time of death plus the lesser of one year's base compensation or
the compensation due through the remainder of the employment term.
In addition, the Company is committed under two employment agreements, one for
an annual salary of $85,000 which expired in January 2002 and the second for an
annual salary of $150,000, which expires in December 2002 and has a renewal term
of two years at the Company's option.
OPERATING AGREEMENTS
NOW Solutions, the Company's 60% owned subsidiary has an operating agreement
with the Company and the other largest shareholder, in which NOW agreed to pay
the Company an annual management fee of $50,000 and the other largest
shareholder an annual management fee of $100,000. The management fees are
payable on a monthly basis.
F-29
NOTE 15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LAWSUITS
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, we are involved in the following 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 that the plaintiffs sustained damage as a
result of an alleged improper rescission of a subscription agreement based on a
November 1999 private placement memorandum. Plaintiffs seek in excess of $18
million in damages based on the alleged increase in value of the stock since the
private placement. We believe this matter is without merit and we intend to
vigorously defend this action.
A second matter, entitled LE SOCIETE FRANCAISE DE CASINOS V. VERTICAL COMPUTER
SYSTEMS, INC., was filed in Los Angeles County, California, Superior Court, on
January 19, 2001. This action was filed by a former customer ("Le Societe") of
Externet World, Inc., a wholly owned subsidiary, which claimed that Vertical
Computer was liable to it for in excess of $500,000 in costs allegedly paid for
an Internet casino software package to be developed and maintained by Externet
World, Inc. The plaintiff also alleged that Vertical Computer has breached an
agreement to pay the disputed sums flowing out of its October 2000 settlement of
litigated matters with two former shareholders of Vertical Computer. A
settlement agreement has been executed and a dismissal was filed in January
2002. As part of the settlement agreement, the parties agreed that Le Societe
received $400,000 and the remaining $100,000 held in escrow, net of
approximately $35,000 in other costs, was distributed 60% to the Company and 40%
to Le Societe.
On April 10, 2002, Vertical Computer appointed a fifth representative to the Now
Solutions' Executive Committee. On April 12, 2002, Vertical Computer received a
letter from Arglen Acquisitions LLC, a member of Now Solutions LLC, accusing
Vertical Computer 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 Vertical Computer's ownership interest in Now Solutions at a
discounted price. On May 8, 2002, Vertical Computer demanded arbitration from
Arglen Acquisitions seeking to enforce its rights under the Operating Agreement,
including the appointment of the fifth representative to the Now Solutions'
Executive Committee. On May 9, 2002, Arglen Acquisitions filed a Demand for
Arbitration and Statement of Claim against Vertical Computer. In its demand,
Arglen Acquisitions alleged that Vertical Computer is in default of its
obligations under the Operating Agreement. Arglen is seeking to enjoin Vertical
Computer 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
Vertical Computer's interest in Now Solutions. Vertical Computer believes these
allegations are without merit. Vertical Computer intends to defend its rights
and to assert its own claims against Arglen Acquisitions.
NOTE 16. SUBSEQUENT EVENTS
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 will pay a monthly fee of $12,500 and issued an additional 100,000
warrants on the same terms as the July 2001 consulting services agreement. The
warrants have vested and are exercisable for five years from issuance at a
strike price equal to the fair market value of the Company 's common stock on
the day of grant. The Company has the option to pay the monthly fee in common
stock valued at 95% of the average closing price 3 trading days prior to
issuance. In the event the proceeds of the stock result in greater than a 20%
profit or loss for the monthly fee, Taurus or the Company shall pay the
difference in profit or loss, as applicable, at the end of the term. The Company
may buyback any unsold shares of stock at any time.
In January 2002, the Company executed indemnity and reimbursement agreements
with Mountain Reservoir Corporation to cover the 10,450,000 shares of stock
pledged by Mountain Reservoir Corporation with regard to the October and
November 2001 notes, whereby the Company would reimburse Mountain Reservoir
Corporation with an number of shares equal to any shares sold as collateral to
cover the default of the loans. Mountain Reservoir Corp. is 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
F-30
Reservoir Corporation and Valdetaro in connection with the $425,000 note issued
in December 2001, whereby the Company would reimburse Mountain Reservoir
Corporation and Valdetaro with the respective number of shares equal to any
shares sold as collateral to cover the default of any loan. The Note is
currently in default and the collateral is currently being sold by the lender
account to cover the amounts currently due. Mountain Reservoir Corp. is a
corporation controlled by the W5 Family Trust, of which Mr. Wade is a trustee.
Mr. Wade is President and CEO of the Company.
NOTE 16. SUBSEQUENT EVENTS (CONTINUED)
In March 2002, the Company issued a $100,000 convertible debenture. The debt
accrues interest at 5% per annum and is due March 2004. The debenture is
convertible into shares of common stock at either 120% of the closing bid price
on the date of agreement or 80% of the lowest closing bid prices 5 days prior to
the conversion. The debenture is convertible at the option of the holder, any
time after purchase. The holder of the debentures is a third-party individual.
As of April 15, 2002, no conversions have taken place.
In April 2002, a $180,000 note that bears interest at 12% per annum, which
Vertical issued in August 2001 and which was due February 2002, was amended such
that the amount on the note was increased to $211,136 and the maturity date was
extended so that the note will be payable in August 2002. In addition, interest
on $146,420 will accrue beginning on August 17, 2001 and interest on the
remaining $64,716 will accrue beginning on September 27, 2001. In connection
with the note, the Company issued warrants to purchase 500,000 shares of its
common stock. The Company pledged third party securities of eResource Capital
Group that is holds. These shares are available for sale as collateral for the
note. The warrants vested immediately, have a strike price of $0.028 per share
and are exercisable for three years from issuance. The value of the warrants,
$5,000 (valued using the Black-Scholes valuation model) has been deferred and
will be amortized over the term of the loan.
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 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, Vertical
agreed to make a minimum payment of no less than $31,500 by April 5, 2002, a
payment of $8,500 by April 6, 2002, ten (10) installment payments of $6,000
beginning on April 15, continuing until all principal then outstanding with all
interest, fees, charges, and other amounts owing hereunder and then unpaid by
June 2002. The first $6,000 payment has not bee paid and the Company is
negotiating an extension.
In April 2002, the Company entered into an amendment agreement concerning a
$100,000 promissory note that Vertical issued in November 2001 that bears
interest at 12% and was due in February 2002. Pursuant to the amendment,
Vertical and the third party agreed waive any default and Vertical agreed to
make monthly installment payments in the amount of $7500 each on the fifteenth
day of each month, beginning in May 2002. Pursuant to this amendment, all
principal then outstanding, and all interest, fees, charges, and other amounts
owing hereunder and then unpaid shall be paid by the end of September 2002. The
May 15, 2002 payment has not been made and the Company is negotiating an
extension.
In April 2002, the Company entered into an amendment agreement concerning the
$280,000 note issued in connection with the purchase of various intangible
assets by Vertical that bears interest at 4% per annum and was due in June 2004.
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. The May 1, 2002 payment has not been made and
the Company is negotiating an extension.
NOTE 17. CONCENTRATION OF RISK
During fiscal 2001, 98% of the Company's net sales were made up of NOW
Solutions' client base. NOW Solutions had one client who accounted for
approximately 5.6% of its total revenues. During fiscal 2000, there were no
significant customers.
F-31
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
Vertical Computer's present directors and executive officers are as
follows:
NAME AGE POSITION
Richard S. Wade 58 President, Chief Executive Officer and Director
William K. Mills 43 Secretary and Director
RICHARD S. WADE, AGE 58, PRESIDENT, DIRECTOR
Richard S. Wade is President of Vertical Computer and has been a
director since October 1999. Before coming to Externet World, Inc. in mid-1999,
and then transitioning to what is now Vertical Computer in late 1999, Mr. Wade
held a number of executive positions with companies in the Pacific Rim from 1983
through early 1999, including the position of Chief Operating Officer of
Struthers Industries, Inc., a public company in the business of wireless
applications. In March 1998, Struthers Industries, Inc. filed a petition for
bankruptcy under the Bankruptcy Act. Prior to these executive positions, Mr.
Wade spent over ten years with Duty Free Shoppers, Inc., culminating in his
attaining the position of President, U.S. Division from 1978 to 1981. Over the
course of his career, Mr. Wade has accumulated experience in retail operations,
distribution, and financial matters. Mr. Wade is a certified public accountant,
earning his Bachelor of Science in Accounting at Brigham Young University and a
Master of Science in Business Policy from Columbia University Business School.
WILLIAM K. MILLS, AGE 43, SECRETARY, DIRECTOR
William K. Mills has been a director since December 2000. Mr. Mills is
a founding partner of Parker Mills & Patel LLP, where he specializes in complex
commercial business representations, including transactional and litigation
matters, such as legal malpractice, intellectual property and general corporate
and governmental representations since 1995. Between 1991 and 1994, Mr. Mills
was a senior attorney and partner with Lewis, D'Amato, Brisbois & Bisgaard,
prior to which he was a senior attorney with Radcliff & West from 1989 to 1991,
senior associate with Buchalter, Nemer Fields & Younger from 1987 to 1991 and an
attorney with Daniels, Baratta & Fine from 1982 to 1987. Mr. Mills holds a J.D.
from UCLA Law School and an A.B. in American Government from Harvard College.
Active in professional and community organizations, he has served as General
Counsel to the California Association of Black Lawyers, a member of the Los
Angeles County Bar Judicial Appointments Committee, and a Board Member of the
John M. Langston Bar Association. Mr. Mills is also a Board Member of the Didi
Hirsch Dental Health Foundation. He has served on the boards of United Way's Los
Angeles Metropolitan Region Board, the Los Angeles City Ethics Commission and
the Los Angeles County Judicial Procedures Commission.
There are no family relationships between any of the executive officers
or directors.
Directors are elected at the Annual Meeting of Shareholders and serve
until their successors have been elected and qualified. Officers are appointed
by and serve at the discretion of the Board of Directors.
Vertical Computer's former directors were Dr. Terry Washburn, who
became a director in June 2000 and resigned in April 2001, and Gary Freeman, who
became a director in February 2001 and resigned in April 2001.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT OF 1934
To the best of management's knowledge, William Mills did not timely
file a Form 3 to report his appointment to our Board of Directors or as an
officer of our Company; and Richard Wade filed a Form 5 reporting a transfer of
shares during fiscal 2001.
35
SIGNIFICANT EMPLOYEES
LUIZ VALDETARO, AGE 43, CHIEF TECHNOLOGY OFFICER
Mr. Valdetaro was previously a consultant (1993-1997) and Chief
Technology Officer (1997-1999) of Diversified Data Resources, a software
company. Mr. Valdetaro helped to implement the first PC to Mainframe in Latin
America in the late 1970s. Mr. Valdetaro also developed a product called ACE.
ACE, an expert based system written in C and assembler using HLLAPI to automate
the operations of IBM mainframes which was sold to Diversified Data Resources in
1991. Mr. Valdetaro, a member of Who's Who Executive Club prior to being Chief
Technology Officer of Diversified Data Resources, was a Senior Systems Engineer
for System/One. Prior to that he was a senior systems engineer for Bank of
America. Mr. Valdetaro is a graduate of Pontific Catholic University, Rio de
Janeiro, Brazil with a B.S. in Electronic Engineering and a M.S. in Systems
Engineering.
VASU VIJAY, AGE 39, EXECUTIVE VICE-PRESIDENT, TECHNOLOGY STRATEGY
As the President of EnFacet, Mr. Vijay is responsible for managing the
overall operations of Vertical Computer while creating an over-arching strategy
and vision to drive towards making EnFacet a successful technology company with
a world-class team and a set of high value products and services. Recently, he
has successfully led the EnFacet team through developing and releasing two
leading innovative software products (NewsFlash and SiteFlash). He has
negotiated and consummated the acquisition of EnFacet by Vertical Computer
Systems Inc., EnFacet's parent company. From 1997-2001, Mr. Vijay led the Arthur
Andersen Business Consulting Advanced Technology team in Austin assisting a
variety of small and medium sized businesses in strategy, technology and
execution. Mr. Vijay also worked at Accenture from April 1992 to September 1997.
Mr. Vijay's extensive industry experience also includes the SuperConducting
SuperCollider, Intersoft Inc., and Siemens.
AUBREY MCAULEY, AGE 38 EXECUTIVE VP, PRODUCT DEVELOPMENT AND SALES
SUPPORT
Aubrey is the founder and chief architect behind Vertical's
award-winning SiteFlash products. His expertise is tightly focused on developing
core technical frameworks and leveraging these frameworks to solve complex
real-world business problems. He has operational responsibility for customer
sales support, customer implementation projects, and product research and
development. He is also charged with combining business and technical
perspectives to guide product development such that our company and product are
well positioned to capitalize on the markets of the future. Mr. McAuley has
spent the last 14 years researching, writing about, and creating software
solutions for the integration of computer technology in complex business
environments, including industrial design and manufacturing, high-volume print
and multimedia production, and massive online repurposing. He has been managing
the product development and professional services teams for SiteFlash and its
predecessors since 1994.
STEPHEN O. ROSSETTI, AGE 51, EXECUTIVE VICE-PRESIDENT, GOVERNMENT
AFFAIRS
As a former senior staff member of the House Armed Services Committee
and as director of the Readiness Subcommittee staff, Stephen Rossetti brings his
extensive government experience and crucial contacts to Vertical Computer. As
director of the Readiness Subcommittee staff, Mr. Rossetti helped to oversee
nearly $90 billion in annual spending of the Department of Defense and
management of the $16 billion defense business and service structure. He also
was responsible for the oversight of the Department of Defense information
technology program, financial programs, infrastructure, military readiness, and
counter-terrorism including chemical and biological weapons preparedness and
response. In 1998, the White House appointed Mr. Rossetti to reform Pentagon
business processes, including service as Chairman of the Defense Travel Board to
overhaul the Department's travel and relocation services for its 4 million
employees. During his tenure with the U.S. Federal government, he worked with
the Senate and House Government Reform Committees, Budget Committees, Armed
Services Committees, Appropriations Committees, and Federal Agencies. In 1996,
he was appointed Executive Director for Morale, Welfare and Recreation and
Resale Activities in the Office of the Secretary of Defense where he oversaw
on-base military businesses with annual revenue of $16 billion. In 1999, he was
appointed to serve as the Director of the Department of Defense integrated
travel and relocation office. Mr. Rossetti has received several honors for his
service from the Congress, the President, and the Secretary of Defense. Since
January 2001, he served as President of Markquest, a lobbying and consulting
practice in Washington D.C. He now serves as our Executive Vice-President of
Government Affairs.
36
LAURENT TETARD, AGE 32, DIRECTOR OF OPERATIONS
Mr. Tetard joined Vertical Computer Systems, Inc. from Externet World,
Inc., where he oversaw business development, managed software design projects
and handled daily operations. His responsibilities included working with clients
and strategic partners to develop business plans, implement strategies and
methodologies to support software development. Combining his education and
experience, Mr. Tetard has specialized in managing design, implementation,
documentation and installation of Internet compatible applications. From 1994 to
1996, Mr. Tetard was a Public Relations Officer with the French Air Force, in
Toulouse, France. Earlier in his career, he completed a thesis in collaboration
with the French Aeronautics and Space Research Center (ONERA) and served
engineering internships at Aerospatiale Matra S.A. Mr. Tetard is an honor's
graduate of the noted French Ecole Nationale Superieure D'arts et Metiers
(ENSAM), with a BS in Engineering and a MS in Multidisciplinary Engineering.
SIGNIFICANT EMPLOYEES OF NOW SOLUTIONS
GARRY P. GYSELEN, AGE 39, CHAIRMAN
As Chairman of Now Solutions, Mr. Gyselen is responsible for
establishing and implementing the firms overall strategic direction. He has
extensive experience in the areas of corporate finance, mergers and
acquisitions, as well as in providing and structuring post-acquisition/financing
implementation and value realization strategies. Mr. Gyselen is also President &
CEO of Arglen Acquisitions LLC, a New York based private equity/leveraged buyout
firm and Senior Managing Director of Thurn & Taxis AG, a Zurich based capital
management organization. Prior to founding Arglen, Mr. Gyselen held senior
positions with Nesbitt Burns Inc., one of Canada's leading investment banks,
Ernst & Young, Deloitte & Touche and Playerston Corporation where he has
sourced, negotiated and structured numerous complex transactions including
multi-jurisdictional financings, strategic acquisitions and divestitures and
restructurings. Mr. Gyselen is a Chartered Accountant (CA) and received
post-graduate degrees in business and public accounting from McGill University,
Montreal and Insead, France. He holds a B.Sc. from Queen's University, Kingston
and is a member of the Canadian Institute of Chartered Accountants, the Ontario
Institute of Chartered Accountants and the Order of Chartered Accountants of
Quebec.
MARIANNE E. FRANKLIN, AGE 42, PRESIDENT AND CEO OF NOW SOLUTIONS
Marianne E. Franklin is President and Chief Executive Officer of Now
Solutions. Ms. Franklin brings extensive experience in the payroll and human
resources industry, which included over 8 years working with this product, under
Ross Systems, most recently as Vice-President of North American sales. As
Vice-President, she built a respected sales division for North America and
increased sales revenue by 200% over a three-year period. Prior to this
function, she was Director of Ross' Canadian Operations where she grew customer
base by 400% over a four-year period. Her background also includes 2 years with
ADP and 13 years in the banking industry, working with their payroll products.
STEPHEN R. GUNN, AGE 47, CHIEF FINANCIAL OFFICER OF NOW SOLUTIONS
Mr. Gunn was appointed Chief Financial Officer of Now Solutions in
April 2001. Prior to joining Now Solutions and Vertical Computer, Mr. Gunn
served as the VP Finance for Intelligent Reasoning Systems, Inc., a privately
held company that is a provider of capital equipment and software to the
electronics manufacturing industry from October 1997 through December 2000. From
April 1996 to May 1997, He served as the CFO of Austin Computer Systems, a
Singapore based personal computer manufacturing company with operations in
Austin, Texas. From August 1994 to March 1996, he served as the Corporate
Controller for Austin Computer Systems. Mr. Gunn obtained his public accounting
experience with KPMG Peat Marwick and received his CPA designation and practiced
as a sole practitioner from 1986 to 1988. He graduated with a BBA from the
University of Texas at Austin.
KENT ORGAIN, AGE 51, VICE-PRESIDENT OF DEVELOPMENT
Mr. Orgain joined Ross Systems in 1993. From 1989 to 1993, he was
Application Maintenance Manager for Tesseract Corporation, a recruiting and
workforce management software company. From 1985 to 1989, Mr. Orgain was a
member of the technical management staff at Argonaut Information Systems, the
original developer of the human resources and payroll product acquired by Ross
Systems. Mr. Orgain moves from Ross Systems where he was Director of business
development. As Vice-President, Mr. Orgain manages the overall development and
direction of the product and the technology. His responsibilities include
supporting the multiple platforms, operating systems and database platforms as
well as deciding the future technology of the product suite.
37
DOROTHY SPOTTS, AGE 41, VICE-PRESIDENT OF SERVICES AND SUPPORT
Ms. Spotts' responsibilities include the overall management of
Application Consulting, Integration Services and Customer Support. She brings
with her a variety of practical and proven skills to promote customer
satisfaction. She has effectively transitioned Customer Support through three
technology generations. Ms. Spotts graduated with a BBA from the University of
Texas at Austin. Ms. Spotts joined Ross Systems, Inc. in April 1991 as a Support
Analyst in the Customer Support department progressing to Operations Manager.
Subsequently, she attained the position of Manager of Integration Services in
September 1997. In March 1999, she was promoted to Director of Integration
Services and then became Director of Professional Services in July 2000.
CARMELINA UGGENTI, AGE 42, VICE-PRESIDENT, SALES AND MARKETING SUPPORT
Ms. Uggenti has the overall responsibility for Now Solutions' global
sales, pre-sales, professional services pre-sales and marketing. Prior to this
position, Ms. Uggenti worked with Ross Systems for over 8 years and was
responsible for the Presales organization. During her tenure, she assisted in
expanding the client base in her territory by 200%.
ITEM 10. EXECUTIVE COMPENSATION
The following table shows all the cash compensation paid by Vertical
Computer, as well as certain other compensation paid or accrued, during the
fiscal years ended December 31, 2001, 2000 and 1999 to Vertical Computer's three
highest paid executive officers, who were employed by Vertical Computer as of
December 31, 2001. No restricted stock awards, long-term incentive plan payouts
or other types of compensation, other than the compensation identified in the
chart below, were paid to these executive officers during these fiscal years. No
other executive officer earned a total annual salary and bonus for any of these
years in excess of $100,000.
[Enlarge/Download Table]
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------------------- --------------------------------------
AWARDS PAYOUTS
------------------------- ----------
OTHER RESTRICTED
NAME AND ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION
------------------ ---- ------ ----- ------------ -------- ---- ------- ------------
($) ($) ($) ($) (#) ($) ($)
Richard Wade,(1) 2001 $162,500(1) -- -- -- 20,850,000 -- --
President and 2000 $145,000 -- -- -- -- -- --
Chief Executive 1999 -- -- -- -- -- -- --
Officer
Luiz Valdetaro, 2001 $150,000 -- -- -- -- -- --
Chief Technology 2000 $145,000 -- -- -- -- -- --
Officer 1999 -- -- -- -- -- -- --
Jeff Davison,(2) 2001 $108,000 -- -- -- -- -- --
Chief Software 2000 $54,000 -- -- -- -- -- --
Officer 1999 -- -- -- -- -- -- --
No stock options were exercised by the named executive officers during
the fiscal year ended December 31, 2000.
(1) Mr. Wade also serves as a Director of Vertical Computer. As a Director,
he is entitled to options to purchase up to 250,000 shares of Common
Stock that expire 3 years after the date of grant or on February 5,
2004.
(2) Mr. Davison tendered his resignation in January 2002.
38
[Enlarge/Download Table]
OPTIONS/SAR GRANT TABLE
-------------------------------------------------------------------------------------------------------------------------------
NO. OF % TOTAL
SECURITIES OPTIONS/SARS VESTING
UNDERLYING GRANTED TO OPTION FROM
OPTIONS/SARS EMPLOYEES EXERCISE OR EXPIRATION EXTENDED STRIKE GRANT PRICE GRANT
NAME GRANTED IN 2001 BASE PRICE DATE POST SPLIT PRICE DATE EXTENSION DATE
---- ------- ------- ---------- ---- ---------- ----- ---- --------- ----
($ PER
(#) (%) SHARE)
--- --- ------
Richard Wade(1) 250,000 0.8% $0.086 02/05/04 250,000 $0.086 02/05/01 21,500 1 year
20,600,000 62.2% $0.100 12/19/04 20,600,000 $0.100 12/20/01 2,060,000 Monthly
Luiz Valdetaro -- -- -- -- -- -- -- -- --
Jeff Davison (2) -- -- -- -- -- -- -- -- --
(1) Mr. Wade also serves as a Director of Vertical Computer. As a Director,
he is entitled to options to purchase up to 250,000 shares of Common
Stock that expire 3 years after the date of grant or on February 5,
2004.
(2) Mr. Davison tendered his resignation in January 2002.
[Enlarge/Download Table]
YEAR-END OPTION VALUES (2000-2001)
------------------------------------------------------------------------------------------------------
NO. OF SECURITIES UNDERLYING
OPTIONS/SARS GRANTED VALUE OF UNEXERCISED IN-THE-MONEY
AS OF FISCAL YEAR END 2001 OPTIONS AT FISCAL YEAR END 2001 (1)
-------------------------- -----------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Richard Wade (2) 822,222 20,027,778 -- --
Jeff Davison (3) 10,000,000 -- -- --
Steve Gunn (4) 250,000 -- -- --
(1) Based on Share Price of $0.013 on December 31, 2001.
(2) Mr. Wade also serves as a Director of Vertical Computer. As a Director,
he is entitled to options to purchase up to 250,000 shares of Common
Stock at a strike price of $0.086 that expire 3 years after the date of
grant or on February 5, 2004. Pursuant to his employment agreement,
dated December 1, 2001, Mr. Wade, as President and CEO, is entitled to
purchase up to 20,600,000 shares of common stock at a strike price of
$0.10 that expire 3 years after the shares vest. These shares vest
equally on a monthly basis over a 3-year period.
(3) Mr. Davison tendered his resignation in January 2002. Mr. Davison is
entitled to options to purchase up to 10,000,000 shares of Common Stock
at a strike price of $0.025 that expire 3 years after the date of grant
or in December 2002.
(4) Mr. Gunn tendered his resignation as CFO of Vertical Computer in
December 2001. Mr. Gunn is entitled to options to purchase up to
250,000 shares of Common Stock at a strike price of $0.086 that expire
3 years after the date of grant or in April 2004.
STOCK OPTIONS AND WARRANTS
During 2000, Vertical Computer granted nonstatutory stock options to
purchase an aggregate of 11,236,364 shares of common stock to various
individuals for services provided. These options are non-assignable and
non-transferable, are exercisable over a three to five year period from the date
of grant, and vest in various increments through 2001.
On December 27, 2000 Vertical Computer executed a rescission agreement
with a majority of the individuals that exercised their stock options during
fiscal 2000. As part of the rescission, the individuals returned the previously
issued shares in exchange for the cancellation of the note receivable they
executed to purchase the options. Julie Holmes and Jeff Davison were
beneficiaries of this program. Vertical Computer recognized a $95,625
compensation expense in connection with the rescission.
39
During 2001, Vertical Computer granted nonstatutory stock options to
purchase an aggregate of 126,687,399 shares of common stock to individuals for
services provided. These options are non-assignable and non-transferable, are
exercisable over a three to five year period from the date of grant, and vest in
various increments through 2001.
OPTION PLAN. Vertical Computer may issue options to purchase up to
60,000,000 shares of common stock under its stock option plan. Most options
issued are non-assignable, non-transferable, have a vesting period of one year
from the date of grant and usually expire five years from the date of grant.
As of December 31, 2001, Vertical Computer had a subscription
receivable of $2,000 due in relation to warrants that were exercised.
On December 27, 2000, Vertical Computer executed a rescission agreement
with a majority of the individuals that exercised their stock options during
fiscal 2000. As part of the rescission, the individuals returned the previously
issued shares in exchange for the cancellation of the notes they executed to
purchase the options. Vertical Computer recognized $95,625 compensation expense
in connection with the rescission. During fiscal 2000, Vertical Computer
received proceeds of $1,792,204 from the exercise of 59,310,000 options and
warrants.
Option activity within each plan is as follows:
[Enlarge/Download Table]
Non- Weighted
Incentive Statutory Average
Stock Option Stock Price
Plans Options Warrants Per Share
---------------- -------------- -------------- ------------
Balance outstanding, December 31, 1999 10,200,000 21,400,000 24,000,000 $ 0.03
Options/warrants granted range from $2.00 to
$0.05 per share 2,300,000 2,400,000 9,836,364 0.36
Options/warrants exercised range from $0.50 to
$0.01 per share (10,710,000) (22,400,000) (26,200,000) (0.04)
Options/warrants rescinded range from $0.50 to
$0.01 per share 10,710,000 21,000,000 - 0.04
---------------- -------------- --------------
Balance/warrants outstanding, December 31, 2000 12,500,000 22,400,000 7,636,364 0.17
Options/warrants granted range from $0.01 to
$.11 per share 8,940,000 3,500,000 126,687,399 0.07
---------------- -------------- -------------- ------------
Options/warrants outstanding , December 31, 2001 21,440,000 25,900,000 134,323,763 0.10
================ ============== ============== ============
Information relating to stock options/warrants at December 31, 2001
summarized by exercise price are as follows:
[Enlarge/Download Table]
Outstanding Exercisable
---------------------------------------------- -----------------------------
Weighted Average Weighted Average
----------------------------------------------
Life Exercise Exercise
Exercise Price Per Share Shares (Months) Price Shares Price
-------------- ------------ ------------- ------------- ------------
Incentive Stock Options:
$0.01 - $0.50 19,940,000 27.5 $ 0.05 19,940,000 $ 0.050
$0.51 - $1.25 1,500,000 18.0 1.25 1,500,000 1.25
------------- ------------ ------------- ------------- ------------
21,440,000 26.8 $ 0.13 21,440,000 $ 1.30
============= ============ ============= ============= ============
Nonstatutory Stock Options:
$0.01 - $0.50 25,100,000 33.4 $ 0.06 25,100,000 $ 0.06
$0.58 - $2.00 800,000 19.9 1.11 800,000 1.11
------------- ------------ ------------- ------------- ------------
25,900,000 32.9 $ 0.09 25,900,000 $ 1.17
============= ============ ============= ============= ============
Warrants
$0.01 - $0.35 134,323,763 40.6 $ .009 51,992,953 $ 0.08
============= ============ ============= ============= ============
40
All stock options issued to employees have an exercise price not less
than the fair market value of Vertical Computer's common stock on the date of
the grant, and in accordance with accounting for such options utilizing the
intrinsic value method there is no related compensation expense recorded in
Vertical Computer's consolidated financial statements.
DIRECTOR COMPENSATION
In February 2001, each member of the Board was granted an option
exercisable for a period of three years to acquire 250,000 shares of Common
Stock at an exercise price of $0.086. No other options or warrants were granted
as director compensation during the fiscal year ended December 31, 2001.
Non-employee directors are entitled to receive $3,500 per meeting.
LIMITATION OF LIABILITY: INDEMNIFICATION
Our Bylaws include an indemnification provision under which we have
agreed to indemnify directors and officers of Vertical Computer to fullest
extent possible from and against any and all claims of any type arising from or
related to future acts or omissions as a director or officer of Vertical
Computer.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
Vertical Computer pursuant to the foregoing, or otherwise, Vertical Computer has
been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable.
EMPLOYMENT AGREEMENTS
In December 2001, Vertical Computer executed an employment agreement
with Richard Wade pursuant to which Mr. Wade serves as Chief Executive Officer
and President of Vertical Computer. This employment agreement replaces the
previous employment agreement. Pursuant to the terms of the December 2001
employment agreement, Mr. Wade will receive an annual base salary of $300,000,
and the issuance of 5-year warrants to purchase 20,000,000 shares Vertical
Computer common stock at a strike price of $0.10 per share and 5-year warrants
to purchase 600,000 shares of stock. Mr. Wade is also entitled to an annual
bonus from a bonus pool for executives equal to 5% of Vertical Computer's
taxable income (without deduction for depreciation). Mr. Wade's share of the
bonus pool is equal to the percentage of his annual base compensation to the
total of the combined annual base compensation of all executives in the pool. In
the event the agreement is terminated by Mr. Wade's death, his estate shall be
entitled to compensation accrued to the time of death plus the lesser of one
year's base compensation or the compensation due through the remainder of the
employment term. In the event of termination by Vertical Computer without cause,
Mr. Wade would receive base compensation for the remainder of the employment
term and his all of his warrants would automatically vest. Mr. Wade did not have
a written employment agreement with Vertical Computer during the years 1999 and
2000. Due to Vertical Computer's cash shortages, Mr. Wade has deferred his
compensation since January 1, 2002.
In January 2000, Vertical Computer executed an employment agreement
with Luiz Valdetaro pursuant to which Mr. Valdetaro serves as Chief Technology
Officer of Vertical Computer. Pursuant to the terms of the agreement, Mr.
Valdetaro receives an annual base salary of $150,000. Mr. Valdetaro is also
entitled to an annual bonus from a bonus pool for executives equal to 5% of
Vertical Computer's taxable income (without deduction for depreciation). Mr.
Valdetaro's share of the bonus pool is equal to the percentage of his annual
base compensation to the total of the combined annual base compensation of all
executives in the pool. Due to Vertical Computer's cash shortages, Mr. Valdetaro
has deferred his compensation since January 1, 2002.
41
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP BY NAMED EXECUTIVE OFFICERS, DIRECTORS AND BENEFICIAL OWNERS
The following table sets forth certain information regarding the
beneficial ownership of the shares of Common Stock as of December 31, 2001, by
each of our directors and executive officers and any person or entity, known by
us to be the beneficial owner of more than five percent of the outstanding
shares of common stock. The table also shows the beneficial ownership of our
stock by all directors and executive officers as a group. The table includes the
number of shares subject to outstanding options and warrants to purchase shares
of Common Stock. The percentages are based on 615,191,422 shares of common stock
outstanding as of December 31, 2001, together with options, warrants or other
securities convertible or exchangeable into shares of common stock within 60
days of December 31, 2001.
SHARES
OF COMMON STOCK PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED OF CLASS
--------------------------------------- ------------------ --------
William K. Mills 4,250,000(2) *
Richard Wade 139,325,500(3) 21.9%
Total Directors and Officers (Two People) 143,575,500 22.6%
Luiz Valdetaro 37,702,940(4) 6.1%
Julie Holmes 5,000,000 *
Jeff Davison 10,000,000 *
Stephen Gunn 250,000(5) *
------------------------------------
* Means less than 1%.
(1) Unless otherwise indicated, the address of each director and officer is
c/o Vertical Computer Systems, Inc., Los Angeles, CA 90048.
(2) Includes options to purchase up to 250,000 shares of Common Stock that
expire 3 years after the date of grant or on April 9, 2004.
(3) Includes options to purchase up to 20,850,000 shares of Common Stock
that expire 3 years after the date of grant. Also includes 101,370,050
shares owned by Mountain Reservoir Corp., a corporation controlled by
the W5 Family Trust, of which Richard W. Wade is a trustee; and
includes 1,000,000 shares owned by Jennifer Wade, a minor child of Mr.
Wade. Pursuant two promissory notes for $100,000 each, Mountain
Reservoir Corp., pledged to sell up to 10,500,000 shares of common
stock owned by Richard Wade to cover any shortfall from the sale of
shares of third party common stock owned by Vertical Computer to pay
the promissory notes. In addition, the $425,000 note issued in December
2001 is secured by 36,303,932 shares of common stock of Vertical
Computer to cover any shortfall in the event of default. These shares
are owned by Mountain Reservoir Corp. on behalf of the W5 Family Trust.
Mr. Wade is a trustee of the W5 Family Trust. In January 2001, Vertical
Computer executed separate indemnity and reimbursement agreements with
Mountain Reservoir Corporation cover the two pledges of 10,450,000 and
36,303,932 shares of common stock, respectively. Pursuant to these
agreements, Vertical Computer agreed to reimburse Mountain Reservoir
for any shares sold as collateral to cover the default of any loan. The
Note is currently in default and the collateral is currently being sold
in the lender's account to cover the amounts currently due.
(4) Includes 1,950,000 shares owned by Gabriela Cuny-Valdetaro, 1,950,000
shares owned by Eliza Cuny-Valdetaro, and 1,950,000 shares owned by
Louis Francois Cuny-Valdetaro, each of whom are minor children of Mr.
Valdetaro. In addition, Valdetaro has pledged to sell up to 20,000,000
shares as collateral for any loans executed on behalf of Vertical
Computer. The note is secured by 15,000,000 shares of common stock of
Vertical Computer that is owned by Mr. Valdetaro, Vertical Computer's
Chief Technology Officer, to cover any shortfall in the event of
default. In January 2001, Vertical Computer executed indemnity and
reimbursement agreements with Mountain Reservoir Corporation and Mr.
Valdetaro to cover his pledge of 15,000,000 shares of common stock.
Pursuant to this agreement, Vertical Computer agreed to reimburse Mr.
Valdetaro for any shares sold as collateral to cover the default of any
loan. The Note is currently in default and the collateral is currently
being sold in the lender's account to cover the amounts currently due.
(5) Includes options to purchase up to 250,000 shares of Common Stock that
expire 3 years after the date of grant or on, April 9, 2004.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the years ended December 31, 2001 and 2000, Vertical Computer
paid Parker, Mills & Patel LLP ("PMP"), its general legal counsel, approximately
$182,000 and $4000 in consideration for legal services rendered. William Mills,
a partner at PMP, is also a director of Vertical Computer. During 2001, we
issued 4,182,000 shares of common stock with a value of $121,000 to William
Mills of Parker, Mills & Patel LLP for partial payment of legal services.
42
During 2001, PMP made advances of approximately $30,000 on behalf of
Vertical Computer. In exchange, PMP received a 6% promissory note due January
2002 and 3-year warrants to purchase 300,000 shares of common stock at a
purchase price of $0.014 per share. This note is currently in default.
In February 2000, Vertical Computer reached an agreement with Marc
Elalouf holder of Externet World, in which 246,470,580 common stock shares were
cancelled. Vertical Computer also recorded an additional $11,000 for a
receivable due from the former owner.
In October 2000, Vertical Computer sold its wholly owned subsidiary
Externet World, Inc. to Eurovest, Inc., a company of which Terry Washburn, a
former member of Vertical Computer's Board of Directors, is an executive
officer. Eurovest subsequently sold Externet World to two former shareholders of
Vertical Computer and received 147,350,980 shares of Vertical Computer's common
stock. As part of a settlement agreement, 144,850,000 common stock shares were
cancelled and 2,000,980 shares were retained in trust for Vertical Computer. As
part of the transaction, Eurovest received fees of $72,000 and 500,000 shares of
Vertical Computer's common stock. An additional 980 shares should have been
retired and the amount was deemed immaterial.
In October 2001, Vertical Computer executed a $100,000 promissory note
with an unrelated party. The note bears interest at 12% per annum and all unpaid
principal and interest was due February 2002. The note is secured by third party
securities owned by Vertical Computer, which it intends to sell in order to
repay the loan and by a pledge against the loan by the Mountain Reservoir Corp.,
to sell up to 5,225,000 shares of common stock owned by Mountain Reservoir Corp.
to cover any shortfall. 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. In April 2002, Vertical Computer
entered into an amendment agreement whereby Vertical and the third party waived
any default and agreed to continue to sell the 400,000 shares of eResource
Capital Group stock, which Vertical pledged pursuant to the Stock Pledge
Agreement as collateral. Vertical Computer 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, Vertical agreed to make a minimum
payment of no less than $31,500 by April 5, 2002, a payment of $8,500 by April
6, 2002, ten (10) weekly installment payments of $6,000 beginning on April 15,
continuing until all principal then outstanding with all interest, fees,
charges, and other amounts owing hereunder and then unpaid by June 2002. The
first $6,000 payment has not been paid and Vertical Computer is negotiating an
extension.
In November 2001, Vertical Computer executed a $100,000 promissory note
with an unrelated party. The note bears interest at 12% per annum and all unpaid
principal and interest was due February 2002. The note is secured by third party
securities owned by Vertical Computer, which it intends to sell to repay the
loan, and by a pledge against the loan by Mountain Reservoir Corp., to sell up
to 5,225,000 shares of common stock owned by Mountain Reservoir to cover any
shortfall. In January 2001, Vertical Computer executed indemnity and
reimbursement agreements with Mountain Reservoir Corporation to cover the
10,450,000 shares of stock pledged by Mountain Reservoir with regard to the
October and November 2001 notes, whereby Vertical Computer would reimburse
Mountain Reservoir with an 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. Mr. Wade, the President and CEO
of Vertical Computer Systems, is the trustee of the W5 Family Trust. In April
2002, Vertical Computer entered into an amendment agreement concerning the note,
whereby Vertical and the third party agreed waive any default and Vertical
agreed to make monthly installment payments in the amount of $7,500 each on the
fifteenth day of each month, beginning in May 2002. Pursuant to this amendment,
all principal then outstanding, and all interest, fees, charges, and other
amounts owing hereunder and then unpaid shall be paid by the end of September
2002. The first $7,500 payment has not been paid and Vertical Computer is
negotiating an extension.
In December 2001, Vertical Computer executed a $425,000 note payable
with a third party. Vertical Computer received proceeds of $300,000 and paid a
commitment fee of $125,000. The note accrues interest at 12% per annum and was
due January 31, 2002. The note is secured by 36,303,932 shares of common stock
of Vertical Computer that is owned by Mountain Reservoir Corporation, and
15,000,000 shares of common stock of Vertical Computer that is owned by Mr.
Valdetaro, Vertical Computer'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 Vertical Computer
Systems, is the trustee of the W5 Family Trust. In January 2001, Vertical
Computer 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,
Vertical Computer agreed to reimburse Mountain Reservoir and Mr. Valdetaro for
any shares sold as collateral to cover the default of any loan. The Note is
currently in default and the collateral is currently being transferred to
Vertical Computer's account to cover the amounts currently due.
43
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this filing:
[Enlarge/Download Table]
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
2.1 Certificate of Ownership and Merger Merging Scientific Incorporated by reference to Exhibit 1.1 to
Fuel Technology, Inc. into Vertical Computer Systems, the Registrant's Form 8-K 12G3 filed on May 2,
Inc. 2000
2.2 Stock Purchase Agreement dated April 5, 2000 between Incorporated by reference to Exhibit 2.2 to
the Company and all the shareholders of Globalfare.com the Registrant's Form 10-KSB/A filed on May
17, 2001
2.3 Stockholders Agreement dated October 12, 2000 between Incorporated by reference to Exhibit 2.3 to
the Company and Vijay Amritraj the Registrant'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
April 26, 2000 the Registrant's Form 10-KSB/A filed on May
17, 2001
2.5 INet Government Services LLC Operating Agreement dated Incorporated by reference to Exhibit 2.5 to
April 28, 2000 the Registrant'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
Vertical Computer Systems, Inc. (f/k/a Xenogen the Registrant's Form 8-K 12G3 filed on May 2,
Technology, Inc.) 2000
3.2 Certificate of Amendment of Certificate of Incorporated by reference to Exhibit 3.2 to
Incorporation (change name to Vertical Computer the Registrant's Form 10-KSB/A filed on May
Systems, Inc.) 17, 2001
3.3 Certificate of Designation of 10% Cumulative Incorporated by reference to Exhibit 3.3 to
Redeemable Series B Preferred Stock the Registrant'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
Redeemable Series D Preferred Stock the Registrant'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
Incorporation (2000) the Registrant's Form 10-KSB/A filed on May
17, 2001
3.6 Certificate of Designation of 4% Cumulative Redeemable Incorporated by reference to Exhibit 3.6 to
Series A Preferred Stock the Registrant'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 Registrant's Form 10-KSB/A filed on May
17, 2001
44
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
4.2 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.2 to
and Ujjwal Bhowmik dated December 17, 1999 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.3 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.3 to
and Juan Caballero dated December 17, 1999 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.4 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.4 to
and Tawee Ekundomsin dated December 17, 1999 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.5 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.5 to
and John R. Feeney dated December 20, 1999 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.6 Non-Statutory Stock Option Agreement between Incorporated by reference to Exhibit 4.6 to
Registrant and Julie M. Holmes Dated December 20, 1999 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.7 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.7 to
and Laurent H. Tetard dated December 18, 1999 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.8 Non-Statutory Stock Option Agreement between Incorporated by reference to Exhibit 4.8 to
Registrant and Andre Bertrand dated December 16, 1999 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.9 Non-Statutory Stock Option Agreement between Incorporated by reference to Exhibit 4.9 to
Registrant and Jeff Davison dated December 16, 1999 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.10 Non-Statutory Stock Option Agreement between Incorporated by referenced to Exhibit 4.10 to
Registrant and Bee C. Lavery dated December 16, 1999 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.11 Non-Statutory Stock Option Agreement between Incorporated by reference to Exhibit 4.11 to
Registrant and Donn F. Morey dated December 16, 1999 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.12 Incentive Stock Option Agreement between Registrant an Incorporated by reference to Exhibit 4.12 to
Steve Lu dated December 19, 2000 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.13 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.13 to
and Ujjwal Bhowmik dated February 5, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.14 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.14 to
and Juan Caballero dated February 5, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.15 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.15 to
and Tawee Ekundomsin dated February 5, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
45
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
4.16 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.16 to
and John R. Feeney dated February 5, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.17 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.17 to
and Laurent H. Tetard dated February 5, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.18 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.18 to
and Diane Castillo dated February 5, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.19 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.19 to
and Carlos Lomheim dated February 5, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.20 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.20 to
and Alex Federico dated February 5, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.21 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.21 to
and Jeannifer Caldona dated February 5, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.22 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.22 to
and Geoffrey Golliher dated February 5, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.23 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.23 to
and Feng Yu (Frank) Zhou dated February 5, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.24 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.24 to
and Jennifer Kim dated February 5, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.25 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.25 to
and Daniela Moura dated February 5, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.26 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.26 to
and James Kim dated February 5, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.27 Non-Statutory Stock Option Agreement between Incorporated by reference to Exhibit 4.27 to
Registrant and Gary Freeman dated February 14, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.28 Non-Statutory Stock Option Agreement between Incorporated by reference to Exhibit 4.28 to
Registrant and William Mills dated February 5, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.29 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.29 to
and Richard Wade dated February 5, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.30 Non-Statutory Stock Option Agreement between Incorporated by reference to Exhibit 4.30 to
Registrant and Terry Washburn dated February 5, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
46
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
4.31 Non-Statutory Stock Option Agreement between Incorporated by reference to Exhibit 4.31 to
Registrant and Vijay Amritraj dated June 5, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.32 Non-Statutory Stock Option Agreement between Incorporated by reference to Exhibit 4.32 to
Registrant and Munish Gupta dated June 5, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.33 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.33 to
and Tawee Ekundomsin dated June 15, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.34 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.34 to
and John R. Feeney dated June 15, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.35 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.35 to
and Laurent Tetard dated June 15, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.36 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.36 to
and Diane Castillo dated June 15, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.37 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.37 to
and Geoffrey Golliher dated June 15, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.38 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.38 to
and Frank Zhou dated June 15, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.39 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.39 to
and Jennifer Kim dated June 15, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.40 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.40 to
and James Kim dated June 15, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.41 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.40 to
and James Kim dated June 15, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.42 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.42 to
and Fabian Marta dated June 15, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.43 Incentive Stock Option Agreement between Registrant Incorporated by reference to Exhibit 4.43 to
and Daniela Moura dated June 15, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.44 Warrant Agreement between Registrant and Phil Incorporated by reference to Exhibit 4.44 to
Alexander dated October 23, 2000 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
47
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
4.45 Warrant Agreement between Registrant and Phil Incorporated by reference to Exhibit 4.45 to
Alexander dated October 23, 2000 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.46 Warrant Agreement between Registrant and Michael Blum Incorporated by reference to Exhibit 4.46 to
dated October 23, 2000 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.47 Warrant Agreement between Registrant and Michael Blum Incorporated by reference to Exhibit 4.47 to
dated October 23, 2000 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.48 Warrant Agreement between Registrant and Gary Blum Incorporated by reference to Exhibit 4.48 to
dated February 5, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.49 Warrant Agreement between Registrant and Donald P. Incorporated by reference to Exhibit 4.49 to
Hatlely dated March 5, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.50 Warrant Agreement between Registrant and Robert Wagman Incorporated by reference to Exhibit 4.50 to
dated May 1, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.51 Warrant Agreement between Registrant and Robert Wagman Incorporated by reference to Exhibit 4.51 to
dated June 1, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.52 Warrant Agreement between Registrant and Mark Kellner Incorporated by reference to Exhibit 4.52 to
dated January 18, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.53 Warrant Agreement between Registrant and Stephen Gunn Incorporated by reference to Exhibit 4.53 to
dated April 9, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
4.54 Warrant Agreement between Registrant and Gary L. Blum Incorporated by reference to Exhibit 4.54 to
dated June 15, 2001 the 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 Registrant'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 Company and Avenel Alliance, Inc. the Registrant'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
Entertainment Marketing Group the Registrant'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
Wade the Registrant's Form 10-KSB/A filed on May
17, 2001
48
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
10.5 Agreement between Registrant and Xatnu, Inc. dated Incorporated by reference to Exhibit 10.1 to
October 16, 2000 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
10.6 Agreement between Registrant and Xatnu, Inc. dated Incorporated by reference to Exhibit 10.2 to
June 29, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
10.7 Agreement between Registrant and Parker Mills Patel Incorporated by reference to Exhibit 10.3 to
dated June 29, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
10.8 Agreement between Registrant and Franklin Financial Incorporated by reference to Exhibit 10.4 to
dated July 9, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
10.9 Agreement between Registrant and Gary L. Blum, Esq. Incorporated by reference to Exhibit 10.5 to
dated July 10, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
10.10 Agreement between Registrant and Taurus Global, LLC Incorporated by reference to Exhibit 10.6 to
dated July 9, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
10.11 Agreement between Registrant and M.S. Farrell & Co., Incorporated by reference to Exhibit 10.7 to
Inc. dated July 9, 2001 the Company's Registration Statement on Form
S-8 filed on July 13, 2001
10.12 Letter Agreement dated as of February 23, 2001 between Incorporated by reference to Exhibit 2.1 to
Arglen Acquisitions, LLC and the Registrant the 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
February 27, 2001 between Arglen Acquisitions LLC and the Company's 8-K filed on May 16, 2001
the Registrant
10.14 Certificate of Designation of Vertical Computers, Inc. Incorporated by reference to Exhibit 3.1 to
Series "C" 4% Cumulative Convertible Preferred Stock Company's Form 10-QSB/A filed on December 19,
2001
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
(b) Berche Stock Pledge Agreement dated August 13, 2001 19, 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
and Cornell Capital Partners, L.P. dated August 16, the Company's Form 10-QSB/A filed on December
2001 19, 2001
10.17 Securities Purchase Agreement between the Company and Incorporated by reference to Exhibit 10.3 to
third party buyers for $250,000 of Convertible the Company's Form 10-QSB/A filed on December
Debentures 19, 2001
10.18 Enfacet, Inc. Stock Purchase Agreement dated Incorporated by reference to Exhibit 10.4 to
August 21, 2001 the Company's Form 10-QSB/A filed on December
19, 2001
49
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
10.19 Agreement between Enfacet and the Company dated August Incorporated by reference to Exhibit 10.5 to
24, 2001 the Company's Form 10-QSB/A filed on December
19, 2001
10.20 Agreement between Registrant and Chuck Ashman dated Incorporated by reference to Exhibit 10.1 to
October 29, 2001 the Company's Registration Statement on Form
S-8 filed on November 8, 2001
10.21 Agreement between Registrant and Michael Blum dated Incorporated by reference to Exhibit 10.2 to
October 29, 2001 the Company's Registration Statement on Form
S-8 filed on November 8, 2001
10.22 Agreement between Registrant and Gary Blum dated Incorporated by reference to Exhibit 10.3 to
November 2, 2001 the Company's Registration Statement on Form
S-8 filed on November 8, 2001
10.23 Agreement between Registrant and Justin Davis dated Incorporated by reference to Exhibit 10.4 to
October 29, 2001 the Company's Registration Statement on Form
S-8 filed on November 8, 2001
10.24 Agreement between Registrant and Allison Enderle dated Incorporated by reference to Exhibit 10.5 to
October 29, 2001 the Company's Registration Statement on Form
S-8 filed on November 8, 2001
10.25 Agreement between Registrant and Robert Farias dated Incorporated by reference to Exhibit 10.6 to
October 30, 2001 the Company's Registration Statement on Form
S-8 filed on November 8, 2001
10.26 Agreement between Registrant and Donald P. Hateley Incorporated by reference to Exhibit 10.7 to
dated October 29, 2001 the Company's Registration Statement on Form
S-8 filed on November 8, 2001
10.27 Agreement between Registrant and Annette Keith dated Incorporated by reference to Exhibit 10.8 to
October 29, 2001 the Company's Registration Statement on Form
S-8 filed on November 8, 2001
10.28 Agreement between Registrant and Aubrey McAuley dated Incorporated by reference to Exhibit 10.9 to
October 29, 2001 the Company's Registration Statement on Form
S-8 filed on November 8, 2001
10.29 Agreement between Registrant and Tom McCloskey dated Incorporated by reference to Exhibit 10.10 to
October 29, 2001 the Company's Registration Statement on Form
S-8 filed on November 8, 2001
10.30 Agreement between Registrant and William Mills dated Incorporated by reference to Exhibit 10.11 to
October 29, 2001 the Company's Registration Statement on Form
S-8 filed on November 8, 2001
10.31 Agreement between Registrant and Leroy Molock dated Incorporated by reference to Exhibit 10.12 to
October 29, 2001 the Company's Registration Statement on Form
S-8 filed on November 8, 2001
10.32 Agreement between Registrant and David Rezeieh dated Incorporated by reference to Exhibit 10.13 to
October 29, 2001 the Company's Registration Statement on Form
S-8 filed on November 8, 2001
50
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
10.33 Agreement between Registrant and Steve Rosetti dated Incorporated by reference to Exhibit 10.14 to
October 29, 2001 the Company's Registration Statement on Form
S-8 filed on November 8, 2001
10.34 Agreement between Registrant and Priyam Sharma dated Incorporated by reference to Exhibit 10.15 to
November 2, 2001 the Company's Registration Statement on Form
S-8 filed on November 8, 2001
10.35 Agreement between Registrant and Jacob Stearns dated Incorporated by reference to Exhibit 10.16 to
October 29, 2001 the Company's Registration Statement on Form
S-8 filed on November 8, 2001
10.36 Agreement between Registrant and Marilyn Stewart dated Incorporated by reference to Exhibit 10.17 to
November 1, 2001 the Company's Registration Statement on Form
S-8 filed on November 8, 2001
10.37 Agreement between Registrant and Vasu Vijay dated Incorporated by reference to Exhibit 10.18 to
October 29, 2001 the Company's Registration Statement on Form
S-8 filed on November 8, 2001
10.38 Agreement between Registrant and Vijay Armitraj dated Incorporated by reference to Exhibit 10.19 to
October 29, 2001 the Company's Registration Statement on Form
S-8 filed on November 8, 2001
10.39 Agreement between Registrant and Taurus Global, LLC Incorporated by reference to Exhibit 10.20 to
dated July 9, 2001 the Company's Registration Statement on Form
S-8 filed on November 8, 2001
10.40 Agreement between Registrant and M.S. Farrell & Co., Incorporated by reference to Exhibit 10.21 to
Inc. dated July 9, 2001 the Company's Registration Statement on Form
S-8 filed on November 8, 2001
10.41 Equity Line of Credit Agreement dated as of August Provided herewith
2001, between the Company and Cornell Capital
Partners, L.P.
10.42 Registration Rights Agreement dated as of August 2001 Provided herewith
between the Company and the buyers identified
therein.
10.43 Escrow Agreement dated as of August 2001 among the Provided herewith
Company, Yorkville Advisors Management, LLC and First
Union National Bank.
10.44 Form of Debenture Provided herewith
10.45 Securities Purchase Agreement dated as of August 2001 Provided herewith
among between the Company and the buyers identified
therein.
10.46 Consulting Agreement dated as of August 2001 between Provided herewith
the Company and Yorkville Advisors Management, LLC.
51
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
10.47 Placement Agent Agreement dated as of August 2001 Provided herewith
among the Company, Westrock Advisors, Inc. and Cornell
Capital Partners, L.P.
10.48 Registration Rights Agreement dated as of August 2001 Provided herewith
between the Company and Cornell Capital Partners, L.P.
10.49 Escrow Agreement dated as of August 2001 among the Provided herewith
Company, Cornell Capital Partners, L.P., Butler
Gonzalez LLP and First Union National Bank.
10.50 Warrant dated as of November 2001 given by the Company Provided herewith
to Parker, Mills & Patel, LLP
10.51 Promissory Note dated as of November 2001 given by the Provided herewith
Company to Parker, Mills & Patel, LLP
10.52 Promissory Note dated as of December 2001 given by the Provided herewith
Company to Brighton Opportunity Fund, LP
10.53 Bridge loan dated as of December 2001 given by the Provided herewith
Company to Brighton Opportunity Fund, LP
10.54 Option Agreement dated as of December 2001 given by Provided herewith
the Company to iNetPurchasing, Inc.
10.55 Stock Pledge Agreement dated as of December 2001 given Provided herewith
by Mountain Reservoir Corp. to Brighton Opportunity
Fund, LP
10.56 Option Agreement dated as of December 2001 given by Provided herewith
the Company to Basil Nikas
10.57 Option Agreement dated as of December 2001 given by Provided herewith
the Company to Robin Mattern
10.58 Option Agreement dated as of December 2001 given by Provided herewith
the Company to Wayne Savage
10.59 Consulting Agreement dated as of January 2002 between Provided herewith
the Company and Taurus Global, LLC
10.60 Reimbursement and Indemnity Agreement dated as of Provided herewith
January 2002 between the Company and Luiz Claudio
Valdetaro Galvao e Mello
10.61 Stock Pledge Agreement dated as of December 2001 given Provided herewith
by Luiz Claudio Valdetaro Galvao e Mello to Brighton
Opportunity Fund, LP
10.62 Amendment Agreement dated as of January 2002 between Provided herewith
the Company and Strategic Media Alliance
10.63 Memorandum of Agreement dated as of January 2002 Provided herewith
between the Company and Strategic Media Alliance
52
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
10.64 Service Agreement dated as of October 31, 2001 between Provided herewith
the Company and Robert Farias
10.65 Promissory Note Agreement as of October 31, 2001 Provided herewith
between the Company and Paradigm Sales, Inc.
10.66 Asset Pledge Agreement as of October 31, 2001 between Provided herewith
the Company and Robert Farias
10.67 Letter Agreement as of October 31, 2001 between the Provided herewith
Company and Robert Farias
10.68 Promissory Note Agreement as of October 31, 2001 Provided herewith
between the Company and Robert Farias
10.69 Stock Pledge Agreement as of October 31, 2001 between Provided herewith
the Company and Robert Farias
10.70 Stock Pledge Letter Agreement as of October 31, 2001 Provided herewith
between the Company and Robert Farias
10.71 Promissory Note Agreement as of November 7, 2001 Provided herewith
between the Company and Robert Farias
10.72 Employment Agreement as of December 1, 2001 between Provided herewith
the Company and Richard Wade
10.73 Warrant Agreement as of December 19, 2001 between the Provided herewith
Company and Richard Wade
10.74 Warrant Agreement as of December 19, 2001 between the Provided herewith
Company and Richard Wade
10.75 Reimbursement and Indemnity Agreement as of January Provided herewith
15, 2002 between the Company and Luiz Claudio
Valdetaro Galvao e Mello
10.76 Reimbursement and Indemnity Agreement as of January Provided herewith
15, 2002 between the Company and Mountain Reservoir
Corporation
10.77 Reimbursement and Indemnity Agreement as of January Provided herewith
15, 2002 between the Company and Mountain Reservoir
Corporation
10.78 Reimbursement and Indemnity Agreement as of January Provided herewith
15, 2002 between the Company and Mountain Reservoir
Corporation
10.79 Letter Amendment Agreement as of April 5, 2002 between Provided herewith
the Company and Robert Farias
53
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
10.80 Asset Purchase Agreement dated November 14, 2001 Provided herewith
between the Company and Paradigm Sales, Inc.
21.1 Subsidiaries of the Company Incorporated by reference to Exhibit 21.1 to
the Registrant's Form 10-KSB/A filed on May
17, 2001
23.1 Consent of BDO Seidman LLP Provided herewith
(b) REPORTS ON FORM 8-K: NONE.
On October 19, 2000, the Company filed a report on Form 8-K dated
September 29, 2000 to disclose the transaction whereby the Company sold its
subsidiary, Externet World, Inc.
On October 19, 2000, the Company filed a report on Form 8-K dated
October 4, 2000 to disclose the transaction whereby two shareholders, each
deemed a control person of the Company, exchanged part of their shareholdings in
the Company to purchase a former Company subsidiary, and thereby each lost
"control person" status.
On March 23, 2001, the Company filed a report on Form 8-K for
acquisition of 60% of Now Solutions LLC.
54
SIGNATURES
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities indicated as of May 20, 2002.
By: /s/ Richard Wade
--------------------------------------
Richard Wade, President and
Chief Executive Officer
By: /s/ Anthony Fidaleo
--------------------------------------
Anthony Fidaleo, Controller (Principal
Accounting Officer)
DIRECTORS:
By: /s/ Richard Wade
--------------------------------------
Richard Wade, Director
By: /s/ William Mills
--------------------------------------
William Mills, Director
55
Dates Referenced Herein and Documents Incorporated by Reference
| Referenced-On Page |
|---|
| This ‘10KSB’ Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| | 9/1/06 | | 60 |
| | 9/1/04 | | 59 |
| | 4/9/04 | | 75 |
| | 2/5/04 | | 71 | | 72 |
| | 2/28/03 | | 60 |
| | 9/30/02 | | 59 | | | | | 10QSB, NT 10-Q |
| | 8/1/02 | | 21 | | 67 |
| | 7/31/02 | | 59 |
| | 6/15/02 | | 54 |
| | 6/10/02 | | 59 |
| | 6/1/02 | | 60 |
| Filed on: | | 5/20/02 | | 88 |
| | 5/15/02 | | 1 | | 67 |
| | 5/9/02 | | 6 | | 66 |
| | 5/8/02 | | 6 | | 66 |
| | 5/1/02 | | 59 | | 67 |
| | 4/16/02 | | 17 |
| | 4/15/02 | | 22 | | 67 |
| | 4/12/02 | | 6 | | 66 |
| | 4/10/02 | | 6 | | 66 |
| | 4/6/02 | | 21 | | 76 |
| | 4/5/02 | | 21 | | 86 |
| | 3/31/02 | | 17 | | | | | 10QSB, NT 10-Q |
| | 1/31/02 | | 21 | | 76 |
| | 1/6/02 | | 8 | | 55 |
| | 1/1/02 | | 74 |
| For Period End: | | 12/31/01 | | 1 | | 75 | | | NT 10-K, NT 10-K/A |
| | 12/19/01 | | 82 | | 86 | | | 10QSB/A |
| | 12/15/01 | | 28 | | 54 |
| | 12/1/01 | | 72 | | 86 |
| | 11/14/01 | | 87 | | | | | NT 10-Q |
| | 11/8/01 | | 83 | | 84 | | | S-8 |
| | 11/7/01 | | 86 |
| | 11/2/01 | | 83 | | 84 |
| | 11/1/01 | | 84 |
| | 10/31/01 | | 86 |
| | 10/30/01 | | 83 |
| | 10/29/01 | | 83 | | 84 |
| | 10/5/01 | | 60 |
| | 9/30/01 | | 17 | | | | | 10QSB, 10QSB/A, NT 10-Q |
| | 9/27/01 | | 22 | | 67 |
| | 9/11/01 | | 11 | | 60 |
| | 8/21/01 | | 82 |
| | 8/17/01 | | 22 | | 67 |
| | 8/13/01 | | 82 |
| | 7/16/01 | | 8 | | 56 |
| | 7/13/01 | | 20 | | 82 | | | S-8 |
| | 7/10/01 | | 82 |
| | 7/9/01 | | 82 | | 84 |
| | 7/1/01 | | 28 | | 53 |
| | 6/30/01 | | 8 | | 56 | | | 10QSB, NT 10-Q |
| | 6/29/01 | | 82 |
| | 6/15/01 | | 80 | | 81 |
| | 6/5/01 | | 80 |
| | 6/1/01 | | 60 | | 81 |
| | 5/17/01 | | 77 | | 87 | | | 10KSB40/A |
| | 5/16/01 | | 82 | | | | | 8-K |
| | 5/8/01 | | 8 |
| | 5/1/01 | | 81 |
| | 4/19/01 | | 8 |
| | 4/9/01 | | 81 |
| | 3/31/01 | | 17 | | | | | 10QSB, NT 10-Q |
| | 3/23/01 | | 87 | | | | | 8-K |
| | 3/5/01 | | 81 |
| | 2/28/01 | | 18 | | | | | SC 13D/A |
| | 2/27/01 | | 82 | | | | | SC 13D/A |
| | 2/23/01 | | 82 |
| | 2/14/01 | | 79 |
| | 2/5/01 | | 78 | | 81 |
| | 1/19/01 | | 16 | | 66 |
| | 1/18/01 | | 81 |
| | 12/31/00 | | 17 | | 75 | | | 10KSB40, 10KSB40/A, NT 10-K |
| | 12/27/00 | | 61 | | 73 |
| | 12/19/00 | | 78 |
| | 10/23/00 | | 80 | | 81 |
| | 10/19/00 | | 87 | | | | | 8-K |
| | 10/16/00 | | 82 |
| | 10/14/00 | | 8 |
| | 10/12/00 | | 77 |
| | 10/4/00 | | 87 | | | | | 8-K |
| | 9/30/00 | | 17 | | | | | 10QSB |
| | 9/29/00 | | 87 | | | | | 8-K |
| | 7/1/00 | | 63 |
| | 6/30/00 | | 17 | | | | | 10QSB, SC 13D |
| | 4/28/00 | | 77 |
| | 4/26/00 | | 77 |
| | 4/5/00 | | 77 |
| | 3/31/00 | | 17 | | | | | 10QSB |
| | 2/7/00 | | 52 |
| | 12/31/99 | | 44 | | 71 | | | 10KSB |
| | 12/20/99 | | 78 |
| | 12/18/99 | | 78 |
| | 12/17/99 | | 78 |
| | 12/16/99 | | 65 | | 78 |
| | 10/21/99 | | 49 |
| List all Filings |
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