U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the quarterly period ended June 30, 2000.
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ____________ to _______________.
Commission file number 0-28685
VERTICAL COMPUTER SYSTEMS, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 65-0393635
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6336 Wilshire Boulevard
Los Angeles, California 90048
(Address of Principal Executive Offices)
(323) 658-4211
(Issuer's Telephone Number)
Scientific Fuel Technology, Inc.
(Former name of small business issuer)
1203 Healing Waters, Las Vegas NV 89031
(Former address of small business issuer)
Indicate by check whether the issuer: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes |_| No |X|
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock, par value $.00001
per share, 746,787,820 shares issued and outstanding as of June 30, 2000.
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
<PAGE>
VERTICAL COMPUTERS SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-QSB
PART I FINANCIAL INFORMATION Page
----
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets (unaudited) as of June 30, 2000
and December 31, 1999 3
Consolidated Statements of Income (unaudited) for the
Three Months Ended June 30, 2000 and 1999 and
Six Months Ended June 30, 2000 and 1999 5
Consolidated Statements of Cash Flows (unaudited) for the
Six Months Ended June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II OTHER INFORMATION
Item 1 Legal Proceedings 15
Item 2 Changes in Securities and Use of Proceeds 15
Item 3 Defaults Under Senior Securities 17
Item 4. Submission of Matters To A Vote Of Security Holders 17
Item 5 Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
2
<PAGE>
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
Item 1. Financial Statements
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- -----------
(Unaudited) (Note)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 8,736,736 $ 210,924
Accounts receivable, trade, net, 71,721 14,456
Due from related parties 19,430 30,247
Stock subscription receivable 15,733 30,700
Other receivable 22,107 30,285
Prepaid expenses 74,516 0
----------- -----------
Total current assets 8,940,243 316,612
----------- -----------
Property and equipment, net of accumulated depreciation
and amortization 471,038 28,768
Goodwill 227,779 0
Investment 455,457 9,987
Deposits 12,370 8,000
----------- -----------
Total assets $10,106,887 $ 363,367
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 123,983 $ 31,657
Accrued dividends 34,891 34,891
Payable due to officer 1,000 15,453
Payable due to shareholder 0 13,708
Note payable 0 100,000
----------- -----------
Total current liabilities 159,874 195,709
----------- -----------
Total liabilities $ 159,874 $ 195,709
----------- -----------
</TABLE>
Commitments and Contingencies (Notes 4 and 5)
3
<PAGE>
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------- ---------------
(Unaudited) (Note)
<S> <C> <C>
Shareholders' Equity (Notes 10 and 11)
Preferred Stock:
Common stock; $0.00001 par value;
1,000,000,000 shares authorized; 746,787,820
shares issued and outstanding at June 30, 2000;
926,603,100 shares issued and outstanding at
December 31, 1999 7,468 9,266
Series A 4% Convertible Preferred stock; $0.001
par value; 600,000 shares authorized; 50,000
shares issued and outstanding at June 30,
2000 and nil shares issued and outstanding at
December 31, 1999 50 0
Series B 10% Convertible Preferred stock;
$0.001 par value; 375,000 shares authorized;
7,200 shares issued and outstanding at
June 30, 2000 and December 31, 1999 7 7
Series D 15% Convertible Preferred stock;
$0.001 par value; 300,000 shares authorized;
25,000 shares issued and outstanding at
June 30, 2000 and December 31, 1999 25 25
Note receivable from shareholder (178,786) (166,984)
Subscription receivable (1,443,050)
Additional paid-in capital 13,024,388 388,171
Accumulated deficit (1,463,089) (62,827)
--------------- ---------------
Total shareholders' equity 9,947,013 167,658
--------------- ---------------
Total liabilities and shareholders' equity $ 10,106,887 $ 363,367
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 11,754 $ 146,941 $ 68,450 $ 326,415
Cost of goods sold 9,791 10,649 20,397 24,697
------------- ------------- ------------- -------------
Gross profit 1,963 136,292 48,053 301,718
------------- ------------- ------------- -------------
Operating expenses:
Selling, general and
administrative expenses 1,015,838 114,648 1,594,836 201,984
------------- ------------- ------------- -------------
Total operating expenses 1,015,838 114,648 1,594,836 201,984
------------- ------------- ------------- -------------
Income from operations (1,013,875) 21,644 (1,546,783) 99,734
Interest Income 160,078 0 160,078 0
Interest expense (13,558) (2) (13,558) (26)
------------- ------------- ------------- -------------
Net income $ (867,355) $ 21,642 $ (1,400,263) $ 99,708
============= ============= ============= =============
Basic and Diluted earnings
per share $ (.001) $ 0.127 $ (.002) $ 0.587
============= ============= ============= =============
Weighted average number of shares outstanding:
Basic and Diluted 750,006,735 170,000 719,094,264 170,000
============= ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ (1,400,262) $ 99,709
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization 22,893 25,000
Gain/(Loss) on Reorganization 0 70,235
Compensation expense on non-statutory stock
options to non-employees 424,197 0
Changes in operating assets and liabilities:
Receivables, including related parties (43,233) (73,789)
Prepaid expenses and other current assets (74,516) (500)
Other assets (219,651) 0
Deposits (4,370) 0
Accounts payable 23,048 7,165
Accounts payable, related party (38,161) (19,189)
------------ ------------
Net cash (used in) provided by operating activities (1,310,055) 108,631
------------ ------------
Cash flows from investing activities:
Acquisition of computer hardware (465,162) (20,557)
Purchase of investments (445,470) 0
------------ ------------
Net cash provided by (used in) investing activities (910,632) (20,057)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of 504 warrants 700,000 0
Issuance of Preferred Series A stock 9,000,000 0
Proceeds from exercise of Series A stock 1,000,000 0
Proceeds from exercise of stock options 46,500 0
------------ ------------
Net cash (used in) provided by financing activities 10,746,500 0
------------ ------------
Net change in cash 8,525,813 88,074
Cash, at beginning of period 210,923 8,309
------------ ------------
Cash, at end of period $ 8,736,736 $ 96,383
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 13,558 $ NIL
Income taxes $ NIL $ NIL
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310 of
regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The accompanying unaudited consolidated financial
statements reflect all adjustments that, in the opinion of the management of
Vertical Computer Systems, Inc. and Subsidiaries (collectively, the "Company"),
are considered necessary for a fair presentation of the financial position,
results of operations, and cash flows for the periods presented. The results of
operations for such periods are not necessarily indicative of the results
expected for the full fiscal year or for any future period. The accompanying
financial statements should be read in conjunction with the audited consolidated
financial statements of the Company included in the Company's Form 10-KSB for
the year ended December 31, 1999.
The Company was incorporated in the State of Delaware in March 1992. The Company
operated as a non-reporting public shell company, with a wholly-owned
subsidiary. On October 21, 1999, the Company acquired the outstanding capital
stock of Externet World, Inc. ("EW"), with the issuance of 786,433,100 shares of
the Company's common stock. The issuance of the Company's common stock to the
shareholders of EW made the Company become an active operating entity. Generally
accepted accounting principles requires that the Company whose stockholders
retain the majority interest in a combined business be treated as the acquirer
for accounting purposes. The relevant acquisition process utilizes the capital
structure of Vertical Computer Systems, Inc. and the assets and liabilities of
EW are recorded at their historical cost. EW is the continuing operating entity
for financial reporting purposes and the financial statements prior to October
21, 1999 represent EW's financial position and results of operations. The net
assets of $35,609 of Vertical Computer Systems, Inc. are included as of October
21, 1999. Although EW is deemed to be the acquiring company for financial
accounting and reporting purpose, the legal status of the Company as the
surviving corporation does not change. The Company is a software development
company, which provides global e-commerce solutions. During December 1999, the
Company acquired the software rights to MLE (aka "EMILY"), a computer language,
which assists the Company in the development of software products.
Note 2 - New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" (SFAS 133), establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. Statement of Financial Accounting
Standards No. 137, Accounting for Derivative Instruments and Hedging Activities
- Deferral of the effective date of FASB Statement No. 133 - an amendment of
FASB Statement No. 133 ("SFAS 133"), defers the effective date of SFAS 133 to be
effective for financial statements ending after June 15, 2000. The Company does
not expect adoption of SFAS No. 133 to have a material effect, if any, on its
financial position or results of operations.
7
<PAGE>
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In December 1999, the SEC staff released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in the financial statements. SAB 101 must be applied to the financial statements
no later than the quarter ending September 30, 2000. The Company does not
believe that the adoption of SAB 101 will have a material affect on the
Company's financial results.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44 ("FIN 44") Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25. FIN 44 clarifies the
application of Opinion No. 25 for (a) the definition of employee for purposes of
applying Opinion No. 25, (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 2, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
The Company believes that the impact of FIN 44 will not have a material effect
on the Company's financial position.
Note 3 - Earnings Per Share
Options to purchase 2,100,000 shares of common stock at an average price of
$0.0562, were granted in June 15, 1992 and remained outstanding at June 30,
1999; these have been split adjusted. These shares were not included in the
computations of diluted earnings per share because the effect of the exercise
would be antidulitive effect on earnings per share.
Options to purchase 4,000,000 shares of common stock at an average price of
$0.769 were granted in the three months ended June 30, 2000 with 2,600,000 of
those unexercised and outstanding at June 30, 2000. These shares were not
included in the computations of diluted earnings per share because the effect of
the exercise would be antidulitive effect on earnings per share.
Note 4 - Contingencies
The Company is subject to certain legal proceedings and claims arising in
connection with its business. In the opinion of management, there are currently
no claims that will have a material adverse effect on the Company's consolidated
financial position, results of operation or cash flows.
Note 5 - Subsequent Event
There are no material subsequent events requiring disclosure as of the date of
this report.
8
<PAGE>
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion is a summary of the key factors management considers
necessary or useful in reviewing the Company's results of operations, liquidity
and capital resources. The following discussion and analysis should be read
together with the Consolidated Financial Statements of Vertical Computer
Systems, Inc. and Subsidiaries and the notes to the Consolidated Financial
Statements included elsewhere in this Form 10-QSB.
This discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity and cash flows of Vertical
Computer Systems, Inc. and Subsidiaries for the six months ended June 30, 2000
and June 30, 1999. Except for historical information, the matters discussed in
this Management's Discussion and Analysis of Financial Condition and Results of
Operations are forward looking statements that involve risks and uncertainties
and are based upon judgments concerning various factors that are beyond our
control. Actual results could differ materially from those projected in the
forward-looking statements as a result of, among other things; the factors
described below under the caption "Cautionary Statements and Risk Factors."
Overview
Vertical Computer Systems, Inc. and Subsidiaries (VCSY) operates in the high
technology industry and is a software development company with limited revenue
generated at this time. It is a multi-lingual portal provider, software
developer and e-commerce solutions company based in the United States. The
financial statements have been prepared in conformity with generally accepted
accounting principles, which contemplates continuation of the Company as a going
concern. However, the Company has suffered operating losses, although it does
not have a capital deficiency as of June 30, 2000.
Management's plan is to continue its strategy to offer an expansive network of
in-country portals, emphasizing its business-to-business (B2B) applications
along with accommodating business-to-consumer (B2C) applications. These portals
allow users, through VCSY's global alliances and its proprietary
state-of-the-art technology, unique access to a wide range of resources, which
are specifically designed around the needs and desires of targeted communities
around the world. Two recognizable alliances established in recent months
include Net2Phone and WebAddressBook.com which greatly add to the usability and
"stickiness" of the portals.
Two of the multi-lingual portals are already online but are being restructured
with improved visual appeal and greater ease of use: The China Bridge
(http://www.thechinabridge.com) and The Brazil Bridge
(http://www.thebrazilbridge). Future plans under review and development include
a US portal as the "gateway", Indian, French, Israeli/Hebrew, Italian and
Australian portals.
For the development of these portals, VCSY intends to work with strong,
strategic international partners who offer investment capital to expand into new
arenas, fuel VCSY Internet businesses, and help the development of the Internet
portals within.
VCSY also develops on its own and will continue to review partnerships with
other regionally established suppliers of Internet infrastructure and content,
top management and authorities, as well as companies and individuals with
expertise and familiarity with the financial, business and
9
<PAGE>
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
marketing communities. In accordance with the VCSY business plan for the
development of multi-lingual portals, the company continues to align itself with
partners whose infrastructures and goals are complementary to its own.
Additionally, the companies that VCSY is selecting to align itself with are
poised to make an immediate impact in the country in which the portal operates.
The specific purposes of these partners are to develop a major network of
portals in different countries, and to market Vertical's proprietary and
licensed technologies throughout the world while developing its own
applications.
With all these multi-lingual portals integrated in one worldwide portal and the
development of unique technological assets, VCSY is working to establish itself
as a leader in worldwide e-business, competing with the major portal providers
and other technology companies providing XML solutions.
ZAPQUOTE, S.A.
In recent months, VCSY entered into two joint ventures with ZAPQuote, S.A.,
Brazil's second largest provider of real time financial information for Brazil's
financial markets. ZAPQuote, S.A., established in 1985, has used its proprietary
wireless technology to become the fastest growing company for financial news and
information based in Brazil. ZAPQuote, S.A. also has a major position in
providing back office software to many of Brazil's major financial institutions.
Both joint venture ownerships are held 50% by VCSY and 50% by ZAPQuote, S.A. The
terms of the first joint venture call for VCSY to provide the latest in U.S.
technology and products while ZAPQuote, S.A. will add its expertise and
familiarity with the Brazilian financial and business communities along with the
initial financing for the project. The specific purpose of this joint venture is
to develop a major Internet portal in Brazil and to market VCSY's proprietary
and licensed technologies throughout the country.
The second joint venture was entered into to develop ZAPQuote, S.A.,'s
proprietatry wireless financial applications for business in countries and
territories around the world, excluding South America.
EMILY SOLUTIONS
VCSY acquired the rights to Emily Solutions web technology on December 16, 1999.
Emily Solution's main product, "the Emily Framework", consists of executable
programs, files, configuration data and documentation needed to create websites
that intercommunicate via XML and HTTP. The Emily Framework is intended to be an
engineering package comparable to other web development tools such as Allaire
Cold Fusion or Microsoft Frontpage.
The primary component of the Emily Framework is MLE (Markup Language Executive),
a programming language that already runs on Windows NT, Linux and several UNIX
platforms. MLE is intended to be both a complement and possibly an alternative
to Java on the server side. MLE implements XML explicitly designed for
server-to-server communication, XML being the industry-endorsed format for
business- to-business communication.
On August 3, 2000, the Company released the official beta version of the first
two products of its MLE solutions suites. The beta tests have commenced with a
number of cross-industry
10
<PAGE>
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
corporations across the United States. The general release of these two MLE
products is scheduled for September 30, 2000.
GLOBALFARE.COM
In May, 2000 VCSY acquired 100% of Globalfare.com, Inc., which is a one-stop
internet travel center. Currently, management is working on several alliances
with certain domestic and international airlines and other travel providers to
ensure a vast offering to VCSY's portal users as well as to anyone who goes
directly to www.globalfare.com. The Company plans to provide guidebook-like
content for the site so as to create the world's most complete source of online
information for travelers.
POINTMAIL.COM, INC.
In June, 2000 VCSY acquired 100% of Pointmail.com, Inc., which has proprietary,
web-based e-mail software that will enhance the Company's existing Postmaster
internet service. This latter service is universally accessible by using a web
browser without the need to install software. This package is scheduled for
release in late 2000.
Another of Pointmail's software packages is FinanceCentral, which is an
application system that provides investors and financial institutions with a
variety of financial services directed toward sophisticated investment analyses.
This package is scheduled for release in late 2000.
iNETPURCHASING, INC.
VCSY entered into two joint venture agreements with iNetPurchasing.com, Inc.
(iNPI). Terms of one agreement call for iNPI to market VCSY's existing and
developmental products, including MLE, to state and local governments within the
U.S. as part of its comprehensive e-solutions bundle.
The second joint venture calls for VCSY to internationally market iNPI's online
procurement services through VCSY's alliances abroad. The initial marketing
targets will be foreign governments, partly in response to certain standards set
forth by the WorldBank, ExlmBank and USAID requiring recipient nations to
implement modern procurement procedures before the release of funds. VCSY will
target international public and private companies as well.
In May 2000, VCSY invested $500,000, in consideration of 2.5% of iNPI's
outstanding shares and a royalty license, which provides for royalty payments to
VCSY based upon iNPI's transactional fees.
EXTERNET WORLD, INC.
VCSY owns 100% of Externet World, Inc., and as a result, owns a 25.2% interest
in the French shopping portal provider Externet World SARL, a French
corporation.
Externet World, Inc. is a global e-corporation solutions company comprised of
three segments:
- Internet services (including web hosting, custom website development
and
11
<PAGE>
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
design),
- turn-key software design, and
- development of proprietary software for the online casino industry.
The Company has significantly reduced Externet World, Inc.'s operations to focus
on other projects that management foresees will result in a greater increase to
shareholder value.
Income/(Loss) from Externet World, SARL is recorded using the equity method of
accounting. The income/(loss) generated is not material to VCSY's operations and
no income/(loss) has been recorded in the financial statements for the period
ended June 30, 2000 due to unavailability of financial information from Externet
World, SARL.
Results of Operations
Net sales for the six months ended June 30, 2000 are primarily made up of
software development, web-site hosting through Externet World,Inc., and travel
bookings through Globalfare.com. This compares to the same period ended June 30,
1999 where the majority of revenues were from a software development contract
with Externet World, Inc. and some incidental computer sales to clients
requiring separate servers maintained onsite.
Cost of Goods Sold (COGS) for the six month period ended June 30, 2000 includes
the costs of outside web-hosting by a third party if Security Socket Layers
(SSL) were required for the web-site(s). Also for this period, COGS includes the
cost of tickets sold through Globalfare.com. For the six month period ended June
30, 1999, the primary COGS was the website hosting charges for SSL requirements
as well as the costs for computers and peripherals that were purchased on behalf
of client(s).
The net loss generated during the six months ended June 30, 2000 ($1,400,262)
was compared to net income of $99,709 for the six months ended June 30, 1999.
The loss for the period ended June 30, 2000 includes operating expenses that
were not incurred in the prior reporting period due to the limited extent of
operations, primarily that of Externet World, Inc. at that time. Significant
operating expenses for the six month period ended June 30, 2000 include
Consulting fees ($69,722), Insurance ($32,772), Legal and Professional fees
($106,437), Salaries and related payroll taxes ($548,868), Compensation Expense
(a non-cash expense for non-statutory options granted to third parties in lieu
of cash payment of $437,456) and Travel expenditures ($27,105).
Liquidity and Capital Resources
Negative cash flows of ($1,310,055) for the six-month period ended June 30, 2000
were a result of operating activities consisting mainly of expenditures incurred
in the normal course of business as described above. Of that amount,($356,883)
of the negative cash flow is a result of changes in non-cash current assets and
current liabilities.
Despite the negative cash flows described above, the Company's experienced an
overall increase in current assets primarily due from the receipt of proceeds
for the private placement of Company securities in the quarter ended March 31,
2000. These placements, totaling $10,046,500 in proceeds, have been used to fund
VCSY's operations, asset acquisitions and investments.
12
<PAGE>
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The excess proceeds are maintained in Money Market Accounts and Certificates of
Deposit to ensure liquidity. A more dynamic investment profile will be
implemented once cash flows from operations are able to support it. The Company
also purchased computer assets, software licenses, and retained attorneys for
various business matters (SEC law, Employment Law, General Counsel, etc.).
Management believes that proceeds from our private placements, together with our
other resources and expected revenues, will be sufficient to cover working
capital requirements for at least 12 months. Should revenue levels expected by
us not be achieved, we would nevertheless require additional financing during
such period to support operations, continued expansion of our businesses and
acquisition of products and technologies. Such sources of financing could
include capital infusions from our strategic alliance partners, additional
equity financings or debt offerings.
During the six months ended June 30, 2000, the Company had an overall decrease
in liabilities due to the payment of payroll taxes and other accrued expenses
outstanding at December 31, 1999. The Company has no long term debt.
Cautionary Statements and Risk Factors
YEAR 2000 ISSUES:
The Company did not experience any problems either directly or indirectly
related to the Year 2000 issues.
Year 2000 issues are the result of computer programs being written using two
digits rather than four to define the applicable year associated with the
program or an associated computation. Any of the Company's computer programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculation causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices or engage in normal
business activities.
Management has assessed its information technology hardware and software,
including personal computers, application and network software for Year 2000
compliance readiness. Over the last two years, the Company upgraded and
purchased various computer hardware and software, all of which are Year 2000
compliant and does not foresee the need of additional purchases in relation to
the Year 2000 issues.
Although the Company believes its computer systems are Year 2000 compliant, the
most significant internal control risk posed by the Year 2000 issues is the
possible failure of the Company's accounting systems. If the accounting systems
were to fail, the Company would implement manual accounting processes, which may
slow the timeliness of information needed to manage the business. The most
significant outside control risk is possible problems experienced by the
Company's financing institutions that maintained the Company's depository
accounts and outstanding debts. These institutions have confirmed that they are
in compliance. Although the Company had not experienced any Year 2000 problems,
there can be no assurance that it will not encounter such problems in the
future.
13
<PAGE>
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARKET RISKS
The Company anticipates that it will have activities in numerous countries in
future periods. These operations will expose the Company to a variety of
financial and market risks, including the effects of changes in foreign currency
exchange rates and interest rates. As of June 30, 2000, there are no material
gains or losses requiring separate disclosure.
DIVIDENDS
The Board intends to declare and pay dividends on VCSY Preferred Stock based on
the earnings, financial condition, cash flow and business requirements of the
Company. During the first six months of 2000, the Board has not declared
dividends on the Series "A", "B", and "D" Preferred Shares, although dividends
on these shares are in arrears in the amount of $212,825 at June 30, 2000.
14
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On June 27, 2000, the Company filed an action in Los Angeles County
California Superior Court for declaratory relief against Mr. Patrice
Lambert, entitled Vertical Computer Systems, Inc. v. Patrice Lambert (LASC
Case No. BC232453). Mr. Lambert owns less than 20% of the Company's
outstanding common stock, and had been the Chief Executive Officer of the
Company's wholly owned subsidiary, Externet World, Inc. This action, which
is currently pending, arises from Mr. Lambert's unauthorized attempt to
gain managerial control of the Company. The Company seeks a declaratory
judgment that Mr. Lambert's actions lacked legal authorization. Counsel
for the Company advises that, based on facts presently known, it is likely
that the Company will prevail on its claims.
In a related case, in July 2000, the Company and its President, Mr.
Richard Wade, were named in a shareholder derivative lawsuit filed by Mr.
Patrice Lambert in Los Angeles County California Superior Court, entitled
Patrice Lambert v. Vertical Computer Systems, Inc., et al. (LASC Case No.
BC233137). The action was filed, which is currently pending, seeks
monetary and punitive damages based on allegations of fraud and breach of
fiduciary duty arising from Mr. Wade's purported mismanagement and alleged
misrepresentations. Counsel advises that, based on the facts presently
known, the Company and Mr. Wade will be able to defend this action
successfully.
Effective July 26, 2000 the Company terminated Mr. Patrice Lambert as the
Chief Executive Officer of Externet World, Inc., a wholly-owned subsidiary
of the Company.
Item 2. Changes in Securities and Use of Proceeds
There have been no modifications to the rights or preferences of any class
of stock issued by the Company during the three months ended June 30,
2000.The sales set forth below involved no underwriter's discounts or
commissions, unless specified below. The sales 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 the
Registrant of shares of its common stock to financially sophisticated
persons who are fully aware of the Registrant's activities, as well as its
business and financial condition and who acquired said securities for
investment purposes and understood the ramifications of same.
For the three months ended June 30, 2000 the Company issued 8,945,300
common shares as consideration for three (3) acquisitions; there were no
proceeds received for these shares. The transactional details required
pursuant to Item 701 of Regulation S-B follow:
|_| Scientific Fuel Technologies, Inc. - On April 6, 2000, 2,000,000
shares of the Company's common shares were issued in exchange for
100% of the outstanding stock of Scientific Fuel Technology, Inc.,
(Scientific) a Nevada corporation. In addition to the common shares,
the Company paid $200,000 cash to Scientific's.
15
<PAGE>
Item 2. Changes in Securities and Use of Proceeds (continued)
sole shareholder.
|_| Globalfare.com - On May 5, 2000, the Company issued 5,945,300 common
shares to 14 parties, including individuals, LLCs, partnerships and
trusts. The share distribution was based on the pre-acquisition
shareholdings of Globalfare.com's common stock. Century Capital LLC
received a fee of $20,000 in connection with this transaction. The
purchase agreement called for total consideration to be calculated
on weighted average closing Company share price covering the
five-day period prior to the transaction on May 5, 2000. This price
was calculated to be $0.841, for total consideration of $5,000,000.
|_| Pointmail.com, Inc. - On May 30, 2000, the Company acquired
Pointmail.com, Inc. for a total of 1,000,000 common shares in
exchange for 100% of the outstanding stock held by a sole
shareholder. As part of this acquisition, the Company agreed to pay
a 10% royalty to the sole shareholder for certain transaction fees
generated in the exploitation of proprietary technology, up to a
limit of $60,000. No royalties have been paid to date.
In addition to the acquisitions discussed above, the Company common shares
were issued in conjunction with the exercise of stock options, as follows:
|_| On June 20, 2000, 800,000 common shares were issued to two (2)
parties in relation to stock options granted under the Stock Option
Plan dated June 12, 1992. These options were exercised at a price of
$0.05625 per share. Proceeds to the Company totaled $45,000.
|_| On May 27, 2000, 300,000 common shares were issued to one employee
in relation to the exercise of stock options granted under the Stock
Option Plan dated December 15, 1999. These options were exercised at
a price of $0.50 per share. An interest-bearing Promissory Note for
$150,000 was received upon exercise.
|_| On June 26, 2000, 100,000 common shares were issued to one employee
in relation to the exercise of stock options granted under the Stock
Option Plan dated December 15, 1999. These options were exercised at
a price of $0.451 per share. An interest-bearing Promissory Note for
$45,100 was received upon exercise.
|_| On May 26, 2000, 500,000 common shares were issued in relation to
the exercise of stock options granted pursuant to the terms of the
Stock Option Plan dated December 15, 1999. These options were
granted to and exercised by an unrelated third party at a price of
$0.578 per share, which was 85% of the closing price ($0.68) on the
day immediately preceding the date of grant. An interest-bearing
Promissory Note for $289,000 was issued to the Company as partial
consideration for the shares.
|_| On April 18, 2000, 500,000 common shares were issued in relation to
the exercise of stock options granted pursuant to the terms of the
Stock Option Plan dated December 15, 1999. These options were
exercised by an unrelated third party at a price of $0.40 per share,
which was 85% of the closing price ($0.47) on the day immediately
preceding the date of grant. An interest-bearing Promissory Note for
16
<PAGE>
$199,750 was issued to the Company as partial consideration for the
shares.
Item 3. Defaults Under Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K.
8-K 12G3 Current Report, filed May 2, 2000 for change in control of
registrant to Vertical Computer Systems, Inc. and Subsidiary.
Financial statements of new registrant were filed.
8-K 12G3/A Amended Current Report, filed May 3, 2000 to amend 8-K
12G3 filed on May 2, 2000.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2000 VERTICAL COMPUTER SYSTEMS, INC.
By: Richard Wade
Its: President
By: Julie M. Holmes
Its: Chief Financial Officer
18
