<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K 12G-3/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act
APRIL 27, 2000
Date of Report
(Date of earliest event reported)
VERTICAL COMPUTER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
6336 WILSHIRE BLVD.
LOS ANGELES, CA 90048
(Address of principal executive offices)
(323) 658-4211
Registrant's telephone number
SCIENTIFIC FUEL TECHNOLOGY, INC.
1850 EAST FLAMINGO ROAD, #111
LAS VEGAS, NV 89119
Former name and former address
DELAWARE 0-28585 65-0393635
(State or other jurisdiction ) (Commission File (IRS Employer
of incorporation) File Number) Identification No.)
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ITEM 1. CHANGES IN CONTROL OF REGISTRANT.
(a) On April 6, 2000, Vertical Computer Systems, Inc., a Delaware
corporation ("VCSY"), acquired 100% of the issued and outstanding stock of
Scientific Fuel Technology, Inc., a Nevada corporation ("Registrant") pursuant
to an Agreement and Plan of Reorganization which has previously been reported on
Form 8-K and filed on April 21, 2000
As a result of VCSY's 100% ownership of the Registrant, the Board of
Directors of VCSY, on April 26, 2000, by unanimous written consent, elected to
merge the Registrant into VCSY pursuant to Section 253 of Delaware's General
Corporate Law ("Merger") and Section 78.457 of the Nevada Revised Statutes.
Pursuant to the Merger, VCSY will be the surviving company.
Upon the effectiveness of the Merger, VCSY has an aggregate of
737,642,520 shares of common stock issued and outstanding, $.00001 par value.
The officers of VCSY will continue as officers of the successor issuer.
See "Management" below. The officers, directors, and bylaws of VCSY will
continue without change as the officers, directors, and bylaws of the successor
issuer.
A copy of the Certificate of Ownership and Merger is filed as an
exhibit to this Form 8-K and is incorporated in its entirety herein. The
foregoing description is modified by such reference.
(b) The following table contains information regarding the
shareholdings of VCSY's current directors and executive officers and those
persons or entities who beneficially own more than 5% of its common stock as of
April 27, 2000:
Amount of Common % of Common Stock
Name Stock Beneficially Owned Beneficially Owned
Richard Wade 138,325,500 (1) 18.75%
President, Director
6336 Wilshire Blvd.
Los Angeles, CA 90048
Luiz Claudio Valdetaro 41,352,940 (2) 5.61%
Galavao e Mello
6336 Wilshire Blvd.
Los Angeles, CA 90048
Patrice Lambert 143,625,500 (3) 19.47%
6336 Wilshire Blvd.
Los Angeles, CA 90048
Marc Elalouf 143,725,480 19.48%
6336 Wilshire Blvd.
Los Angeles, CA 90048
Julie Holmes 5,000,000 <1%
6336 Wilshire Blvd.
Los Angeles, CA 90048
All directors and
executive officers as 184,678,440 25.04%
a group (3 persons)
The persons and entities named in the table have sole voting and investment
power with respect to all shares shown as beneficially owned by them, except as
noted below.
<PAGE> 3
(1) Includes 101,372,560 shares owned by Mountain Resevoir 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.
(2) Includes 1,000,000 shares owned by Gabriella Cuny-Valdetaro,
1,000,000 shares owned by Eliza Cuny-Valdetaro, and 1,000,000
shares owned by Louis Francois Cuny-Valdetaro, each of whom
are minor children of Mr. Valdetaro.
(3) Includes 101,372,560 shares owned by Queue Communications
Ltd., a corporation controlled by Patrice Lambert.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
(a) As a result of VCSY merging with Registrant, its wholly-owned
subsidiary pursuant to Section 253 of the Delaware General Corporate Law, and
Section 78.45 of the Nevada Revised Statutes. Registrant's outstanding shares
shall be cancelled, and VCSY shall assume Registrant's reporting obligations
under successor issuer status as more fully detailed in Section 12g-3(a).
(b) VCSY intends to continue developing multi-linqual portals and
provide internet solutions to foreign countries, developing nations and regions
of the world.
BUSINESS
Vertical Computer Systems, Inc. (VCSY) is a multi-lingual portal and Internet
solutions provider for foreign countries, developing nations and regions of the
world where access and content is limited. VCSY focuses particularly on
development in the various regions' native tongues. VCSY is committed to
building communities fostering the development of the Internet in the Americas,
Europe, Asia and the Pacific Rim.
VCSY's current strategy is to offer an expansive network of in-country portals,
accommodating both business-to-business (B2B) and 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 of the multi-lingual portals are already online: The China Bridge
(http://www.thechinabridge.com) and the Brazil Bridge
(http://www.thebrazilbridge). Future plans under review and development include
an Italian portal, French portal, Israeli/Hebrew portal, as well as Indian and
Australian portal.
For the development of these portals, VCSY intends to work with strong,
strategic investment partners who will 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 may partner, once entered in the country, with
other regionally established suppliers of Internet infrastructure and content,
top management and authorities, as well as companies with expertise and
familiarity with the financial, business and 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
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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 portals providers.
ZAPQUOTE S.A.
VCSY entered into a joint venture 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.
The joint venture ownership is held 50% by VCSY and 50% by ZapQuote, S.A. The
terms of the joint venture call for VCSY to provide the latest in U.S.
technology and products while Zap 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.
EMILY SOLUTIONS
VCSY acquired Emily Solutions web technology on December 16, 1999. Emily'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 (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.
VCSY started as of April 1, 2000, a 90-day program entitled "The Emily
Development Project", which contains three primary goals:
- to develop the Emily Framework into a mature software that
embodies requirements useful to VCSY in its internal
development of its international portals and websites;
- to develop the Emily Framework into a deliverable software
product that can be sold by VCSY to other website developers
and programmers thereby capturing market share for XML and
dynamic website creation; and
- to develop a website which can explain and demonstrate the
Emily Framework to third parties.
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.
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Externet World, Inc. is a global e-corporation solutions company comprised of
three segments:
- Internet services (including web hosting, custom website
development and design)
- turn-key software design
- development of proprietary software for the online casino
industry
MANAGEMENT
NAME AGE TITLE SINCE
Richard S. Wade 56 President, Director 1999
Julie M. Holmes 39 Chief Financial Officer 2000
Luiz Claudio Valdetaro 41 Chief Technology Officer 2000
Galvao e Mello
Patrice Lambert 38 Chief Executive Officer, 1999
Externet World, Inc.
RICHARD S. WADE is President of VCSY. Before coming to Externet World,
Inc. in mid-1999, and then transitioning to what is now VCSY 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 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, he has accumulated
experience in retail operations, distribution, and financial matters. Mr. Wade
is a CPA, earning his Bachelor of Science in Accounting at Brigham Young
University as well as a Master of Science in Business Policy from Columbia
University Business School.
JULIE M. HOLMES is Chief Financial Officer of VCSY. Prior to joining
the Company full-time in February, 2000, Ms. Holmes accumulated over 20 years of
experience in accounting and consulting. Immediately prior to VCSY, Ms. Holmes
was a Senior Manager in the International Tax Division of Arthur Andersen LLP,
Los Angeles. During her 14-year career with AA LLP, she has been assigned to the
Firm's Honolulu, Hong Kong and Mexico City offices working in the international
tax arena. During the 4-year period of working outside AA LLP, Ms. Holmes held a
senior consulting position with Strategic Compensation Associates, Los Angeles
office and an internal consulting position with Intel in Chandler, AZ. These
positions broadened Ms. Holmes' business skills in operational, strategic and
compensation matters. Ms. Holmes earned a Bachelor of Science degree in
accounting from California State University, Long Beach and an MBA from the
University of Southern California. She is a California CPA, holding membership
in the Cal Society of CPAs and the American Institute of CPAs.
LUIZ CLAUDIO VALDETARO GALAVAO E MELLO is Chief Technical Officer (CTO)
of VCSY. He is well-known in international computer circles, obtaining Lifetime
membership in the Who's Who Executive Club. Immediately prior to coming to
Externet World, Inc. in 1999 as its CTO and then transitioning to the same
position to what is now VCSY in late 1999, Mr. Valdetaro held the CTO position
with Diversified Data Resources, Inc. (DDR) the company to which he sold the
rights for his expert-based system which marketed as ACE. This product,
originally TPFXPERT, is being used by Fortune 500 companies (e.g., AMEX, VISA
and Bank of America, to name a few) and remains a key product of DDR. Mr.
Valdetaro has an extensive programming background in the banking and airline
industries. Mr. Valdetaro is a graduate of Catholic University, Rio de Janeiro,
Brazil earning
<PAGE> 6
a Bachelor of Science of degree in Electronic Engineering and a Masters of
Science degree in Systems Engineering.
PATRICE LAMBERT is the Chief Executive Officer of Externet World, Inc.,
a wholly-owned subsidiary of VCSY. Prior to Externet, Mr. Lambert was the CEO of
Microplanet, a web management company based in Los Angeles from 1995 to 1997.
Prior to that, Mr. Lambert founded and operated an international exporting
company which focused on the French consumer market for distribution of American
products. Mr. Lambert has also held executive positions with two companies in
France, his country of origin. Mr. Lambert earned a Bachelor of Science degree
in Economics from the University of Nice, France from which he also earned an
undergraduate degree in Electronic Sciences.
Members of the Board of Directors are elected on an annual basis and serve until
their successors have been duly elected and qualified. There are no family
relationships among any of the directors and executive officers.
ITEM 3. BANKRUPTCY OR RECEIVERSHIP
Not Applicable.
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
Not Applicable.
ITEM 5. OTHER EVENTS
Successor Issuer.
Pursuant to Rule 12g-3(a) of the General Rules and Regulations of the
Securities and Exchange Commission, VCSY is the successor issuer to Scientific
Fuel Technology, Inc.. for reporting purposes under the Securities Exchange Act
of 1934.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
Audited financial statements of VCSY are filed herewith along with
Proforma financial statements after the merger.
(A) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
The audited financial statements of the acquiring business,
Vertical Computer Systems, Inc. and Subsidiaries, together
with the audit report of BDO Seidman, LLP is attached hereto
as Exhibit 99.1.
(B) PRO FORMA FINANCIAL INFORMATION
On April 6, 2000, Vertical Computer Systems, Inc., a Delaware
corporation ("VCSY"), acquired 100% of the issued and
outstanding stock of Scientific Fuel Technology, Inc., a
Nevada corporation ("Registrant"), in exchange for 2,000,000
VCSY common shares. As a result of VCSY's 100% ownership of
the Registrant,
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the Board of Directors of VCSY, on April 27, 2000, elected to
merge the Registrant into VCSY pursuant to Section 253 of
Delaware's General Corporate Laws. As a result of the merger,
VCSY will be the surviving company.
The pro forma exhibits include a combining consolidated
balance sheet as of March 31, 2000 that reflects the effect of
the stock issued in the acquisition. The acquisition has been
accounted for as an issuance of VCSY common stock in exchange
for the net monetary assets of Registrant, accompanied by a
recapitalization (reverse merger). In addition, two combining
pro forma consolidated statements of operations are included
which present income (loss) from operations for the year ended
December 31, 1999, and the three months ended March 31, 2000.
The unaudited pro forma combined financial statements of VCSY
are based upon the historical financial statements of
the Registrant and VCSY after giving effect to the merger
discussed above. These unaudited pro forma combined financial
statements are not necessarily indicative of the financial
position and results of operations that would have been
attained had the transactions actually taken place at the
date indicated and do not purport to be indicative of the
effects that may be expected to occur in the future.
The accompanying unaudited pro forma combined financial
statements illustrate the effect of the merger on the
Registrant's financial position and results of operations.
The unaudited pro forma combined balance sheet as of December
31, 1999 is based on the historical balance sheets of the
Registrant and VCSY and assumes the merger took place on the
date. The combined statements of operations for three months
ended March 31, 2000 and the year ended December 31, 1999,
are based on the historical statements of operations of the
Registrant and VCSY for the same period and assume the merger
occurred as of January 1, 1999.
(C) EXHIBITS
1.1 Certificate of Ownership and Merger Merging
Scientific Fuel Technology, Inc. into Vertical
Computer Systems, Inc.
1.2 Original Unamended Certificate of Incorporation of
Vertical Computer Systems, Inc.(f/k/a Xenogen
Technology, Inc.)
99.1 Audited financial statements of Vertical Computer
Systems, Inc. as of December 31, 1999 and 1998 and
for the periods then ended
99.2 Unaudited financial statements of Vertical Computer
Systems, Inc. as of March 31, 2000 and for the three
months then ended
99.3.a Pro forma combined consolidated balance sheet as of
December 31, 1999
99.3.b Pro forma consolidated statement of operations for
the three months ended March 31, 2000
99.3.c Pro forma consolidated statement of operations for
the year ended December 31, 1999
ITEM 8. CHANGE IN FISCAL YEAR
Not Applicable.
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 hereunto duly authorized.
VERTICAL COMPUTER SYSTEMS,INC.
BY/S/ RICHARD S. WADE, PRESIDENT
DATE: APRIL 28, 2000
<PAGE> 1
CERTIFICATE OF OWNERSHIP AND MERGER
MERGING
SCIENTIFIC FUEL TECHNOLOGY, INC.
A NEVADA CORPORATION
INTO
VERTICAL COMPUTER SYSTEMS, INC.
A DELAWARE CORPORATION
(PURSUANT TO SECTION 78.457 OF THE NEVADA REVISED STATUTES & SECTION
253 OF THE DELAWARE GENERAL CORPORATE LAW)
VERTICAL COMPUTER SYSTEMS, INC., a Delaware corporation (the "Corporation"),
does hereby certify:
FIRST: That the Corporation is incorporated in the State of Delaware
pursuant to the General Corporation Law of the State of Delaware.
SECOND: That the Corporation owns all of the outstanding shares of
each class of the capital stock of Scientific Fuel Technology, Inc., a Nevada
corporation.
THIRD: That the Corporation, by the following resolutions of its Board
of Directors, duly adopted on the 26th day of April, 2000, determined to merge
into itself Scientific Fuel Technology, Inc.
on the conditions set forth in such resolutions:
RESOLVED: That Vertical Computer Systems, Inc. merge into itself its
wholly-owned subsidiary, Scientific Fuel Technology, Inc., and assume all of
said subsidiary's liabilities and obligations;
FURTHER RESOLVED: That the President and the Secretary of the
Corporation be and they hereby are directed to make, execute and acknowledge a
certificate of ownership and merger setting forth a copy of the resolution to
merge Scientific Fuel Technology, Inc. into this Corporation and to assume the
subsidiary's liabilities and obligations on the date of adoption thereof and to
file the same in the offices of the Secretary of States of Delaware and Nevada.
IN WITNESS WHEREOF, Vertical Computer Systems, Inc. has caused its
corporate seal to be affixed and this certificate to be signed by Richard Wade,
its authorized officer, this 27th day of April, 2000.
VERTICAL COMPUTER SYSTEMS, INC.
BY:
---------------------------
Richard Wade, President
<PAGE> 1
CERTIFICATE OF INCORPORATION
OF
XENOGEN TECHNOLOGY, INC.
(A DELAWARE CORPORATION)
- --------------------------------------------------------------------------------
The undersigned, in order to form a corporation pursuant to the General
Corporation Law of the State of Delaware, does hereby certify as follows:
FIRST: The name of the corporation is Xenogen Technology, Inc.
SECOND: The address of the registered office of the
corporation in the state of Delaware is the
Prentice-Hall Corporation System, Inc., 32
Loockerman Square, Suite L-100, in the City of
Dover, County of Kent 19901. The name of its
registered agent at the address is The Prentice-Hall
Corporation System, Inc.
THIRD: The purpose of the corporation is to engage in any
lawful act or activity for which corporation
may be organized under the General Corporation Law
of the State of Delaware.
FOURTH: The total number of shares of all classes which the
corporation is authorized to have
outstanding is Twenty One Million (21,000,000)
shares of which stock Twenty Million (20,000,000)
shares in the par value of $.001 each, amounting in
the aggregate to Twenty Thousand Dollars ($20,000)
shall be common stock and of which One Million
(1,000,000) shares in the par value of $.001 each,
amounting in the aggregate to One Thousand Dollars
($1,000) shall be preferred stock. The holders of
preferred stock shall have such rights, preferences,
and privileges as may be determined, prior to the
issuance of such shares, by the board of directors.
FIFTH: Election of directors at an annual or special meeting
of stockholders need not be by written ballot unless
the bylaws of the corporation shall otherwise
provide. The number of directors of the corporation
which shall constitute the whole board of directors
shall be such as from time to time shall be fixed by
or in the manner provided in the bylaws.
SIXTH: In furtherance and not limitation of the powers
conferred by statute, the board of directors is
expressly authorized to make, repeal, alter, amend
and rescind the bylaws of the corporation.
SEVENTH: A director of the corporation shall not be
personally liable for monetary damages to the
corporation or its stockholders for breach of any
fiduciary duty as a director, except for liability
(i) for any breach of the director's duty
<PAGE> 2
of loyalty to the corporation or its stockholders;
(ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation
of law; (iii) under Section 174 of the Delaware
General Corporation Law of (iv) for any transaction
from which the director derives and improper personal
benefit.
EIGHTH: A director or officer of the corporation shall not
be disqualified by his or her office from
dealing or contracting with the corporation as a
vendor, purchaser, employee, agent or otherwise. No
transaction, contract or act of the corporation
shall be void or voidable or in any way affected or
invalidated by reason of the fact that any director
or officer of the corporation is a member of any
firm, a stockholder, director or officer of any
corporation or trustee or beneficiary of any trust
that is in any way interested in such transaction,
contract or act. No director or officer shall be
accountable or responsible to the corporation for or
in respect to any transaction, contract or act of
the corporation or for any gain or profit directly
or indirectly realized by him or her by reason of
the fact that he or she or any firm in which he or
she is a member or any corporation of which he or
she is stockholder, director, or officer, or any
trust of which he or she is a trustee, or
beneficiary, is interested in such transaction,
contract or act provided the fact that such director
or officer or such firm, corporation, trustee or
beneficiary of such trust, is so interested shall
have been disclosed or shall have been known to the
members of the board of directors which shall be
present at any meeting at which action upon such
contract, transaction or act shall have been taken.
Any director may be counted in determining the
existence of a quorum at any meeting of the board of
directors as shall authorize or take action in
respect to any such contract, transaction or act,
and may vote thereat to authorize, ratify or approve
any such contract, transaction or act, and any
officer of the corporation may take any action
within the scope of his or her authority, respecting
such contract, transaction or act with like force
and effect as if he or she or any firm of which her
or she is a member, or any corporation of which her
or she is a stockholder, director or officer, or any
trust of which he or she is a trustee or
beneficiary, were not interested in such
transaction, contract or act. Without limiting or
qualifying the foregoing, if in any judicial or
other inquiry, suit, cause or proceeding, the
question of whether a director or officer of the
corporation has acted in good faith is material, and
notwithstanding any statute or rule of law or equity
to the contrary (if any there be) his or her good
faith shall be presumed in the absence of proof to
the contrary by clear and convincing evidence.
NINTH: Whenever a compromise or arrangement is proposed
between the corporation and its creditors or any
class of them and/or between the corporation and its
stockholders or any class of them, any court or
equitable jurisdiction within the State of Delaware
may, on the application in a summary way of the
corporation or of any creditor or stockholder thereof
or on the application of
<PAGE> 3
any receiver or receivers appointed for the
corporation under the provisions of sectoin 291 of
Title 8 of the Delaware Code or on the application of
trustees in dissolution or of any receiver or
receivers appointed for the corporation under the
provisions of section 279 of Title 8 of the Delaware
Code, order a meeting of the creditors or class of
creditors, and/or of the stockholders or class of
stockholders of the corporation, as the case may be,
to be summoned in such manner as the said court
directs. If a majority in number representing
three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of
stockholders of the corporation, as the case may be,
agree to any compromise or arrangement and to any
reorganization of this corporation as consequence of
such compromise or arrangement, the said compromise
or arrangement and the said reorganization shall, if
sanctioned by the court to which the said application
has been made, be binding on all the creditors or
class of creditors, and/or on all the stockholders or
class of stockholders, of the corporation, as the
case may be, and also on the corporation.
TENTH: The corporation reserves the right to amend and
repeal any provision contained in this certificate of
Incorporation in the manner prescribed by the laws of
the State of Delaware. All rights herein conferred
are granted subject to this reservation.
ELEVENTH: The incorporator is Jehu Hand whose mailing address
is 29691 Monarch Drive, San Juan Capistrano 92672.
I, the undersigned, being the incorporator, for the purpose of forming
a corporation under the laws of the State of Delaware do make, file and record
this Certificate of Incorporation, do certify that the facts herein stated are
true, and, accordingly, have hereunto set my hand this ___ day of March 1992.
------------------------------------
Jehu Hand
Incorporator
<PAGE> 1
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARY
-----------------------
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
-----------------------
<PAGE> 2
Vertical Computer Systems, Inc. and Subsidiary
Contents
Report of Independent Certified Public Accountants F-3
Consolidated Financial Statements
Consolidated Balance Sheet F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
F-2
<PAGE> 3
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Vertical Computer Systems, Inc. and Subsidiary
Los Angeles, California
We have audited the accompanying consolidated balance sheet of Vertical Computer
Systems, Inc. and Subsidiary as of December 31, 1999 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1999 and 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit 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
statement 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 Subsidiary at December 31, 1999 and the results of their
operations and cash flows for years ended December 31, 1999 and 1998, in
conformity with generally accepted accounting principles.
BDO Seidman, LLP
/s/ BDO Seidman, LLP
Los Angeles, California
April 25, 2000
F-3
<PAGE> 4
Vertical Computer Systems, Inc. and Subsidiary
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31,
1999
----------------------
Assets
<S> <C>
Current assets
Cash $ 210,924
Accounts receivable, less allowance for doubtful accounts of
$14,900 14,456
Receivable due from related party (Note 5) 30,247
Stock subscription receivable (Note 11) 30,700
Other receivable (Note 7) 30,285
----------------------
Total current assets 316,612
Property and equipment, net of accumulated depreciation (Note 3) 28,768
Investment (Note 5) 9,987
Deposits 8,000
----------------------
Total assets $ 363,367
======================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities (Note 4) $ 121,657
Accrued dividends (Note 11) 34,891
Payable due to officer 15,453
Payable due to shareholder 13,708
Note payable (Note 6) 10,000
----------------------
Total current liabilities 195,709
----------------------
Total liabilities 195,709
----------------------
Commitments and contingencies (Note 14)
Stockholders' equity (Notes 10 and 11)
Common stock; $0.00001 par value; 1,000,000,000 shares
authorized; 926,603,100 shares issued and
outstanding 9,266
Series B 10% Convertible Preferred stock; $0.001 par value;
375,000 shares authorized; 7,200 shares issued and
outstanding 7
Series D 15% Convertible Preferred stock; $0.001 par value;
300,000 shares authorized; 25,000 shares issued and
outstanding 25
Note receivable from shareholder (166,984)
Additional paid-in capital 388,171
Accumulated deficit (62,827)
======================
Total stockholders' equity 167,658
----------------------
Total liabilities and stockholders' equity $ 363,367
======================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 5
Vertical Computer Systems, Inc. and Subsidiary
Consolidated Statements of Operations
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1999 1998
---------------------- ----------------------
<S> <C> <C>
Net sales (Notes 5 and 15) $ 495,264 349,475
Cost of sales 43,988 46,923
---------------------- ----------------------
Gross profit 451,276 302,552
Selling, general and administrative expenses 501,332 270,316
---------------------- ----------------------
Net income (loss) from operations (50,056) 32,236
---------------------- ----------------------
Dividend applicable to preferred stock 10,590 -
Net income (loss) available to common shareholders $ (60,646) 32,236
====================== ======================
Basic income (loss) per common share $ (0.0001) .19
====================== ======================
Basic weighted average number of common shares outstanding 794,877,073 170,000
====================== ======================
Diluted income (loss) per common share $ (0.0001) $ .19
====================== ======================
Diluted weighted average number of common shares outstanding 794,877,073 170,000
====================== ======================
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 6
Vertical Computer Systems, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Common Stock Series A Series B
Shares Amount Shares Amount Shares Amount
-------------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1998 170,000 $ 2 - $ - - - $ -
Net income - - - - - -
--------------- ----------- ----------- ---------- ---------- ----------
BALANCE, December 31, 1998 - 2 - - - -
Issuance of common stock and
Preferred in
recapitalization
transaction (Note 11) 786,433,100 7,864 600,000 600 7,200 7
Conversion of Preferred
Series A stock (Note 11) 120,000,000 1,200 (600,000) (600) - -
Issuance of common stock
(Note 11) 20,000,000 200 - - - -
Non-employee compensation
expense from options
issued (Note 10) - - - - - -
Note receivable from
shareholder (Note 11) - - - - - -
Net loss - - - - - -
--------------- ----------- ----------- ---------- ---------- ----------
BALANCE, December 31, 1999 926,603,100 $ 9,266 - $ - 7,200 $ 7
=============== =========== =========== ========== ========== ==========
<CAPTION>
Note
Receivable Additional
Series D From Paid-In Accumulated
Shares Amount Shareholder Capital Deficit
--------- ---------- ------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1998 - $ - $ - $ 29,998 $ (45,007)
Net income - - - - 32,236
--------- ---------- ------------- ------------- -----------------
BALANCE, December 31, 1998 - - - 29,998 (12,771)
Issuance of common stock and
Preferred in
recapitalization
transaction (Note 11) 25,000 25 - 27,113 -
Conversion of Preferred
Series A stock (Note 11) - - - (600) -
Issuance of common stock
(Note 11) - - - 299,800 -
Non-employee compensation
expense from options
issued (Note 10) - - - 31,860 -
Note receivable from
shareholder (Note 11) - - (166,984)
Net loss - - - - (50,056)
--------- ---------- ------------- ------------- -----------------
BALANCE, December 31, 1999 25,000 $ 25 $ (166,984) $ 388,171 $ (62,827)
========= ========== ============= ============= =================
<CAPTION>
Total
-------------
<S> <C>
BALANCE, January 1, 1998 $ (15,007)
Net income 32,236
-------------
BALANCE, December 31, 1998 17,229
Issuance of common stock and
Preferred in
recapitalization
transaction (Note 11) 35,609
Conversion of Preferred
Series A stock (Note 11) -
Issuance of common stock
(Note 11) 300,000
Non-employee compensation
expense from options
issued (Note 10) 31,860
Note receivable from
shareholder (Note 11) (166,984)
Net loss (50,056)
-------------
BALANCE, December 31, 1999 $ 167,658
=============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 7
Vertical Computer Systems, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1999 1998
---------------------- ---------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (50,056) $ 32,236
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 7,316 6,041
Gain on investment (5,627) (2,860)
Provision for bad debts - 14,900
Stock options issued 31,860 -
Changes in assets and liabilities:
Accounts receivable (8,458) (20,898)
Receivable from shareholder (166,984) (23,988)
Receivable from related party (8,670) (21,577)
Deposits (4,000) -
Other receivable (5,697) -
Accounts payable 89,387 29,206
Due to officer 15,453 -
Due to shareholder 13,708 (25,022)
--------------------- ---------------------
Net cash used in operating activities (91,768) (11,962)
--------------------- ---------------------
Cash flows from investing activities:
Proceeds from sale of subsidiary 70,000 -
Payments for equipment (6,573) (8,118)
--------------------- ---------------------
Net cash provided by (used in) investing activities 63,427 (8,118)
--------------------- ---------------------
Cash flows from financing activities:
Proceeds from private placement 269,300 -
Payment on note payable (38,344) -
--------------------- ---------------------
Net cash provided by financing activities 230,956 -
--------------------- ---------------------
NET INCREASE IN CASH 202,615 (20,080)
CASH AND CASH EQUIVALENTS, beginning of year 8,309 28,389
--------------------- ---------------------
CASH AND CASH EQUIVALENTS, end of year $ 210,924 $ 8,309
===================== =====================
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 8
Vertical Computer Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 1. ORGANIZATION
Vertical Computer Systems, Inc. (the "Company") was incorporated in the State
of Delaware in April 1993. The Company has operated as a non-reporting public
shell company, with a wholly-owned subsidiary. 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. 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 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 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 transaction is treated for
accounting purposes as a recapitalization of EW. Accordingly, proforma
information normally required for business combinations is not presented. The
Company is a software development company, which provides global e-commerce
solutions. During December 1999, the Company acquired the software rights
to EMILY, a computer language, which assists the Company in the development
of software products.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiary. 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 such accounts.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to earnings 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.
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 will be written down to fair value.
F-8
<PAGE> 9
Vertical Computer Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company recognizes sales and related cost of sales of software products and
services under the percentage of completion method, in accordance with ARB 45.
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.
INCOME TAXES
The Company provides for income taxes in accordance with Statements of Financial
Accounting Standards, ("SFAS") No. 109, "Accounting for Income Taxes." Deferred
income taxes are provided on the difference in earnings determined for tax and
financial reporting purposes.
EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"). The statement replaces the calculation of
primary and fully diluted earnings (loss) per share with basic and diluted
earnings (loss) 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.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments including cash, accounts receivable
and accounts payable, approximate fair value due to their short maturities.
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 differ from those estimates.
F-9
<PAGE> 10
Vertical Computer Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
NOTE 3. PROPERTY AND EQUIPMENT
As of December 31, 1999, property and equipment consist of the following:
<TABLE>
<CAPTION>
Amount
----------------
<S> <C>
Equipment $ 23,878
Leasehold improvements 12,218
Furniture and fixtures 6,682
Less accumulated depreciation (14,010)
----------------
$ 28,768
================
</TABLE>
NOTE 4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
As of December 31, 1999, accounts payable and accrued liabilities consist of
the following:
<TABLE>
<CAPTION>
Amount
---------------
<S> <C>
Accounts payable $ 28,685
Payroll taxes payable 71,141
Accrued liabilities 21,651
---------------
$ 121,657
===============
</TABLE>
NOTE 5. RECEIVABLE DUE FROM RELATED PARTY
The Company conducts business and has an investment with a related party which
it accounts for under the equity method. On the accompanying consolidated
balance sheet, receivables from the related party consisted of trade accounts
receivable of $26,196 and $4,051 of cash advances made to the company. No
interest is accrued on any cash advances. Included in the accompanying
consolidated statements of operations are approximate sales to the related
party of $62,000 and approximate cost for those sales of $3,600 for the year
ended December 31, 1999.
NOTE 6. NOTE PAYABLE
On September 29, 1999, the Company obtained a short-term, non-interest bearing
note payable in the amount of $10,000.
F-10
<PAGE> 11
Vertical Computer Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 7. OTHER RECEIVABLES
As of December 31, 1999, other receivables consist of the following:
<TABLE>
<CAPTION>
Amount
---------------
<S> <C>
Customer advances - ISC France $ 21,685
Miscellaneous advances 8,000
---------------
$ 30,285
===============
</TABLE>
NOTE 8. INCOME TAXES
As of December 31, 1999, the Company had net federal operating loss
carryforwards and net state operating loss carryforwards of approximately
$11,400. The net federal operating loss carryforwards expire in various years
through 2017 and net state operating loss carryforwards expire in various years
through 2002.
The primary components of temporary differences which give rise to the
Company's net deferred tax asset at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
December 31,
1999
----------------------
<S> <C>
Deferred tax asset:
Net operating losses $ 24,128
Valuation allowance (24,128)
----------------------
Net deferred tax asset $ -
======================
</TABLE>
The difference between the effective tax rate and that computed under the
federal statutory rate is as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
1999
-----------------------
<S> <C>
Federal statutory rate 34%
State taxes, net of federal benefit 6
Change in valuation allowance (40)
-----------------------
-%
=======================
</TABLE>
F-11
<PAGE> 12
Vertical Computer Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 9. EARNINGS PER SHARE
The components of basic and diluted earning per share were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1999 1998
-------------------- --------------------
<S> <C> <C>
Numerator
Net income / (loss) $ (50,056) $ 32,236
Preferred stock dividends 10,590 -
-------------------- --------------------
Income/(loss) available for common stockholders $ (60,646) $ 32,236
==================== ====================
Denominator
Weighted average number of common shares outstanding during
the period 794,877,073 170,000
Assumed exercised stock options outstanding ** **
Assumed conversion of Series B Preferred Stock ** **
Assumed conversion of Series D Preferred Stock ** **
-------------------- --------------------
Common stock and common stock equivalents used for diluted
EPS 794,877,073 170,000
==================== ====================
Per share amounts
Basic income/(loss) per share $ (0.0001) $ 0.19
==================== ====================
Diluted income/(loss) per share $ (0.0001) $ 0.19
==================== ====================
</TABLE>
**The effect of outstanding stock options and preferred stock is not included as
the result would be anti-dilutive.
NOTE 10. COMMON STOCK OPTIONS
Incentive Stock Option Plans ("ISOP")
Under the terms of the Company's ISOP, under which options to purchase
50,000,000 shares of common stock can be issued, all key employees are eligible
to receive non-assignable and non-transferrable options to purchase shares. The
exercise price of any option may not be less than the fair market value of the
shares on the date of grant; provided, however, that the exercise price of any
option granted to an eligible employee owning more than 10% of the outstanding
common stock may not be less than 110% of the fair market value of the shares
underlying such option on the date of grant. No options granted may be
exercisable more than ten years after the date of grant. The options granted
generally vest evenly over a one year period, beginning from the date of grant.
During 1999, the Company granted 10,200,000 stock options under the Company's
ISOP.
Nonstatutory Stock Options ("NSSO")
During 1999, the Company granted nonstatutory stock options to purchase an
aggregate of 24,000,000 shares of common stock to four individuals for services
provided. These options are non-assignable and non-transferable, are exercisable
over a three year period from the date of grant and vest in various increments
through 2001.
F-12
<PAGE> 13
Vertical Computer Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 10. COMMON STOCK OPTIONS (CONTINUED)
Option activity within each plan is as follows:
<TABLE>
<CAPTION>
Non- Weighted
Incentive Statutory Average
Stock Option Stock Price
Plans Options Per Share
------------------ --------------- --------------
<S> <C> <C> <C>
Options granted range from $0.0005 to $0.025 per share 10,200,000 24,000,000 $ 0.0205
------------------ --------------- --------------
Balance outstanding, December 31, 1999 10,200,000 24,000,000 $ 0.0205
================== =============== ==============
</TABLE>
Information relating to stock options at December 31, 1999 summarized by
exercise price are as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------------------------- -----------------------------------
Weighted Average Weighted Average
-------------------------------------------------------
Exercise Price Life Exercise Exercise
Per Share Shares (Months) Price Shares Price
----------------- -------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Incentive Stock Option Plan:
$0.025 10,200,000 35.5 $ 0.025 - $ -
----------------- -------------- ---------------- -------------- ---------------
10,200,000 35.5 $ 0.025 - $ -
================= ============== ================ ============== ===============
Nonstatutory Stock Options:
$0.0005 6,000,000 35.5 $ 0.0005 - $ -
$0.025 18,000,000 81.0 0.025 - -
----------------- -------------- ---------------- -------------- ---------------
24,000,000 70.0 0.019 - $ -
================= ============== ================ ============== ===============
</TABLE>
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 SFAS 123, the Company's net loss and loss per
share for the years ended December 31, 1999 and 1998 would have been increased
to the pro forma amounts presented:
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
<S> <C> <C>
Net income/(loss) attributable to common stockholders $ (60,646) $ 32,236
Pro forma $ (93,755) $ 32,236
Diluted income/(loss) per common share $ (.0001) $ 0.19
Pro forma $ (.0001) $ 0.19
</TABLE>
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 in 1999; expected life of options was 1.5 years,
expected volatility of 111%, 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 1999 was $0.0205 per option.
F-13
<PAGE> 14
Vertical Computer Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 11. STOCKHOLDERS' EQUITY
COMMON STOCK
On October 21, 1999, the Company issued 786,433,100 shares to acquire all of the
outstanding shares of EW in a reverse merger. As such, the original accumulated
deficit of the Company prior to the merger was eliminated against additional
paid-in capital, since the Company prior to the merger operated as a shell
company.
On November 1, 1999, the Company executed a Private Placement, in which they
issued 100,000 units comprised of 200 shares of the Company's common stock to be
purchased for $0.015 a share and 1 warrant to purchase 200 shares of the
Company's common stock for $0.035 per share. In connection with the Private
Placement, the Company issued 20,000,000 shares of common stock, which raised
$269,300 in proceeds and created a subscription receivable of $30,700. No
warrants were exercised at December 31, 1999.
On December 16, 1999, the board of directors approved the conversion of the
Company's Preferred Series A stock, into the Company's common stock at a ratio
of 200 shares of common stock for every 1 share of Series A stock. In connection
with the conversion, the Company issued 120,000,000 shares of the Company's
common stock.
PREFERRED STOCK
The Series B Convertible Preferred Stock accrues dividends at 10% per annum and
is convertible into common stock at a rate of 75.76 to 1.
The Series D Convertible Preferred Stock accrues dividends at 15% per annum and
is convertible into common stock at a rate of 75.76 to 1.
The Company has issued Preferred Stock that pays dividends. The amount
declared and accrued at December 31, 1999 was $34,891 and the amount
accumulated but not declared was $10,590.
NOTE RECEIVABLE FROM SHAREHOLDER
The Company made various cash advances to a shareholder, which is due to be paid
back to the Company and is secured by the Company's common stock.
NOTE 12. SALE OF ASSETS
Subsequent to the reverse merger (see Note 11), the Company sold certain
intangible assets for $75,000. The Company recognized no gain or loss in
connection with the sale since the assets were sold at the book value. At
December 31, 1999 $5,000 was held in a trust account.
NOTE 13. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Supplemental cash flow information for the years ended December 31, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1999 1998
---------------------- ----------------------
<S> <C> <C>
Cash paid for interest $ 480 $ 39
====================== ======================
</TABLE>
Non-cash financing activities for the years ended December 31, 1999 and 1998
were as follows:
<TABLE>
<CAPTION>
December 31,
1999
----------------------
<S> <C>
Conversion of Series A preferred stock into 120,000,000 shares of common stock $ 1,200
======================
</TABLE>
F-14
<PAGE> 15
Vertical Computer Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 14. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company leases a building expiring in October 2000. Future minimum rental
payments required in excess of one year at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Year ending December
31, Amount
- ---------------------------------------- --------------
<S> <C>
2000 $ 57,573
2001 52,702
2002 54,282
2003 55,910
2004 47,750
--------------
Total $ 268,217
==============
</TABLE>
Rental expense for the years ended December 31, 1999 and 1998 was approximately
$50,350 and $48,480, respectively.
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.
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.
NOTE 15. SIGNIFICANT CUSTOMERS
During fiscal 1999, 87% of the Company's net sales were made up of two
customers and 90% of net sales were to foreign customers. At December 31, 1999
there were no ongoing contracts. There were no significant customers for
fiscal 1998.
NOTE 16. SUBSEQUENT EVENTS
During January and February 2000, the Company raised $700,000 upon the exercise
of 20,000,000 outstanding warrants that were originally granted in connection
with the Private Placement in November 1999 (see Note 11).
On February 7, 2000, the Company executed a 20-for-1 stock split (See Note 2).
On February 10, 2000, the Company reached an agreement with a former shareholder
of EW, in which 246,470,580 shares of the Company's common stock were cancelled.
F-15
<PAGE> 16
Vertical Computer Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 16. SUBSEQUENT EVENTS (CONTINUED)
On February 28, 2000, the Company raised $10,000,000 through the issuance of
50,000 shares of the Company's Non-Convertible Preferred Series A stock. The
shares have voting rights equivalent to common stock and are not entitled to
dividends. The Preferred shareholders were also granted 1,000,000 common stock
warrants at an exercises price of $1.00 per share. In March 2000, the Company
raised $1,000,000 upon the exercise of these warrants.
On March 14, 2000, the Company entered into a joint venture agreement, with a
Brazilian company, to establish an international internet portal. On March 30,
2000, the Company entered into a joint venture agreement, with the same
Brazilian company, to develop an international marketing program for the
Brazilian company's wireless technology.
On April 6, 2000, the Company acquired all the outstanding capital stock of
Scientific Fuel, Inc., a company that has no operations and in accordance with
SFAS No. 7 is considered a development stage company, for 2,000,000 shares of
the Company's common stock.
F-16
<PAGE> 1
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARY
-----------------------
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED MARCH 31, 2000
<PAGE> 2
VERTICAL COMPUTER SYSTEMS, INC.
UNAUDITED CONSOLIDATED BALANCE SHEET
AT 3/31/2000
- -------------------------------------------------------------------------------
Description
- -------------------------------------------------------------------------------
Assets
Cash and cash equivalents 10,124,228
Trade accounts receivable 7,372
Prepaid Expenses 72,623
Rec. from Externet World - France (Note 4) 30,249
Subscription receivable 35,933
Other receivable (Note 6) 20,091
----------
Total Current Assets 10,290,496
Property and equipment, net (Note 2) 127,832
Notes Receivable (Note 7) 861,700
Other assets 17,987
----------
Total Assets 11,298,015
==========
Liabilities
Accounts Payable and accrued expenses (Note 3) 48,915
Due to officer 6,067
Dividend payable 34,891
Deferred Revenue (Note 12) 5,000
----------
Total Liabilities 94,872
Equity
Common stock: $.00001 par value,
1,000,000,000 shares authorized, 735,642,520
shares issued and outstanding at March 31, 2000 . 7,356
Preferred Stock, Series A, Series B, and Series C 82
Note Receivable from Shareholder (178,786)
Additional paid-in capital 11,907,202
Accumulated Deficit (532,711)
----------
Total Stockholder's Equity 11,203,143
----------
Total Liabilities & Equity 11,298,015
==========
See accompanying notes to consolidated financial statements
<PAGE> 3
Vertical Computer Systems, Inc.
Unaudited Consolidated Statement of Operations
for the quarter ended 3/31/2000
Net Sales $ 56,622
Cost of Sales 10,606
-----------
Gross Profit 46,016
Selling, general and administrative expenses 515,901
-----------
Net Income/ (Loss) from operations (469,885)
-----------
Dividend applicable to preferred stock 10,590
Net loss available to common shareholders $ (480,475)
===========
Basic loss per common share $ (0.001)
===========
Basic weighted average number of common shares
outstanding (in millions) 682.2
===========
Diluted loss per common share $ (0.001)
===========
Diluted weighted average number of common
shares outstanding (in millions) 682.2
===========
See accompanying notes to consolidated financial statements
<PAGE> 4
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for fair presentation
have been included. Operating results for the three months ended March 31, 2000
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report for the year ended December 31, 1999.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiary. 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 debt instruments 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 such accounts.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to earnings 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.
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 will be written down to fair value.
REVENUE RECOGNITION
The Company recognizes sales and related cost of sales of software products and
services under the percentage of completion method, in accordance with ARB 45.
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.
<PAGE> 5
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company provides for income taxes in accordance with Statements of Financial
Accounting Standards, ("SFAS") No. 109, "Accounting for Income Taxes." Deferred
income taxes are provided on the difference in earnings determined for tax and
financial reporting purposes.
EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"). The statement replaces the calculation of
primary and fully diluted earnings (loss) per share with basic and diluted
earnings (loss) 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.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments including cash, accounts receivable
and accounts payable, approximate fair value due to their short maturities.
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 differ from those estimates.
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.
<PAGE> 6
NOTE 2. PROPERTY AND EQUIPMENT
As of December 31, 1999, property and equipment consist of the following:
Amount
-------------
Equipment $ 80,141
Leasehold improvements 51,195
Furniture and fixtures 3,182
Software 11,770
Intangible Assets 4,725
Less accumulated depreciation (23,181)
-----------
$ 127,832
===========
NOTE 3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
As of December 31, 1999, accounts payable and accrued liabilities consist of the
following:
Amount
-------------
Accounts payable $ 0
Payroll taxes payable 23,377
Accrued liabilities 25,538
-----------
$ 48,915
===========
NOTE 4. RECEIVABLE DUE FROM RELATED PARTY
The Company conducts business and has an investment with a related party, which
it accounts for under the equity method. On the accompanying consolidated
balance sheet, receivables from the related party consisted of trade accounts
receivable of $26,198 and $4,051 of cash advances made to the company. No
interest is accrued on any cash advances. Included in the accompanying
consolidated statements of operations are approximate sales to the related party
of $2,410 and approximate cost for those sales of $0 for the quarter ended March
31, 2000.
NOTE 5. NOTE PAYABLE
On September 29, 1999, the Company obtained a short-term, non-interest bearing
note payable in the amount of $10,000. On February 2, 2000, the Company paid off
the note according to the terms of the note.
NOTE 6. OTHER RECEIVABLES
As of March 31, 2000, other receivables consist of the following:
Amount
----------
Customer advances - ISC France $ 21,685
Miscellaneous advances (1,594)
----------
$ 20,091
==========
<PAGE> 7
NOTE 7. NOTES RECEIVABLE
On March 31, 2000, employees, with Incentive Stock Option (ISO) grants
outstanding, exercised their ISOs and in return signed Nonrecourse Promissory
Notes to the Company, which are short-term, 6% interest bearing. Additionally,
various holders of Non-Statutory Stock Options (NSSO), whose options were
outstanding as of March 15, 2000 exercised their NSSOs and in return signed
Nonrecourse Promissory Notes to the Company, which are short-term, 6% interest
bearing.
Amount
----------
Notes due From Officers for ISOs $ 125,000
Notes due From Employees for ISOs 130,000
Notes Receivable from Non-Employees for NSSOs 450,000
Other Note Receivable 156,700
----------
$ 861,700
==========
NOTE 8. INCOME TAXES
As of March 31, 2000, the Company had net federal operating loss carryforwards
and net state operating loss carryforwards of approximately $481,285. The net
federal operating loss carryforwards expire in various years through 2017 and
net state operating loss carryforwards expire in various years through 2002.
The primary components of temporary differences, which give rise to the
Company's net deferred tax asset at March 31, 2000 are as follows:
March 31,
2000
--------------
Deferred tax asset:
Net operating losses $ 192,514
Valuation allowance (192,514)
------------
Net deferred tax asset $ -
============
The difference between the effective tax rate and that computed under the
federal statutory rate is as follows:
Quarter Ended
March 31,
2000
-------------
Federal statutory rate 34 %
State taxes, net of federal benefit 6
Change in valuation allowance (40)
--------
- %
========
<PAGE> 8
NOTE 9. EARNINGS PER SHARE
The components of basic and diluted earning per share were as follows:
Quarter Ended
March 31, 2000
Numerator
Net income / (loss) $ (469,885)
Preferred stock dividends 10,590
---------
Income/(loss) available for common stockholders $ (480,475)
=========
Denominator
Weighted average number of common shares outstanding
during the period (in millions) 682.2
Assumed exercised stock options outstanding **
Assumed conversion of Series B Preferred Stock **
Assumed conversion of Series D Preferred Stock **
---------
Common stock and common stock equivalents used for
diluted EPS (in millions) 682.2
=========
Per share amounts
Basic income/(loss) per share $ (0.001)
=========
Diluted income/(loss) per share $ (0.001)
=========
**The effect of outstanding stock options and preferred stock is not
included as the result would be anti-dilutive.
NOTE 10. COMMON STOCK OPTIONS
Incentive Stock Option Plans ("ISOP")
- -------------------------------------
Under the terms of the Company's ISOP, under which options to purchase
50,000,000 shares of common stock can be issued, all key employees are eligible
to receive non-assignable and non-transferrable options to purchase shares. The
exercise price of any option may not be less than the fair market value of the
shares on the date of grant; provided, however, that the exercise price of any
option granted to an eligible employee owning more than 10% of the outstanding
common stock may not be less than 110% of the fair market value of the shares
underlying such option on the date of grant. No options granted may be
exercisable more than ten years after the date of grant. The options granted
generally vest evenly over a one year period, beginning from the date of grant.
As of March 31, 2000, all granted options outstanding at March 24, 2000 had been
exercised by the employees. The Company received Nonrecourse Promissory Notes as
payment of the shares (see Note 7).
Nonstatutory Stock Options ("NSSO")
- -----------------------------------
During December 1999, the Company granted nonstatutory stock options to purchase
an aggregate of 24,000,000 shares of common stock to four individuals and one
service Firm for services provided. These options are non-assignable and
non-transferable, are exercisable over a three year period from the date of
grant and vest in various increments through 2001. Additional grants were made
in January, 2000 to one individual and two companies whose stakeholders agreed
to accept NSSO's in lieu of cash payment for certain services rendered to the
Company.
<PAGE> 9
NOTE 10. COMMON STOCK OPTIONS (CONTINUED)
As of March 31, 2000, three individuals and two companies had exercised their
options. The Company received Nonrecourse Promissory Notes as payment of the
shares from the three individuals (see Note 7).
Option activity within each plan is as follows:
<TABLE>
<CAPTION>
Non- Weighted
Incentive Statutory Average
Stock Option Stock Price
Plans Options Per Share
---------- ---------- --------
<S> <C> <C> <C>
Options granted range from $0.0005 to $0.0100 per share 10,200,000 31,200,000 $ 0.03
---------- ---------- --------
Balance outstanding, March 31, 2000 10,200,000 31,200,000 $ 0.03
========== ========== ========
</TABLE>
Information relating to stock options at March 31, 2000 summarized by exercise
price are as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
---------------------------------------- ----------------------------
Weighted Average Weighted Average
----------------------------------------
Exercise Price Life Exercise Exercise
Per Share Shares (Months) Price Shares Price
------------ ----------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Incentive Stock Option Plan:
$0.0250 $ 10,200,000 $ 0.0250
------------ ----------- ----------- ------------- -----------
$ 10,200,000 $ 0.0250
============ =========== =========== ============= ===========
Nonstatutory Stock Options:
$0.0005 6,000,000 35.5 $ 0.0005 $
$0.0250 18,000,000 $ 0.0250
$0.0025 1,200,000 $ 0.0025
$0.0100 6,000,000 35.5 $ 0.1000
------------ ----------- ----------- ------------- -----------
12,000,000 70.0 $ 0.0500 19,200,000 $ 0.0240
============ =========== =========== ============= ===========
</TABLE>
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 SFAS 123, the Company's net loss and loss per share for the quarter ended
March 31, 2000 would have been increased to the pro forma amounts presented:
For the Quarter
ended March 31,
2000
---------------
Net income/(loss) attributable to common stockholders $ (480,475)
Pro forma $ (508,261)
Diluted income/(loss) per common share $ (.001)
Pro forma $ (.001)
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 in December 1999 and first quarter of 2000; expected life
of options was 1.5 years, expected volatility of 111%, 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 1999 and exercised in the quarter ended March
31, 2000 was $0.03 per option (split adjusted).
<PAGE> 10
NOTE 11. STOCKHOLDERS' EQUITY
COMMON STOCK
On October 21, 1999, the Company issued 786,433,100 shares to acquire all of the
outstanding shares of EW in a reverse merger. As such, the original accumulated
deficit of the Company prior to the merger was eliminated against additional
paid-in capital, since the Company prior to the merger operated as a shell
company.
On November 1, 1999, the Company executed a Private Placement, in which they
issued 100,000 units comprised of 200 shares of the Company's common stock to be
purchased for $0.015 a share and 1 warrant to purchase 200 shares of the
Company's common stock for $0.035 per share. In connection with the Private
Placement, the Company issued 20,000,000 shares of common stock, which raised
$300,000.
On December 16, 1999, the board of directors approved the conversion of the
Company's Preferred Series A stock, into the Company's common stock at a ratio
of 200 shares of common stock for every 1 share of Series A stock. In connection
with the conversion, the Company issued 120,000,000 shares of the Company's
common stock.
During January and February 2000, the Company raised $664,067 upon the exercise
of 20,000,000 outstanding warrants that were originally granted in connection
with the Private Placement in November 1999; a Subscription receivable of
$35,933 has been recorded as of March 31, 2000. This receivable is being held in
trust at March 31, 2000. All warrants had been exercised by February 6, 2000.
On February 7, 2000, the Company executed a 20-for-1 stock split (See Note 1).
On February 10, 2000, the Company reached an agreement with a former shareholder
of EW, in which 246,470,580 shares of the Company's common stock were cancelled.
PREFERRED STOCK
The Company has issued Preferred Stock that pays dividends. The amount declared
and accrued at March 31,2000 was $34,891 and the amount accumulated but not
declared was $13,240.
On February 28, 2000, the Company raised $10,000,000 through the issuance of
50,000 shares of the Company's Non-Convertible Preferred Series A stock. The
shares have voting rights equivalent to common stock and are not entitled to
dividends. The Preferred shareholders were also granted 1,000,000 common stock
warrants at an exercises price of $1.00 per share. In March 2000, the Company
raised $1,000,000 upon the exercise of these warrants.
NOTE RECEIVABLE FROM SHAREHOLDER
The Company made various cash advances to a shareholder, which is due to be paid
back to the Company and is secured by the Company's common stock.
NOTE 12. SALE OF SUBSIDIARY
Subsequent to the reverse merger in October, 1999, the Company sold its
wholly-owned subsidiary for $75,000. The Company recognized no gain or loss in
connection with the sale since the subsidiary was sold at the book value.
At March 31, 2000, $5,000 was held in a trust account.
<PAGE> 11
NOTE 13. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company leases a building expiring in October 2000. Future minimum rental
payments required in excess of one year at March 31, 2000 are as follows:
Quarter ending March
31,2000 Amount
- -------------------- ----------
2000 $ 43,050
2001 52,702
2002 54,282
2003 55,910
2004 47,750
----------
Total $ 253,694
==========
Rental expense for the quarter ended March 31, 2000 was approximately $14,523.
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. No Royalties had been paid in the quarter ended March 31, 2000.
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.
NOTE 14. SIGNIFICANT CUSTOMERS
During the first quarter ended March 31, 2000, the Company's net sales were made
up of approximately 15 customers, one of which made up 36% of net sales;
additionally, 5.4% of net sales were to foreign customers. At March 31, 2000
there was one ongoing contract, resulting in deferred revenue of $5,000.
NOTE 15. SIGNIFICANT EVENTS IN THE QUARTER ENDED MARCH 31, 2000
On March 14, 2000, the Company entered into a joint venture agreement, with a
Brazilian company, to establish an international internet portal. On March 30,
2000, the Company entered into a joint venture agreement, with the same
Brazilian company, to develop an international marketing program for the
Brazilian company's wireless technology.
<PAGE> 1
VERTICAL COMPUTER SYSTEMS, INC.
PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET
EXHIBIT 99.3.A
MARCH 31, 2000
<TABLE>
<CAPTION>
VERTICAL SCIENTIFIC PRO FORMA
COMPUTER FUEL BALANCE
SYSTEMS TECHNOLOGIES ELIMINATION PRO FORMA SHEET
(UNAUDITED) (UNAUDITED) ENTRIES ADJUSTMENT (UNAUDITED)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 10,124,228 $ 200 $ 10,124,428
Trade accounts receivable 7,372 7,372
Other accounts receivable 20,091 20,091
Receivable from related party 30,249 30,249
Subscription receivable 35,933 35,933
Prepaid expenses 72,623 72,623
-------------------------------------------------------------------------------
10,290,496 -- 10,290,696
Property and equipment, net 127,832 127,832
Notes receivable 861,700 861,700
Other assets 17,987 17,987
===============================================================================
$ 11,298,015 $ 200 $ -- $ -- $ 11,298,215
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses 48,915 48,915
Due to officers 6,066 1,000 7,066
Dividend payable 34,891 34,891
Deferred revenue 5,000 5,000
--------------------------------------------------------------------------------
94,872 1,000 -- -- 95,872
Stockholders' equity
Preferred stock, Series A, Series B and Series C 82 82
Common stock, $.00001 par value, 1,000,000,000 7,356 10,000 (10,000) 20 7,376
shares authorized, 735,642,520 shares issued and
outstanding at March 31, 2000 (737,642,520 pro forma)
Notes receivable from shareholder (178,786) (178,786)
Additional paid-in capital 11,907,202 (20) 11,907,182
Retained earnings (deficit) (532,711) (10,800) 10,000 (533,511)
--------------------------------------------------------------------------------
11,203,143 (800) -- -- 11,202,343
================================================================================
$ 11,298,015 $ 200 $ -- $ -- $ 11,298,215
================================================================================
</TABLE>
The adjustment records the issuance of 2,000,000 common shares of Vertical
Computer Systems to acquire 100% of Scientific Fuel Technologies. Only nominal
assets were acquired.
<PAGE> 1
VERTICAL COMPUTER SYSTEMS, INC.
PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
EXHIBIT 99.3.B
THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
VERTICAL PRO FORMA
COMPUTER STATEMENT OF
SYSTEMS PRO FORMA OPERATIONS
UNAUDITED ADJUSTMENT (UNAUDITED)
<S> <C> <C> <C>
Sales and revenues $ 56,622 $ 56,622
Cost of sales 10,606 10,606
---------------------------------------
Gross profit 46,016 -- 46,016
Selling, general and administrative expense 515,901 515,901
---------------------------------------
Loss from operations (469,885) -- (469,885)
Dividend applicable to preferred stock 10,590 10,590
=======================================
Net loss available to common shareholders $(480,475) $ -- $(480,475)
=======================================
--
Basic loss per common share $ (0.001) $ (0.001)
=========== ===========
Basic weighted average shares outstanding, in millions 682.2 2.0 684.2
=========== ===========
Diluted loss per common share $ (0.001) $ (0.001)
=========== ===========
Diluted weighted average number of shares outstanding, in millions 682.2 2.0 684.2
=========== ===========
</TABLE>
The adjustment records the effect of the acquisition and merger which resulted
in an increase in the weighted average shares outstanding. Scientific Fuel
Technologies, Inc. had no operations during the period.
<PAGE> 1
VERTICAL COMPUTER SYSTEMS, INC.
PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
EXHIBIT 99.3.C
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
VERTICAL PRO FORMA
COMPUTER PRO FORMA STATEMENT OF
SYSTEMS ADJUSTMENT OPERATIONS
<S> <C> <C> <C>
Sales and revenues $ 495,264 $ 495,264
Cost of sales 43,988 43,988
---------------------------------------
Gross profit 451,276 -- 451,276
Selling, general and administrative expense 501,332 501,332
---------------------------------------
Loss from operations (50,056) -- (50,056)
Dividend applicable to preferred stock 10,590 10,590
=======================================
Net loss available to common shareholders $ (60,646) $ -- $ (60,646)
=======================================
--
Basic loss per common share $ (0.0001) $ (0.0001)
=========== ==========
Basic weighted average shares outstanding, in millions 794.9 2.0 796.9
=========== ==========
Diluted loss per common share $ (0.0001) $ (0.0001)
=========== ==========
Diluted weighted average number of shares outstanding, in millions 794.9 2.0 796.9
=========== ==========
</TABLE>
The adjustment records the effect of the acquisition and merger which resulted
in an increase in the weighted average shares outstanding. Scientific Fuel
Technologies, Inc. had no operations during the period.
