U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 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, 747,387,820 shares issued and outstanding as of September 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 Condensed Financial Statements:
Consolidated Condensed Balance Sheets (unaudited) as of
September 30, 2000 and December 31, 1999 3
Consolidated Condensed Statements of Income (unaudited) for the
Three Months Ended September 30, 2000 and 1999 and
Nine Months Ended September 30, 2000 and 1999 5
Consolidated Condensed Statements of Cash Flows (unaudited) for the
Nine Months Ended September 30, 2000 and 1999 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II OTHER INFORMATION
Item 1 Legal Proceedings 16
Item 2 Changes in Securities and Use of Proceeds 16
Item 3 Defaults Under Senior Securities 16
Item 4. Submission of Matters To A Vote Of Security Holders 16
Item 5 Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
2
<PAGE>
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
Item 1. Consolidated Condensed Financial Statements
<TABLE>
<CAPTION>
September December
30, 31,
2000 1999
----------- -----------
(Unaudited) (Note)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 6,902,144 $ 210,924
Marketable Securities 840,000 --
Accounts receivable, trade, net of allowance for bad debts
of $ 0 and $14,900, respectively 5,014 14,456
Due from related parties 1,094,000 30,247
Stock subscription receivable -- 30,700
Other receivable 44,516 30,285
Prepaid expenses 134,334 --
----------- -----------
Total current assets 9,020,008 316,612
----------- -----------
Property and equipment, net of accumulated
depreciation of $80,238 and $14,010, respectively 775,610 28,768
Goodwill 224,930 --
Investment 467,748 9,987
Deposits 15,783 8,000
----------- -----------
Total assets $10,504,079 $ 363,367
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 77,736 $ 121,657
Accrued dividends 34,891 34,891
Payable due to officer 1,000 15,453
Payable due to shareholder -- 13,708
Note payable -- 10,000
----------- -----------
Total current liabilities 113,627 195,709
----------- -----------
Total liabilities $ 113,627 $ 195,709
----------- -----------
</TABLE>
Contingencies (Notes 3)
3
<PAGE>
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September December
30, 31,
2000 1999
------------ ------------
(Unaudited) (Note)
<S> <C> <C>
Shareholders' Equity
Common stock; $0.00001 par value; 1,000,000,000 shares authorized;
747,387,820 shares issued and outstanding at September 30, 2000;
926,603,100 shares issued and
outstanding at December 31, 1999 7,474 9,266
Series A 4% Convertible Preferred stock; $0.001 par value;
1,000,000 shares authorized; 50,000 shares issued and
outstanding at September 30, 2000 and no shares issued and
outstanding at December 31, 1999 50 --
Series B 10% Convertible Preferred stock; $0.001 par value;
375,000 shares authorized; 7,200 shares issued and
outstanding at September 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 September 30, 2000 and December 31, 1999 25 25
Note receivable from shareholder -- (166,984)
Subscription receivable (1,443,050) --
Unrealized Gain 540,000 --
Additional paid-in capital 13,334,059 388,171
Accumulated deficit (2,048,113) (62,827)
------------ ------------
Total shareholders' equity 10,390,452 167,658
------------ ------------
Total liabilities and shareholders' equity $ 10,504,079 $ 363,367
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30, Nine Months Ended Sept 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 25,624 $ 112,821 $ 94,074 $ 439,236
Cost of goods sold 18,791 6,362 39,188 31,058
------------- ------------- ------------- -------------
Gross profit 6,833 106,459 54,886 408,178
------------- ------------- ------------- -------------
Operating expenses:
Selling, general and
administrative
expenses 1,353,621 38,130 3,022,682 240,114
------------- ------------- ------------- -------------
Total operating expenses 1,353,621 38,130 3,022,682 240,114
------------- ------------- ------------- -------------
Income/(Loss) from
operations (1,346,788) 68,329 (2,967,796) 168,064
Interest Income 114,516 -- 274,594 --
Interest expense (5,668) (113) (19,225) (139)
Gain on sale of asset 838,252 -- 838,252 --
------------- ------------- ------------- -------------
Net income/(Loss) $ (399,688) $ 68,216 $ (1,874,175) 167,925
============= ============= ============= =============
Basic and Diluted
earnings/(loss) per
share $ (0.001) $ 0.401 $ (0.003) $ 0.988
============= ============= ============= =============
Weighted average
number of shares
outstanding:
Basic and Diluted 782,405,794 170,000 728,576,772 170,000
============= ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Nine Months Ended Sept 30,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income/(Loss) $ (1,874,175) $ 167,925
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization 71,300 25,000
Unrealized Gain on Investments 540,000
Loss on Reorganization -- (35,136)
Goodwill (224,930) --
Compensation expense for non-statutory stock
options to non-employees 424,195 --
Changes in operating assets and liabilities:
Receivables, including related parties 258,023 106,174
Prepaid expenses and other current assets (134,334) --
Other assets (12,659) --
Deposits (7,783) --
Accounts payable (43,921) 69,274
Accounts payable, related party (38,161) (94,127)
------------ ------------
Net cash (used in) provided by operating activities (1,042,445) 239,110
------------ ------------
Cash flows from investing activities:
Acquisition of computer hardware (818,141) (22,173)
Purchase of investments (457,760) --
Note Receivable from sale of Externet World, Inc. (1,094,000) --
------------ ------------
Net cash used in investing activities (2,369,901) (22,173)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of 504 warrants 700,000 --
Issuance of Preferred Series A stock 9,000,000 632
Dividends Paid on Preferred Shares (111,111) --
Proceeds from exercise of Series A stock 1,000,000 --
Proceeds from exercise of stock options 354,678 --
------------ ------------
Net cash provided by financing activities 10,943,567 632
------------ ------------
Net change in cash 7,531,221 217,569
Cash, at beginning of period 210,923 8,309
------------ ------------
Cash, at end of period $ 7,742,144 $ 225,878
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 19,225 $ --
Income taxes $ 61,430 $ --
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310 of
regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The accompanying unaudited consolidated condensed
financial statements reflect all adjustments that, in the opinion of the
management of Vertical Computer Systems, Inc. and Subsidiaries (collectively,
the "Company"), are considered necessary for a fair presentation of the
financial position, results of operations, and cash flows for the periods
presented. The results of operations for such periods are not necessarily
indicative of the results expected for the full fiscal year or for any future
period. The accompanying financial statements should be read in conjunction with
the audited consolidated financial statements of the Company included in the
Company's Form 10-KSB for the year ended December 31, 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 require that the Company whose stockholders
retain the majority interest in a combined business be treated as the acquirer
for accounting purposes. The relevant acquisition process utilizes the capital
structure of Vertical Computer Systems, Inc. and the assets and liabilities of
EW are recorded at their historical cost. EW is the continuing operating entity
for financial reporting purposes and the financial statements prior to October
21, 1999 represent EW's financial position and results of operations. The net
assets of $35,609 of Vertical Computer Systems, Inc. are included as of October
21, 1999. Although EW is deemed to be the acquiring company for financial
accounting and reporting purpose, the legal status of the Company as the
surviving corporation does not change. The Company is a software development
company, which provides global e-commerce solutions. During December 1999, the
Company acquired the software rights to MLE (aka "EMILY"), a computer language,
which assists the Company in the development of software products.
Note 2 - Earnings Per Share
Options to purchase 3,900,000 shares of common stock at an average price of
$0.7766 were granted in the three months ended June 30, 2000 with 2,500,000 of
those unexercised and outstanding at September 30, 2000. Additionally, options
to purchase 815,000 shares of common stock at an average price of $0.47 were
granted in the three months ended September 30, 2000 with 815,000 of those
unexercised and outstanding at September 30, 2000. These shares were not
included in the computations of diluted earnings per share because the effect of
the exercise would be anti-dulitive effect on earnings per share.
Note 3 - Contingencies
The Company is subject to certain legal proceedings and claims arising in
connection with its business. In the opinion of management, there are currently
no claims that will have a material adverse effect on the Company's consolidated
financial position, results of operation or cash flows.
7
<PAGE>
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 4: Related Party Transactions
On September 29, 2000, in contemplation of the Company entering into a
settlement with Patrice Lambert and Marc Elalouf, the Company entered into a
Stock Purchase Agreement with Eurovest, Inc. ("Eurovest"), a Nevada Corporation
controlled by Dr. Terry Washburn (a member of the Company's Board of Directors).
The Company sold to Eurovest 100% of the outstanding and issued stock of
Externet World, Inc., a wholly owned subsidiary of the Company. In exchange,
Eurovest gave the Company a Promissory Note in the sum of $1,094,000. The
parties determined the consideration to be commensurate with the value of
operations, estimated on Externet World, Inc.'s discounted future cash flows. In
connection with the sale of Externet World, Inc., the Company recognized a gain
of approximately $838,000.
Subsequent to September 30, 2000, the Company collected $594,000 of the
Promissory Note, while the other $500,000 remains in an Escrow Account. Dr.
Terry Washburn earned a commission of $72,000 on the transaction.
Note 5 - Subsequent Events
1. On October 4, 2000, Eurovest, Inc. ("Eurovest"), a Nevada
corporation controlled by Dr. Terry Washburn (who is a member of the
Board of Directors of the Company), acquired a total of 147,350,980
shares of the Company's common stock from Marc Elalouf ("Elalouf")
and Patrice Lambert (and from Lambert's affiliate, Queue
Communications, Ltd.) (collectively, "Lambert"), each of whom were
deemed control persons of the Company. The 147,350,980 shares
represent approximately 19.75% of the Registrant's issued and
outstanding shares.
As a result of the transaction, neither Elalouf nor Lambert have a
controlling interest in the Company. Eurovest, upon consummation of
the transaction, cancelled 144,850,980 of the 147,350,980 shares
conveyed by the former control persons, leaving 2,500,000 shares
beneficially owned by Dr. Terry Washburn, Director of the Company.
2. On October 12, 2000, the Company entered into a Stockholder's
Agreement with Vijay Amritraj to form a foreign joint venture; each
party owning 50% of the issued and outstanding shares of the foreign
corporation. In compliance with a prior joint venture agreement
signed in May, 2000, the parties committed to initial capital
contributions of $5,000 each. In addition, the parties are seeking
outside investment from a third party, which will result in a
dilution of shares. As part of the Agreement signed in October,
2000, the parties signed a funding commitment calling for the
Company to make operating funds available up to $50,000 each month
over the course of 10 months.
3. On October 14, 2000, the Company entered into Stock Purchase
Agreement with Apollo Industries, Inc. (Apollo). The Company
committed to purchase Three Million (3,000,000) shares of Apollo
common shares representing 30% of Apollo's issued and outstanding
shares on that date for $250,000. As part of the Stock Purchase
Agreement, the Company also entered into a Royalty Agreement with
Apollo, and paid $25,000 in consideration for receipt of a future
royalty revenue stream equal to 2% of Apollo's transaction fees
until the Company's investment is recouped and then a royalty of 1%
of transactions thereafter.
8
<PAGE>
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED 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 Condensed Financial Statements of Vertical
Computer Systems, Inc. and Subsidiaries and the notes to the Consolidated
Condensed Financial Statements included elsewhere in this Form 10-QSB.
This discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity and cash flows of Vertical
Computer Systems, Inc. and Subsidiaries for the nine months ended September 30,
2000 and September 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
The Company operates in the high technology industry and is a software
development company with limited revenue generated at this time. It is a
multi-lingual gateway provider, software developer and e-commerce solutions
company based in the United States. The financial statements have been prepared
in conformity with generally accepted accounting principles, which contemplates
continuation of the Company as a going concern. However, the Company has
suffered operating losses, although it does not have a capital deficiency as of
September 30, 2000.
The Company's products and services, technology, and distribution channels
complement each other and are supported by its distinctive e-commerce business
model, the Home Country Gateways (HCG's). Currently, the Company has three HCG's
in full operation:, the US Bridge (http://www.theUSbridge.com), the Brazil
Bridge (http://www.thebrazilbridge.com), and the China Bridge
(http://www.thechinabridge.com). Others, including the India Bridge
(http://www.theindiabridge.com), are either under construction or are being
considered as future sites.
HCG's are being developed in strong alliance with local partners who provide
country specific expertise, capital and/or content. As the company's
distribution channels, HCG's are expected to secure multiple revenue streams
from advertising, revenue sharing agreements, and licensing and fee
arrangements. Utilizing this expanded global network of online HCG's, the
Company offers B2B, B2G, and B2C solutions through its wide range of accessible
resources that specifically cater to the needs and desires of targeted
communities around the world. Two recognizable alliances established in recent
months include Net2Phone and WebAddressBook.com, which greatly add to the
usability of the gateways.
The companies identified as potential alliances are poised to make an immediate
impact in the country in which the gateway operates. The specific purposes of
these partnerships are twofold:
9
<PAGE>
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) develop a major network of gateways in different countries, and (2) to
market Vertical's proprietary and licensed technologies throughout the world
while developing its own applications.
The Company will continue to review partnerships with other regionally
established suppliers of Internet infrastructure and content, top management and
authorities, as well as companies and individuals with expertise and familiarity
with the financial, business and marketing communities. In accordance with the
Company's business plan for the development of multi-lingual gateways, the
company continues to align itself with partners whose infrastructures and goals
are complementary to its own.
ZAPQUOTE, S.A.
In recent months, the Company entered into two joint ventures with ZAPQuote,
S.A., Brazil's second largest provider of real time financial information for
Brazil's financial markets. ZAPQuote, S.A., established in 1985, has used its
proprietary wireless technology to become the fastest growing company for
financial news and information based in Brazil. ZAPQuote, S.A. also has a major
position in providing back office software to many of Brazil's major financial
institutions.
Both joint venture ownerships are held 50% by the Company and 50% by ZAPQuote,
S.A. The first joint venture was converted to a Brazilian corporation named
Vertical Zap S.A. in August of 2000 with the Company owning 3,400 common shares
and Zap Quote owning 3,400 common shares of the 6,800 outstanding. The terms of
Vertical Zap S.A. call for the Company to provide the latest in U.S. technology
and products while ZAPQuote, S.A. will add its expertise and familiarity with
the Brazilian financial and business communities along with the initial
financing for the project. The specific purpose of this joint venture is to
develop a major Internet Home Country Gateway in Brazil and to market the
Company's proprietary and licensed technologies throughout the country.
The second joint venture was entered into to develop ZAPQuote, S.A.,'s
proprietary wireless financial applications for business in countries and
territories around the world, excluding South America. This joint venture is in
the process of being converted to a BVI corporation.
EMILY SOLUTIONS
The Company acquired the rights to Emily Solutions web technology on December
16, 1999. Emily Solutions' work platform, "the Emily Framework", consists of
executable programs, files, configuration data and documentation needed to
create web-based applications that intercommunicate via XML and HTTP. The Emily
Framework is intended to be an engineering package comparable to other web
development tools such as Allaire Cold Fusion or Microsoft Frontpage.
The primary component of the Emily Framework is MLE (Markup Language Executive),
a programming language that already runs on Windows NT, Windows 2000, Linux and
several UNIX platforms. MLE is intended to be both a complement and possibly an
alternative to Java on the server side. MLE implements XML explicitly designed
for server-to-server communication, XML being the industry-endorsed format for
business-to-business communication.
10
<PAGE>
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The company released the official beta version of the first product of its Emily
Solutions' suite of products, called the XML Catalog Enabler Agent in August
2000. Subsequently, the company announced it retained WaveBend, a consulting
firm to assist in the marketing strategy of the XML Catalog Enabler Agent with a
targeted launch date of November 17, 2000.
GLOBALFARE.COM
In May 2000, the Company acquired 100% of Globalfare.com (Globalfare), a
one-stop internet travel portal offering customers greatly discounted
last-minute deals on air, hotel rooms, car rental, and travel packages from
around the world. Globalfare.com plans to use guidebook-like content on the site
so as to create the world's most complete and engaging source of on-line
information for travelers.
During the third quarter, Globalfare successfully opened its customer care and
reservation center in Las Vegas, Nevada, completing a strategic milestone in its
business model. The customer care center is dedicated to providing Globalfare's
customers with personalized "person to person" service in booking travel, and in
web-site assistance. The center's phone number is (888) 350-3273 or (350-FARE)
and is scheduled for around-the-clock operation in the near future.
As the Globalfare enters the fourth quarter, management is in the final stages
of negotiating a strategic alliance with a major global reservation system. The
company has also recently signed a joint development agreement with a
German-based custom travel software solution company. The alliances are being
negotiated to launch the next phase of Globalfare's business plan; that is,
delivering a new, innovative and easy to use on-line booking system that
instantly connects Globalfare to consolidator databases around the world
providing customers with what will be one of the largest selection of discount
fares that can be booked on-line. The initial development will be in four
languages and is scheduled for a soft launch in January 2001.
Also in early 2001, the Company foresees the implementation of MLE (see above
for discussion) as a tool to significantly enhance the search capabilities for
Globalfare's customers making it a leading source of travel information,
including virtual real time ticket availability, entertainment opportunities at
destination sites, and many other options.
By the end of the fourth quarter, all of the Company's gateway users will be
able to go directly to Globalfare.com by clicking on "Travel" from whichever
gateway they are visiting.
POINTMAIL.COM, INC.
In June, 2000 the Company acquired 100% of Pointmail.com, Inc., which owned
proprietary, web-based e-mail software that enhances the Company's existing
Postmaster internet service. This service is universally accessible by using a
web browser without the need to install software. The software package was
successfully installed as a replacement for the existing Postmaster internet
service in September, 2000 on the Company's home gateway, the US Bridge
(http://www.theUSbridge.com). Furthermore, the package will be installed on the
Company's other gateways, the Brazil Bridge (http://www.thebrazilbridge.com),
and the China Bridge (http://www.thechinabridge.com) and all upcoming Bridges
(e.g., the India Bridge
11
<PAGE>
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(http://www.theindiabridge.com) in the fourth quarter of 2000. Ultimately, the
e-mail software package will be installed on all of the Company's web sites as
they are developed.
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 early 2001.
iNETPURCHASING, INC.
The Company entered into two Limited Liability Companies (LLC) agreements with
iNetPurchasing.com, Inc. (iNPI). Both joint venture ownerships are held 50% by
the Company and 50% by iNET Purchasing.com, Inc. One LLC, iNET GOVERNMENT
SERVICES LLC calls for iNPI to market the Company's existing and developmental
products, including Emily, to state and local governments within the U.S. as
part of its comprehensive e-solutions bundle.
The second joint LLC, Vertical-iNET LLC, calls for the Company to
internationally market iNPI's online procurement services through the Company's
alliances abroad. The initial marketing targets will be foreign governments,
partly in response to certain standards set forth by the WorldBank, ExlmBank and
USAID requiring recipient nations to implement modern procurement procedures
before the release of funds. The Company will target international public and
private companies as well.
In May 2000, the Company invested $500,000, in consideration of 2.5% of iNPI's
outstanding shares and a royalty license, which provides for royalty payments to
the Company based upon iNPI's transactional fees. INPI anticipates revenues
commencing in December 2000.
Results of Operations
Net sales for the nine months ended September 30, 2000 were $94,074, which are
primarily made up of software development, web-site hosting through Externet
World, Inc., and travel bookings through Globalfare.com. This is a $345,162
decrease from the same period ended September 30, 1999 where the majority of
revenues were derived from a software development contract between Externet
World, Inc. and an outside party, as well as some incidental computer sales to
clients requiring separate servers maintained onsite.
Net Sales for the three months ended September 30, 2000 were $25,624 and are
primarily made up of web-site hosting through Externet World, Inc. and travel
bookings through Globalfare.com. This is an $87,197 decrease from the same
period ended September 30, 1999 where the majority of revenues were derived from
a software development contract between Externet World, Inc. and an outside
party.
Cost of Goods Sold (COGS) for the nine-month period ended September 30, 2000,
were $39,188 which 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. This is a
$8,130 increase from the nine-month period ended September 30, 1999, the primary
COGS included the website hosting charges for SSL requirements as well as the
costs for computers and peripherals that were purchased on behalf of client(s).
12
<PAGE>
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Cost of Goods Sold (COGS) for the three-month period ended September 30, 2000,
were $18,791 which 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. This is a
$12,429 increase from the three-month period ended September 30, 1999, the
primary COGS included the website hosting charges for SSL requirements as well
as the costs for computers and peripherals that were purchased on behalf of
client(s).
The net loss of ($1,874,175) generated during the nine months ended September
30, 2000, was a decrease of $7,042,100 when compared to net income of $167,925
for the nine months ended September 30, 1999. The loss for the period ended
September 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. during 1999. Significant operating expenses for the nine
month period ended September 30, 2000 include Consulting fees ($139,728),
Security ($92,353), Insurance ($89,954), Legal and Professional fees ($187,461),
Salaries and related payroll taxes ($1,031,095).
The net loss of ($473,913) generated during the three months ended September 30,
2000, can be compared to net income of $68,216 for the three months ended
September 30, 1999. The loss for the period ended September 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. during
1999. Significant operating expenses for the three month period ended September
30, 2000 include Consulting fees ($70,005), Security ($86,522), Insurance
($57,182), Legal and Professional fees ($81,024), Salaries and related payroll
taxes ($395,997).
Liquidity and Capital Resources
Negative cash flows from operating activities of ($1,042,445) for the nine-month
period ended September 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, ($235,773) of the negative cash flow is a result of
changes in non-cash current assets and current liabilities.
Positive cash flows from operating activities of $267,610 for the three-month
period ended September 30, 2000 were primarily the result of an unrealized gain
on marketable securities and a decrease in receivables.
Despite the negative cash flows described above, the Company's experienced an
overall increase in current assets primarily due from the receipt of proceeds
from a 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
the Company's operations, asset acquisitions and investments.
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
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VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
and expected revenues, will be sufficient to cover working capital requirements
for at least 12 months. Should expected revenue levels not be achieved, we would
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, all of which may not
be possible to obtain if needed.
During the nine months ended September 30, 2000, the Company had an overall
decrease in liabilities due to the payment of a short-term note payable, payroll
taxes and other accrued expenses outstanding at December 31, 1999. This is the
same for the three-month period ended September 30, 2000. 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.
MARKET RISKS
The Company anticipates that it will have activities in numerous countries in
future periods. These operations will expose the Company to a variety of
financial and market risks, including the effects of changes in foreign currency
exchange rates and interest rates. As of September 30, 2000, there are no
material gains or losses requiring separate disclosure.
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<PAGE>
VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
DIVIDENDS
The Board intends to declare and pay dividends on the Company's Preferred Stock
based on the earnings, financial condition, cash flow and business requirements
of the Company. During the first six months of 2000, the Board had not declared
dividends on the Series "A", "B", and "D" Preferred Shares. However, for the
three months ending September 30, 2000, the Board declared and paid dividends to
Preferred Series "A" shareholders totaling $111,111 based on the terms of the
preferred shares. Dividends on preferred shares of $ 134,891 are in arrears at
September 30, 2000.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The action filed by the Company on June 27, 2000, 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), and the related cases involving the
Company and Patrice Lambert, the former CEO of the Company's former
subsidiary, Externet World, Inc., have been fully and completely
settled based on confidential terms.
In July 2000, an action was filed in Los Angeles Superior Court,
against the Company by Summitt Healthcare, Inc., entitled Summitt
Healthcare, Inc. v. Vertical Computer Systems, Inc. (LASC Case No.
SC062610), alleging claims arising out of breach of contract and
fraud. The action seeks compensatory liquidated and punitive
damages, based on the supply of services to the plaintiff by
Externet World, Inc. In the opinion of counsel, an unfavorable
outcome as to the Company or Externet World, Inc., is unlikely.
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
September 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 September 30, 2000 the Company issued
600,000 common shares. The transactional details required pursuant
to Item 701 of Regulation S-B follow:
|_| On July 8, 2000, 600,000 common shares were issued to one (1)
party 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 $33,750.
Item 3. Defaults Under Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
16
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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, filed October 19, 2000 for changes in control of registrant.
8-K, filed October 19, 2000 for acquisition or disposition of
assets.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 2000 VERTICAL COMPUTER SYSTEMS, INC.
By: /s/ Richard Wade
Richard Wade
Its: President
By: /s/ Julie M. Holmes
Julie M. Holmes
Its: Chief Financial Officer
18
