-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TZMGU3xUfqeIBbasgW3C0zXz2lvZr3xd4DpJZHBPXHyRdHAC+PQVe7B9jyag/LTI Q2qsDnoVguYn7z07SWKXpw== 0001005477-01-502313.txt : 20020413 0001005477-01-502313.hdr.sgml : 20020413 ACCESSION NUMBER: 0001005477-01-502313 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011219 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VERTICAL COMPUTER SYSTEMS INC CENTRAL INDEX KEY: 0001099509 STANDARD INDUSTRIAL CLASSIFICATION: [9995] IRS NUMBER: 880441551 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-28685 FILM NUMBER: 1818056 BUSINESS ADDRESS: STREET 1: 6336 WILSHIRE BLVD CITY: LOS ANGELES STATE: CA ZIP: 90048 BUSINESS PHONE: 3236584211 MAIL ADDRESS: STREET 1: 6336 WILSHIRE BLVD CITY: LOS ANGELES STATE: CA ZIP: 90048 FORMER COMPANY: FORMER CONFORMED NAME: SCIENTIFIC FUEL TECHNOLOGY INC DATE OF NAME CHANGE: 19991122 10QSB/A 1 d01-35298.txt FORM 10QSB/A U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB/A |X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended September 30, 2001. OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to Commission file number 0-28685 VERTICAL COMPUTER SYSTEMS, INC. (Exact Name of Small Business Issuer as Specified in its Charter) Delaware 65-0393635 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 6336 Wilshire Boulevard Los Angeles, California 90048 (Address of Principal Executive Offices) (323) 658-4211 (Issuer's Telephone Number) Scientific Fuel Technology, Inc. -------------------------------------- (Former name of small business issuer) 1203 Healing Waters, Las Vegas, NV 89031 ---------------------------------------- (Former address of small business issuer) The Company is amending its 10-QSB, since a review has been completed by the Company's Independent Certified Public Accountants. Indicate by check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, par value $.00001 per share, 615,191,422 shares issued and outstanding as of December 19, 2001. Transitional Small Business Disclosure Format (check one): Yes |_| No |X| VERTICAL COMPUTERS SYSTEMS, INC. AND SUBSIDIARIES INDEX TO FORM 10-QSB/A PART I FINANCIAL INFORMATION Page Item 1. Condensed Consolidated Financial Statements: Report of Independent Certified Public Accountants 3 Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2001 4 Condensed Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2001 and 2000 6 Condensed Consolidated Statements of Cash Flows (unaudited) for The Nine Months Ended September 30, 2001 and 2000 7 Notes to Condensed Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 PART II OTHER INFORMATION Item 1 Legal Proceedings 26 Item 2 Changes in Securities and Use of Proceeds 26 Item 3 Defaults Under Senior Securities 28 Item 4. Submission of Matters To A Vote Of Security Holders 28 Item 5 Other Information 28 Item 6. Exhibits and Reports on Form 8-K 29 2 Report of Independent Certified Public Accountants Vertical Computer Systems, Inc. Los Angeles, CA We have reviewed the accompany condensed consolidated financial statements of Vertical Computer Systems, Inc. as of September 30, 2001, and for the three-month and nine-month periods then ended. These financial statements are the responsibility of the company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquires of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with accounting principals generally accepted in the United States of America. The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the condensed consolidated financial statements, the Company has suffered recurring operating losses that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ BDO Seidman, LLP Los Angeles, CA December 19, 2001 3 Item 1. Condensed Consolidated Financial Statements VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) September 30, 2001 - -------------------------------------------------------------------------------- Assets Current Assets Cash $ 781,946 Restricted cash 1,552,527 Securities available for sale 528,000 Accounts receivable, net of allowance for bad debts of $43,650 1,098,702 Receivable from officers and employees 3,796 Prepaid expenses 52,596 - -------------------------------------------------------------------------------- Total current assets 4,017,567 Property and equipment, net of accumulated depreciation 1,073,785 Goodwill and other intangibles, net 6,503,759 Deposits 70,507 - -------------------------------------------------------------------------------- Total assets $11,665,618 ================================================================================ Liabilities, Convertible Preferred Stock and Stockholders' Equity Current liabilities Accounts payable and accrued liabilities $ 1,185,333 Deferred revenue 1,811,886 Accrued dividends 34,891 Current portion - notes payable 5,215,938 - -------------------------------------------------------------------------------- Total current liabilities 8,248,048 Convertible debt 125,000 Note payable, net of discount and current portion 1,212,505 - -------------------------------------------------------------------------------- Total liabilities $ 9,585,553 ================================================================================ See accompanying notes to the condensed consolidated financial statements 4 VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, 2001 - ----------------------------------------------------------------------------------------------- Commitments and contingencies Series B 10% Convertible Preferred stock; $0.001 par value; 375,000 Shares authorized; 7,200 shares issued and outstanding at September 30, 2001 45,000 Series D 15% Convertible Preferred stock; $0.001 par value; 300,000 Shares authorized; 25,000 shares issued and outstanding at September 30, 2001 156,250 Minority interest 267,000 Stockholders' Equity Common stock; $0.00001 par value; 1,000,000,000 shares authorized; 594,967,965 and shares issued and outstanding at September 30, 2001 5,950 Series A 4% Convertible Cumulative Preferred stock; $0.001 par value; 250,000 shares authorized; 50,000 shares issued and outstanding at September 30, 2001 50 Series A Preferred stock; par value $0.001; 750,000 shares authorized; No shares issued and outstanding at September 30, 2001 -- Series C 4% Cumulative Convertible Preferred Stock; par value $0.001; 200,000 shares authorized; 30,000 shares issued and outstanding to a subsidiary of the Company at September 30, 2001 -- Series C Preferred stock; par value $0.001; 175,000 shares authorized; no shares issued and outstanding at September 30, 2001 -- Subscription receivable (2,000) Additional paid-in capital 25,506,125 Accumulated deficit (24,126,310) Accumulated other comprehensive income 228,000 - ----------------------------------------------------------------------------------------------- Total stockholders' equity 1,611,815 - ----------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 11,665,618 ===============================================================================================
See accompanying notes to the condensed consolidated financial statements 5 VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended For the Nine Months Ended September 30, September 30, -------------------------------- -------------------------------- 2001 2000 2001 2000 ------------- ------------- ------------- ------------- Revenues: Maintenance $ 255,257 $ -- $ 1,182,798 $ -- Consulting services 63,878 -- 849,455 -- Other 670,675 6,833 331,879 54,886 ------------- ------------- ------------- ------------- Total revenues $ 989,810 $ 6,833 $ 2,364,132 $ 54,886 Selling, general and administrative expenses 5,140,974 1,353,621 11,186,558 3,022,682 ------------- ------------- ------------- ------------- Operating loss (4,151,164) (1,346,788) (8,822,426) (2,967,796) Interest income 14,433 114,516 119,433 274,594 Interest expense (153,786) (5,668) (347,272) (19,225) Gain on sale of asset -- 838,252 -- 838,252 ------------- ------------- ------------- ------------- Net loss before minority interest (4,290,517) (399,688) (9,050,265) (1,874,175) Minority interest in loss of subsidiary 185,294 -- 400,005 -- ------------- ------------- ------------- ------------- Net loss (4,105,223) (399,688) (8,650,260) (1,874,175) Dividend applicable to preferred stock (14,400) -- (196,846) -- ------------- ------------- ------------- ------------- Net loss applicable to common stockholders' $ (4,119,623) $ (399,688) $ (8,847,106) $ (1,874,175) ============= ============= ============= ============= Basic and diluted loss per common share $ (0.01) $ (0.01) $ (0.02) $ (0.01) ============= ============= ============= ============= Basic and diluted weighted average of common shares outstanding 590,174,993 782,405,794 578,530,002 728,576,772 ============= ============= ============= ============= Comprehensive loss and its components consist of the following: Net loss $ (4,105,223) $ (399,688) $ (8,650,260) $ (1,874,175) Loss on securities available for sale (144,000) -- (192,000) -- ------------- ------------- ------------- ------------- Comprehensive loss $ (4,249,223) $ (399,688) $ (8,842,260) $ (1,874,175) ============= ============= ============= =============
See accompanying notes to condensed consolidated financial statements. 6 VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (Unaudited)
Nine Months Ended September 30, 2001 2000 ------------------------------- Cash Flows From Operating activities Net loss $(8,650,260) ($1,874,175) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,094,583 75,526 Minority Interest in Subsidiary (400,005) -- Non-employee compensation expense and stock issued for services 1,883,380 505,803 Allowance for bad debt 43,659 (14,900) Gain on sale of subsidiary -- (863,252) Write off for investments 367,788 -- Changes in operating assets and liabilities: Accounts receivable (617,918) 36,681 Receivable for related party 17,834 (1,068,767) Prepaids (10,747) (134,334) Deposits (1,443) (7,783) Other assets 35,000 16,469 Accounts Payable 625,314 (71,992) Deferred revenue 1,811,886 -- ----------------------------- Net cash used in operating activities (3,800,929) (3,400,724) Cash flow from investing activities: Restriction of cash for debt guarantee (1,500,000) -- Purchase of equipment -- (822,458) Proceeds paid for investments -- (650,000) Proceeds paid for securities available for sale -- (300,000) Proceeds received from sale of subsidiary, net of restricted cash -- 575,779 Purchase of payroll division 498,741 -- ----------------------------- Net cas used in investing activities (1,001,259) (1,196,679) Cash Flow from financing activities: Proceeds from issuance of Series A Preferred Stock -- 9,000,000 Proceeds from exercise of warrants -- 1,700,000 Proceeds form stock options exercised -- 92,204 Proceeds from Convertible Debt 125,000 -- Payment of note payable (457,500) (10,000) Proceeds from note payable 317,822 -- ----------------------------- Net Cash provided by (used in) financing activities (14,678) 10,782,204 Net increase (decrease) in cash (4,816,866) 6,184,801 Cash and cash equivalents, beginning of period 5,598,812 210,924 ----------------------------- Cash and cash equivalents, end of period $ 781,946 $ 6,395,725 ============================= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 282,902 $ 19,225 Income Taxes $ -- $ --
See accompany notes to the condensed consolidated financial statements 7 VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1 - Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310 of regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited consolidated condensed financial statements reflect all adjustments that, in the opinion of the management of Vertical Computer Systems, Inc. and Subsidiaries (collectively, the "Company"), are considered necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements of the Company included in the Company's Form 10-KSB for the year ended December 31, 2000. Going Concern Uncertainty The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the financial statements do not purport to represent realizable or settlement values. The report of the Company's Independent Certified Public Accountants for the December 31, 2000 financial statements included an explanatory paragraph expressing substantial doubt about the Company's ability to continue as a going concern. At this point in time, the Company has generated revenue, however it continues to suffer operating losses. The Company believes it can launch a number of products, services and other revenue generating programs. Additionally, the Company believes its three existing international in-country partners have the ability and resources to market its products concurrently in their respective country of origin. Furthermore, the Company is exploring certain opportunities with a number of companies to participate in the marketing of its products. The exact results of these opportunities are unknown at this time. The Company is continuing its efforts to secure working capital for operations, expansion and possible acquisitions, mergers, joint ventures, and/or other business combinations. However, there can be no assurance that the Company will be able to secure additional capital, or that if such capital is available, whether the terms or conditions would be acceptable to the Company. The consolidated financial statements contain no adjustment for the outcome of this uncertainty. 8 Note 2 - Common and Preferred Stock Transactions On July 11, 2001, the Company entered into two consulting agreements, in which the Company agreed to issue approximately $200,000 in common stock to each consultant for business advisory services. 20% of the common stock was due on the agreement date, with an additional 20% due on the 30th and 60th day subsequent to the agreement date and the remaining 40% due on the 90th day subsequent to the agreement date. The number of shares to be issued to each consultant will be determined on the date each consulting fee is due. These shares were registered pursuant to the Form S-8 filed on July 13, 2001. The Company is also obligated to issue warrants to purchase 500,000 shares of Company's common stock to each consultant. As of September 30, 2001 the Company has issued 10,081,152 shares of its common stock in exchange for the consulting services provided and 1,000,000 warrants. The warrants have vested and are exercisable for five years from issuance at a strike price equal to the fair market value of the Company's common stock on the day of grant. As of September 30, 2001, the Company recognized approximately $248,000 in consulting expenses in relation to the common stock issued and $10,000 for the value of the warrants (the warrants were valued using the black-scholes valuation model). In August 2001, the Company issued $125,000 of convertible debentures. The debt accrues interest at 6% per annum and is due October 2006. The debenture is convertible into shares of common stock at either 120% of the closing bid price on the date of agreement or 80% of the 3 lowest closing bid prices 20 days prior to the conversion. The debenture is convertible at the option of the holder, any time after purchase. The Company has recognized $31,250 as interest expense in relation to the beneficial feature conversion of the debentures. As of September 30, 2001 no conversions have taken place. In August 2001, the Company issued a $180,000 note, which is due February 2002 and bears interest at 12% per annum. In connection with the note, the Company issued 500,000 warrants to purchase shares of its common stock and pledged third party securities owned by the Company and available for sale as collateral for the note. The warrants vested immediately and are exercisable for three years from issuance. The value of the warrants, $5,000 (valued using the black-scholes valuation model) has been deferred and will be amortized over the term of the loan. In August 2001, the Company entered into an Equity Line of Credit agreement, whereby up to $10,000,000 of the Company's common stock may be purchased. The shares must be registered before sale and the shares can be purchased at 95% of the closing bid price, on the date of purchase. The equity line of credit contains a fee of $400,000 payable in common stock. As of September 30, 2001, the Company issued 7,142,857 shares of common stock or $200,000 (fair market value of shares issued) of the fee and accrued for the remaining portion, which is to be paid the earlier of the registration of shares that are to be issued in connection with the Equity Line of Credit or six months. Also, as of September 30, 2001 no shares have been purchased. In August 2001, the Company issued 30,000 shares of its Series C 4% Cumulative Convertible Preferred Stock to acquire 100% of the outstanding common stock of Enfacet, Inc. ("Enfacet"), a Company involved in the development of website management software. The Series C 4% convertible stock eliminates on consolidation, since the shares were issued to Enfacet. As per the agreement, Enfacet shall distribute 15,000 shares to those employees still employed by Enfacet, one year from the anniversary date of the agreement. At that time the remaining shares may be used by Enfacet to acquire additional funding. The fair value of the liabilities assumed by the Company approximated $428,000, which was off set by assets with an approximate fair value of the same amount. The Series C 4% Cumulative Convertible Preferred Stock is convertible into shares of the Company's common stock at a ratio of one to four hundred. Dividends on the stock are cumulative and accrue on a quarterly basis. In the event of a voluntary or involuntary liquidation, the Series C 4% shareholders are entitled to a liquidation preference of $100 per share. 9 Throughout the third quarter of fiscal 2001, the Company issued 5,036,449 shares of its common stock or $186,350 (fair market value of shares issued), to various legal, investment and marketing consultants for services rendered. These shares were registered pursuant to the Form S-8 filed on July 13, 2001. Note 3 - Acquisition In February 2001 the Company acquired a 60% interest in NOW Solutions, LLC ("NOW"), a company that develops and maintains human resource software, in exchange for $1,000,0000. Pursuant to the terms of the operating agreement, the Company's interest will be reduced to 51% over three years as employees of NOW Solutions will be entitled to receive shares of NOW Solutions common stock. Also in February 2001 NOW purchased the human resource software assets of Ross Systems, Inc. ("Ross") in exchange for $5,100,000 and a promissory note due to Ross for $1,000,000. The Ross note does not bear interest and has payment requirements of $250,000 and $750,000 due February 2002 and 2003, respectively. In addition, the agreement calls for various earnout provisions to be paid to Ross if certain sales levels are achieved by NOW during the two years subsequent to the purchase. NOW acquired a $5,500,000 note payable to finance the Ross acquisition. The note bears interest at Prime plus one and a half (Prime was 6% at September 30, 2001) and has an interest rate floor of 8.5%. The Note payable is due the earlier of February 2006 or if terminated, by either party, in accordance with the terms of the agreement. The note calls for monthly principal payments of $91,500 plus interest. The Company entered into a declining pledge agreement whereby the Company guaranteed $1,500,0000 of the note. Arglen Acquisition, LLC ("Arglen") facilitated the NOW transactions and acquired a 30% interest in NOW for services provided and received warrants of the Company to purchase 5% of the total outstanding stock of the Company, for an exercise price of $0.08. The warrants are anti-dilutive, with a third of the warrants vesting upon grant and the remaining thirds vesting equally in one and two years from the grant date. All warrants are exercisable five years from the vesting date. The NOW purchase was accounted for under the purchase method of accounting, with the cash paid to Ross, note payable due to Ross, $667,000 for Arglen's 30% interest in NOW and $798,000 for the value of the Warrants issued to Arglen (valued using the black-scholes valuation model), all included as part of the purchase price. The Company and NOW recognized approximately $7,066,000 of goodwill and other intangible assets in connection with the purchase, which is being amortized over a 3 to 8 year period. NOW is consolidated with the Company for financial reporting purposes, with minority interest being recognized for the 40% interest. Of the remaining minority interest, 5% is held by a consultant who facilitated the NOW transactions and 5% is reserved for the employees. Note 4 - Notes Payable NOW Solutions, LLC has been notified by a lender that it is in default of certain covenants in the loan agreement, in which the Company has pledged a $1.5 million deposit as collateral pursuant to the declining pledge agreement. This deposit is reflected as restricted cash on the balance sheets. 10 Note 5 - Legal Proceedings The Company is, from time to time, involved in various lawsuits generally incidental to its business operations, consisting primarily of collection actions and vendor disputes. In the opinion of management, the ultimate resolution of these matters, if any, will not have a significant effect on the financial position, operations or cash flows of the Company. In addition, the Company is involved in two additional litigated matters. The case entitled, Margaret Greco, et al., v. Vertical Computer Systems, Inc., filed in United States District Court for the Eastern District of New York (Case No. 00 Civ. 6551 (DRH), involves allegations that the plaintiffs sustained damage as a result of an alleged improper rescission of a subscription agreement based on a November 1999 private placement memorandum. Plaintiffs seek damages based on the alleged increase in value of the stock since the private placement. The matter is open and the Company is vigorously defending this action. A second matter, entitled La Societe Francaise de Casinos v. Vertical Computer Systems, Inc., was filed in Los Angeles County, California, Superior Court, on January 19, 2001. This action was filed by a former customer of Externet World, Inc., a former wholly owned subsidiary, which claimed that the Company is liable to it for in excess of $500,000 in costs allegedly paid for an Internet casino software package to be developed and maintained by Externet World. The plaintiff also alleges that the Company has breached an agreement to pay the disputed sums flowing out of its October 2000 settlement of litigated matters with two former shareholders of the Company. The Company executed a Settlement and Mutual General Release Agreement on July 20, 2001. Pursuant to the settlement agreement, the Company received all right, title, and interest in and to the internet gaming software package developed by Externet World and Casino in exchange for payment of $400,000 by the Company to Casino, and payment of state and federal taxes on behalf of Externet World. Only a few nominal and non-contested matters remain open regarding (a) payment of state taxes and (b) transfer of domain names. Those issues should be resolved by January 31, 2002. Note 6 - New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. 11 Some of the Company's previous business combinations were accounted for using the purchase method of accounting. As of September 30, 2001, the net carrying amount of goodwill and other intangible assets is $6,071,759. Currently, the Company is assessing but has not yet determined how the adoption of SFAS 141 and SFAS 142 will impact its financial position and results of operations. SFAS 143, Accounting for Asset Retirement Obligations, was issued in June 2001 and is effective for fiscal years beginning after June 15, 2002. SFAS 143 requires that any legal obligation related to the retirement of long-lived assets be quantified and recorded as a liability with the associated asset retirement cost capitalized on the balance sheet in the period it is incurred when a reasonable estimate of the fair value of the liability can be made. SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, was issued in August 2001 and is effective for fiscal years beginning after December 15, 2001. SFAS 144 provides a single, comprehensive accounting model for impairment and disposal of long-lived assets and discontinued operations. SFAS 143 and SFAS 144 will be adopted on their effective dates, and adoption is not expected to result in any material effects on the Corporation's financial statements. Note 7 - Subsequent Events In October 2001 the Company executed a $100,000 promissory note. The note bears interest at 12% per annum and all unpaid principal and interest is due February 2002. The note is secured by third party securities owned by the Company which the Company intends to sell in order to repay the loan and by a pledge against the loan by the President of the Company to sell up to 5,225,00 shares of common stock owned by the President to cover any shortfall. In October 2001 the Company agreed to reduce its interest in Worldbridge Webscasting, LLC from 51% to 49%, in consideration for extending the Company's obligation to make a capital contribution pursuant to the Operating Agreement in the amount of $100,000 up to and including January 15, 2002. In the event the Company does not make payment by January 15, 2002, the Company's interest shall be further reduced from 49% to 25%. In November 2001 the Company executed a $100,000 promissory note. The note bears interest at 12% per annum and all unpaid principal and interest is due February 2002. The note is secured by third party securities owned by the Company which the Company intends to sell to repay the loan and by a pledge against the loan by the President of the Company to sell up to 5,225,00 shares of common stock owned by the President to cover any shortfall. Also in November 2001 the Company purchased various assets of Adhesive Software, Inc. for $100,000, 50,000 shares of the Company's Series C 4% Convertible Preferred Stock and a promissory note of $280,000. The note bears interest at 4% per annum and has average monthly principal and interest payments of $9,375 through out the term of the note. All unpaid amounts are due June 2004. The note is secured by certain assets of the Company is reserved as collateral. Also in November 2001 the Company also entered into a license agreement with iNET whereby the Company licensed its Emily software and technology for use in connection with iNet's e-procurement system in Texas, Maine, and Idaho in exchange for a 20% commission of subscription fees and the ability to market all subscription fees (except for Texas QISV vendors) as well as a joint marketing effort to sell the Company's Emily Agent to all vendors whereby the Company retains 100% of the $495 sales price. 12 The Company has issued 20,223,458 shares of common stock as payment for services rendered by consultants and vendors which were registered on a form Form S-8 which was filed on November 8, 2001. In December 2001, the Company executed a $425,000 note payable with a third party. The Company received proceeds of $300,000 and paid a commitment fee of $125,000. The fee accrues interest at 12% per annum and is due January 31, 2002. The note is secured by 36,303,932 shares of common stock of the Company that is owned and controlled by the President of the Company, Richard Wade, and 15,000,000 shares of common stock of the Company that is owned by its Chief Technology Officer, Luiz Valdetaro, to cover any shortfall in the event of default As of December 19, 2001, the Company issued stock options to its employees for 2,740,000 shares pursuant to the Incentive Stock Option Plan, dated December 16, 1999. As of December 19, 2001, warrants to purchase 1,657,250 shares of common stock at an average price of $0.023 were granted since September 30, 2001; all of those were unexercised and outstanding as of December 19, 2001. 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/A. This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity and cash flows of Vertical Computer Systems, Inc. and Subsidiaries for the three and nine months ended September 30, 2001 and September 30, 2000. Except for historical information, the matters discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations are forward looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond our control. Actual results could differ materially from those projected in the forward-looking statements as a result of, among other things, the factors described below under the caption "Cautionary Statements and Risk Factors." OVERVIEW Vertical Computer Systems, Inc. (OTC.BB: VCSY) is a multinational provider of Web services, underpinning Web technologies, and Administrative Software Services through a global partner distribution network. Web services involve the outsourcing of administrative services software via the Internet. Underpinning Web technologies are the foundation technologies used to build Web services. Administrative Software Services are software products, such as human resources or procurement that provide the basic functionality of any operational entity. The Company acquires and operates companies whose products, in the Company's belief: (1) are proven and best of the breed, (2) on the path to profitability, (3) complement each other, and (4) provide cross-product distribution channels. The Company's business model combines complementary, integrated Web services, a multinational distribution system of local partners, and underpinning Web technologies to create a distribution matrix that it believes are capable of penetrating multiple sectors through cross promotion. The Company's different Administrative Software Services provide cross distribution channels for each other, the Global Partners System provides worldwide distribution channels, and the underpinning Web technologies permit the rapid development and deployment of all systems. 13 Web services Web services encompasses a full range of services from the simple Web-unique application of instant messaging to complex administrative services such as accounting packages converted into an application service provider model. An application service provider or "ASP" is a company that offers individuals or enterprises access over the Internet to applications and related services that would otherwise have to be located in their own personal or enterprise computers. The Company's Web services derive from a full range of (i) Administrative Software Services controlled by the Company that will be converted into specialized Web services and (ii) Web services the Company has developed independently or acquired. The Company's ownership interest is typically a controlling interest. In most cases, the administrative service will retain its historic client-server based customer even though it developed a Web service for those same customers and new customers. The Company's current Web services address the following market segments:
WEB MARKET PRODUCT SERVICES OWNERSHIP VCSY % Application Platform Bridges Yes VCSY 100% Database connect XML Emily Agent Yes VCSY 100% Emily XML Scripting Language EMILY Yes VCSY 100% Publishing Content NewsFlash No VCSY 100% Higher Education VarsityFlash No VCSY 100% Franchises/Independent Agent AffiliateFlash Yes VCSY 100% Emergency Management ResponseFlash Yes VCSY 100% Public Sector e-Procurement Service INet Yes INetPurchasing 2.5% Human Resources HRIS No NOW Solutions 60% Webcasting Webcast Yes WorldBridge 49% Webcasting Services Travel Globalfare Yes VCSY 100% Smart Cards ApolloSmart Yes VCSY 30%
Underpinning Web Technologies Underpinning Web technologies provide the software foundation to support (1) internet based platforms for the delivery of Web services; (2) individual software products that can be sold independently or combined with another software product; and (3) rapid deployment of all Web services and software products throughout the Company's distribution system. The Company's first underpinning Web technology is the patent pending Emily Extensible Markup Language or Emily XML. Extensible Markup Language or XML is a flexible way to create common information formats and share both the format and the date on the World Wide Web, intranets, and elsewhere. For example, computer makers might agree on a standard or common way to describe the information about a computer product (processor speed, memory size, and so forth) and then describe the product information format with XML. Such a standard way of describing data would enable a user to send an intelligent agent (a program) to each computer maker's Web site, gather data, and then make a valid comparison. XML can be used by any individual or group of individuals or companies that wants to share information in a consistent way. Emily XML has recently been upgraded to be Java compatible. Java is a programming language expressly designed for use in the distributed environment of the Internet. Java can be used to create complete applications that may run on a single computer or be distributed among servers and clients in a network. Utilizing Emily, the Company developed two products, the Emily Agent and Broker, which are now jointly marketed with iNetPurchasing as part of the State of Texas' new e-procurement system. Dr. Charles Goldfarb, recognized as the Father of Markup Languages, has included a chapter on Emily and its application, relative to the State of Texas procurement system, in the 4th Edition of the XML Handbook. The Emily XML Automation Toolkit for Java is currently in its final testing phase, in preparation for release in the first quarter of 2002. 14 The Company's second underpinning Web technology is SiteFlash. The SiteFlash technology utilizes XML and publishes on the Web, enabling the user to build and efficiently operate Web services with the unique ability to separate form, function, and content on the Web. This unique ability is patent pending and has vast application in the web arena. SiteFlash technology is being used in higher education (e.g.,California State University), newspapers (e.g., La Opinion), and consulting Organizations (eg. Infotec). The Company believes the SiteFlash architectural concepts enable easy integration with existing technological components the in any organization. Additional key features that differentiate SiteFlash from other products are its affiliation/syndication capability, its multi-lingual capability and its multi-modal (any output device including PDAs, wireless phones, etc) framework. The Company offers SiteFlash as a stand-alone product and also as a development product for selective in vertical markets, such as NewsFlash and VarsityFlash. Administrative Software Services Administrative Software Services as adapted to an ASP model on the Web are a sub-set of Web services. These services include procurement, scheduling, travel management, payroll, financial and other common functions. All of the Company's Administrative Software Services are Web enabled, meaning that they can be accessed on the Internet. Exploratory analysis is being done to develop an ASP application for Human Resource Information Service (HRIS) Application Software. The Company believes that its Administrative Software Services provide upfront cost savings and productivity increases for everyday operations with competitive set-up charges and implementation times less than competitors. The Company is developing a portfolio of ASP Administrative Software Services in initial deployment stages with iNetPurchasing with three states under contract. The key is limited up-front charges coupled with an on-going transaction fee. Global Partners System The Company's Global Partners System is intended to create export markets for a product or service. The Global Partners System has partners in three countries through Phase I. The Company's initial strategy is to develop Web service applications in one of the original Global Partner's countries to demonstrate the strength of the distribution system. The foreign partnership has the option either to market the Web service directly or to subcontract the Web service to a local entity with particular expertise in that particular field. The ultimate objective is to demonstrate the strength of the local partner when marketing the best-of-breed Web service in that respective country by competitively selling its products against competitive products from major companies. Marketing Each of the Company's business units has distinct marketing strategies for their niche markets. The Company, as a strategic marketing element, plans to increase the growth rates of these individual business units by enabling them to leverage each other's strengths in their segments, as well as to exploit the network of customers, vendors, and support agencies that the Company has built. In the past two years, the Company has built an international distribution system offering Web services and underpinning Web technologies from its own platform. Upon expansion, the Company intends to incorporate third party products and services into its worldwide distribution platform while selling its own services to these third parties. The Company has obtained a significant base of Web services and underpinning Web technologies that are ready to go to market. 15 Currently, the Company's marketing effort focuses upon several sectors, though the United States government has become a focus for the following reasons: (1) Companies which the Company controls have significant governmental clients that created the potential to cross promote Web services; (2) the underpinning Web technologies are well-suited to the emerging governmental environment that demands the capability for cross-agency and federal/state/and local interface; and (3) the increased security environment caused by the terrorist attacks of September 11, 2001 necessitate improvements in secure communications and agency to agency contacts that are easily enabled by the Company's technology. Depending on the circumstances, the Company's marketing strategy is to obtain federal government contracts through its existing relationships or to be a subcontractor for a particular service to one of the major federal government prime contractors. For local and state government entities, the Company intends to cross-market to its existing client base. Overall, the marketing strategy entails building a strong international distribution base by which the Company hopes to attract the best-of-breed smaller Web services from companies without international distribution to market and commercially exploit their Web services on the Company's own platform and as well as for distribution to governmental entities. SUBSIDIARIES, ASSETS, AND PARTNERSHIPS Below is a description of the Company's key subsidiaries, assets and partnerships. EMILY SOLUTIONS The Company acquired the rights to Emily Solutions Web technology in December 1999. Emily Solutions' work platform, "the Emily Framework", consists of executable programs, files, configuration data and documentation needed to create Web-based applications that intercommunicate via XML (Extensible Markup Language) and HTTP. HTTP or the the Hypertext Transfer Protocol is the set of rules for exchanging files (text, graphic images, sound, video, and other multimedia files) on the World Wide Web. The Emily Framework was developed to be an engineering package comparable to other Web development tools such as Allaire Cold Fusion or Microsoft Frontpage. The primary component of the Emily Framework is MLE (Markup Language Executive), a programming language that already runs on Windows NT, Windows 2000, Linux and several UNIX platforms. MLE is developed to be both a complement and an alternative to Java on the server side. In addition, the Company developed the Emily broker application, used now as the interface between Publicbuy.Net e-procurement system for the state of Texas. As part of the agreement between iNet Purchasing and the Company, the Emily XML Enabler Agent will be offered as an optional product to expedite the interface at a price of $495. This arrangement will also be applicable for the PublicBuy.Net e-procurement contracts for Maine and Idaho. The Emily scripting language has been enabled to work on Java and the option is being explored to launch the Emily scripting language as part of a Java tool kit in the next two months. ZAPQUOTE, S.A. In March 2000 the Company entered into two joint ventures with ZAP Quote, S.A., Brazil's second largest provider of real time financial information for Brazil's financial markets. ZAP Quote, S.A., established in 1985, has used its proprietary wireless technology to become the fastest growing company for financial news and information based in Brazil. ZAP Quote, S.A. also has a major position in providing back office software to many of Brazil's major financial institutions. 16 Both joint venture ownerships are held 50% by the Company and 50% by ZAP Quote, S.A. The first joint venture was converted into a Brazilian corporation named Vertical Zap S.A. in August 2000 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. require the Company to provide the latest in U.S. technology and products while ZAP Quote, S.A. will add its expertise and familiarity with the Brazilian financial and business communities along with the initial financing for the project. As part of the Company's Global Partner's System, Vertical Zap S.A developed and launched an internet distribution website or "Bridge" to market and distribute the Company's Web services and underpinning web technologies throughout Brazil. The second joint venture, known as ZAP Vertical, has not been converted into a corporation, but is developing a strategy to market and distribute ZAP Quote, S.A.'s proprietary wireless financial applications in countries and territories around the world, excluding South America. As of September 30, 2001 all of the joint venture investments are fully reserved. There have been no revenues or expenses in relation to the investments for the 9 months ended September 30, 2001. GLOBALFARE.COM In May 2000 the Company acquired 100% of Globalfare.com ("Globalfare"). Headquartered in Las Vegas, Nevada, Globalfare is an e-commerce business-to-consumer and business-to-business outlet whose aim is to seek out and promote travel products from across the USA and around the world that are the best values in terms of price, quality and selection. Globalfare also offers a point of presence on the web for travelers looking for the best buys available for travel within a relatively short time frame and for those who are looking to plan vacations trips throughout the world during the coming year. Globalfare's goal is to become the world's most complete online travel service, and offer a comprehensive range of best-buy travel products; excellent hotels to suit all budgets; and first-rate travel insurance at reasonable costs, all with instant confirmation and the convenience of credit card payment. For the nine months ended September 30, 2001, Globalfare.com had assets of $86,000, $102,538 in net revenues and a net loss of $449,532. POINTMAIL.COM, INC. In June 2000 the Company acquired 100% of Pointmail.com, Inc., which owned proprietary, web-based e-mail software that enhances the Company's existing "ThePostmaster.Net" Internet service. ThePostmaster.Net is accessible world wide, offers a cross-platform e-mail solution, and is cheaper and easier than using traditional e-mail programs. ThePostmaster.Net is now a component of the Bridge technology and is also presented as a stand-alone products at "thepostmaster.net". For the nine months ended September 30, 2001, Pointmail.com had assets of $78,000, no revenues and a net loss of $14,557. 17 iNETPURCHASING, INC. The Company entered into two Limited Liability Company (LLC) agreements with iNetPurchasing.com, Inc. (iNPI). Both joint venture ownerships are held 50% by the Company and 50% by iNet Purchasing.com, Inc. One LLC, iNet Government Services, LLC, calls for iNPI to market the Company's existing and developmental products, including Emily, to state and local governments within the U.S. as part of its comprehensive e-solutions bundle. The second joint LLC, Vertical-iNet LLC, calls for the Company to internationally market iNPI's online procurement services through the Company's alliances abroad. The initial marketing targets will be foreign governments, partly in response to certain standards set forth by the WorldBank, EximBank 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 projects revenues commencing in second quarter of 2002. As of September 30, 2001 all of the iNet investments and advances paid for royalties are reserved. There have been no revenues or expenses in relation to the investments for the 9 months ended September 30, 2001. NOW SOLUTIONS, LLC In February 2001, NOW Solutions LLC ("NOW"), of which the Company owns a 60 percent majority interest, purchased the Renaissance CS(R) Human Resources and Payroll ("HRIS/PAYROLL") assets from Ross Systems, Inc. (NASDAQ: ROSS). NOW provides Human Resource Information Service (HRIS) Application Software. Customers are primarily located in North America. NOW derives revenue from software licenses, professional services consulting, and renewable maintenance from approximately 175 customers. In February 2001 the Company acquired a 60% interest in NOW Solutions, LLC ("NOW"), a company that develops and maintains human resource software, in exchange for $1,000,0000. Also in February 2001 NOW purchased the human resource software assets of Ross Systems, Inc. ("Ross") in exchange for $5,100,000 and a promissory note due to Ross for $1,000,000. The Ross note does not bear interest and has payment requirements of $250,000 and $750,000 due February 2002 and 2003, respectively. In addition the agreement calls for various earnout provisions to be paid to Ross if certain sales levels are achieved by NOW during the two years subsequent to the purchase. NOW acquired a $5,500,000 note payable to finance the Ross acquisition and use the excess amount for working capital. The note bears interest at Prime plus one and a half (Prime was 6% at September 30, 2001) and has an interest rate floor of 8.5%. The Note payable is due the earlier of February 2006 or if terminated, by either party, in accordance with the terms of the agreement. The note calls for monthly principal payments of $91,500 plus interest. The Company entered into a declining pledge agreement whereby the Company guaranteed $1,500,0000 of the note. Arglen Acquisition, LLC ("Arglen") facilitated the NOW transactions and acquired a 30% interest in NOW for services provided and received warrants of the Company to purchase 5% of the total outstanding stock of the Company, for an exercise price of $0.08. The warrants are anti-dilutive, with a third of the warrants vesting upon grant and the remaining thirds vesting equally in one and two years from the grant date. All warrants are exercisable five years from the vesting date. 18 Pursuant to the terms of the operating agreement, the Company's interest will be reduced to 51% over three years as employees of NOW Solutions will be entitled to receive shares of NOW Solutions common stock. The NOW purchase was accounted for under the purchase method of accounting, with the cash paid to Ross, note payable due to Ross, $667,000 for Arglen's 30% interest in NOW and $798,000 for the value of the Warrants issued to Arglen (valued using the black-scholes valuation model), all included as part of the purchase price. The Company and NOW recognized approximately $7,066,000 of goodwill and other intangible assets in connection with the purchase, which is being amortized over a 3 to 8 year period. As of September 30, 2001 the NOW has approximately $5,597,000 of goodwill and other intangible assets and for the 9 months ended September 30, 2001, NOW has $2,329,987 of net revenue and a net loss of $1,006,794. ENFACET, INC. The Company acquired 100% of Enfacet, Inc. on August 21, 2001, for 30,000 shares of Series C 4% Cumulative Convertible preferred stock. EnFacet is a software products company that has web-based eBusiness software used by newspapers, government agencies, universities and large franchises. EnFacet's products, Newsflash (catering to the publishing industry and newspapers in particular) and Site Flash (the affiliation/ syndication web product) are already accepted in the marketplace and are based on award winning (Crossroads A-List for 2000 and 2001), patent pending technologies. The products are mature products in a growing market, and provide for satisfying the enormous growth in the Internet data, web sites and e-commerce. For the 9 months ended September 30, 2001, Enfacet had $428,000 of assets and no revenue or expenses. APOLLO INDUSTRIES, INC. Apollo Industries, Inc. ("Apollo") is a smart card-based financial transaction and service solutions provider located in Los Angeles, California. On October 14, 2000, the Company agreed to provide $250,000 in funding to Apollo for the enhancement of its ApolloSmart technology and development of its service business in exchange for a 30% equity interest. Also on October 14, 2000, in consideration for $25,000 from the Company, Apollo agreed to pay a royalty of 2% of all transaction fees up to $275,000 and 1% up to $3,000,000. On April 19, 2001, Company loaned Apollo $24,000 which was due on June 30, 2001. On May 8, 2001, the Company loaned Apollo an additional $24,000 which was due on July 16, 2001. The loans are secured pursuant to a stock pledge in the amount of 500,000 shares for each of the two loans. Apollo is in default of the two loans. The Company has not foreclosed on either loan and Apollo is in the process of securing funding to repay both loans. ApolloSmart technology will be used by the Company to offer consumers many features from small-change transactions, banking and credit/debit spending, computer security, Web-based shopping, and Internet voting up to assisting enterprises around the world in implementing and expanding smart card usage. As of September 30, 2001 all of the advances paid to Apollo for royalties have been reserved for 100%. There has been no revenues and a net loss of $219,000 recorded in relation to Apollo for the 9 months ended September 30, 2001. 19 WORLDBRIDGE WEBCASTING SERVICES, LLC. Worldbridge Webcasting Services, LLC, provides webcast services. As of September 30, 2001, all investments in Worldbridge has been reserved for 100%. There have been no revenues or expenses in relation to the investments for the 9 months ended September 30, 2001. In October 2001 the Company agreed to reduce its interest in Worldbridge Webscasting, LLC from 51% to 49%, in consideration for extending the Company's obligation to make a capital contribution pursuant to the Operating Agreement in the amount of $100,000 up to and including January 15, 2002. In the event the Company does not make payment by January 15, 2002, the Company's interest shall be further reduced from 49% to 25%. BRIDGES The Company is developing a web-based distribution platform called Home Country Gateways ("HGCs" or "Bridges") as part of its Global Partners System. These Bridges represent an international distribution platform for the demonstration, deployment and sale of Company's Web Services and underpinning Web technologies. Currently, the Company has six Bridges in full operation, the World Bridge (http://www.theworldbridge.com), the US Bridge (http://www.theUSbridge.com), the Brazil Bridge (http://www.thebrazilbridge.com), the China Bridge (http://www.thechinabridge.com), the India Bridge (http://www.theindiabridge.com) and the Korea Bridge (http://www.thekoreabridge.com). Additionally, bridges for each of the fifty U.S. states, are either under construction or are being considered as future sites. These Bridges are targeted at individual audience segments and users, with maximum personalization thanks to the underpinning Web technologies. A sample segment is private expatriates living abroad, as well as those on government service in the military or diplomatic corps. For example, 6 million U.S. expatriates living abroad are able to better stay in touch with events in the US and their home state(s) through the mix of products and services on the USbridge.com and various state bridges. The goal of the Bridges is to use them as a distribution platform for Web Services. In the meantime, the Company moves toward the implementation of structured subscription fees as goods, services and technology are added to the Bridges. Later, these Bridges will also offer exclusive sponsorship opportunities in a broad range of ways to effectively deliver companies' messages and desired product information to millions of newfound consumers worldwide. These Bridges display Web Services like the Personal Information Management system through a licensing agreement with WebAddressBook, whereby the Company acquired a permanent license to utilize the source code for "WebAddressBook" in October 2000. This system allows users to manage personal information such as address book, calendar, contacts, bookmarks, note pads, files and tasks. WebAddressBook is customizable, multi-language and user-friendly. It is a full-featured customizable product that fits seamlessly into the Company's existing infrastructure. The Bridges continue to offer a free Internet messaging service through Webbe, which is licensed and co-branded from a third party. The Company is currently negotiating a renewal of this license. Webbe, essentially a highly personalized Web browser, is a one-stop shop for Internet activity, and adds unique communications tools to the Company's global network of Bridges. As of September 30, 2001, the Company has no assets, revenues or expenses in relation to the Bridges. 20 Results of Operations Nine Months Ended September 30, 2001 Compared To Nine Months Ended September 30, 2000 Total Revenues. The Company had total revenues of $2,364,132 in the nine months ended October 31, 2001. Total revenues primarily consist of software license, consulting and maintenance fees. All of these revenues relate to the business operations of NOW Solutions, a subsidiary in which the Company owns a 60% interest. The Company acquired the 60% interest in NOW Solutions in February 2001. As a result, The Company's operating results for the corresponding period in the prior year excluded the results of operations of NOW Solutions. As such, the Company had no revenues for the nine months ended September 30, 2000. Selling, General and Administrative Expenses. The Company had selling, general and administrative expenses of $11,186,558 and $3,022,682 in the nine months ended September 30, 2001 and 2000, respectively. This increase of $8,163,876 was primarily attributable to the operations of NOW Solutions, the write off of certain investments, and the amortization of goodwill. For the nine months ended September 30, 2001, selling, general and administrative expenses consisted primarily of consulting fees of $678,014, marketing expenses of $140,066, insurance premiums of $33,167, travel expenses of $68,031, professional fees of $575,944 and employment expenses of $1,188,346. Operating Loss. The Company had an operating loss of $8,822,426 and $2,967,796 in the nine months ended September 30, 2001 and 2000, respectively. This increase was primarily attributable to the increase in selling, general and administrative expenses in the current period. Minority Interest in Loss of Subsidiary. The minority interest in loss of subsidiary was $400,005 and zero for the nine months ended September 30, 2001 and 2000, respectively. This increase was primarily attributable to the Company's acquisition of its subsidiary NOW Solutions and the operating losses incurred by NOW Solutions. Net Loss. The Company had a net loss of $8,650,260 and $1,874,175 in the nine months ended September 30, 2001 and 2000, respectively. This increase was primarily attributable to the increase in selling, general and administrative expenses, amortization of goodwill. Interest expense has increased by $328,047 over the previous year due to the additional debt incurred for the asset purchase from Ross Systems, Inc. by NOW Solutions. Dividends Applicable to Preferred Stock. The Company had outstanding Series A 4% Convertible Cumulative Preferred stock that accrues dividends at a rate of 4% on a semi-annual basis. The dividends applicable to this preferred stock is $196,846 in the nine months ended September 30, 2001. The Company has outstanding preferred stock that accrues dividends at a rate of four percent on a quarterly basis if declared and these dividends are cumulative. These accrued dividends are reflected in the dividends applicable to preferred stock. Net Loss Applicable to Common Stockholders'. The Company had a net loss applicable to common stockholders of $8,847,106 and $1,874,175 in the nine months ended September 30, 2001 and 2000, respectively. This increase is primarily attributable to an increase in selling, general and administrative expenses, amortization of goodwill, and the increase in reserves for investments as well as the dividends applicable to preferred stockholders. Interest expense has increased by $328,047 over the previous year due to the additional debt incurred for the asset purchase from Ross Systems, Inc. by NOW Solutions. 21 Liquidity And Equity Line Of Credit The Company is dependent on external cash to fund its operations. The Company's primary need for cash during the next twelve months consists of working capital needs, as well as cash to repay loans in the amount of $805,000. The Company currently has enough working capital (excluding cash held at subsidiaries) to sustain operations for approximately 1 month. Thereafter, the Company will need additional cash to fund its operations. In order to meet its obligations, the Company will need to raise cash from the sale of securities or loans. Other than the Equity Line of Credit discussed below, the Company does not currently have any commitments for such capital, and no assurances can be given that such capital will be available when needed or on favorable terms, if at all. NOW Solutions, an entity in which the Company has a 60% ownership interest, believes it has adequate working capital to fund its current operations for the next 12 months. The management of NOW Solutions is currently working with its lender to cure the covenant default. Debt service for the next twelve months will be approximately $1,785,000 in principal and interest. NOW Solutions has a renewable maintenance revenue base of approximately $4.2 million that will provide adequate working capital for its operations. In addition, it is management's opinion that Professional Services Consulting and Software Licenses revenue will provide additional working capital to fund operations for the next twelve months. In February 2000 the Company through its subsidiary NOW Solutions purchased the human resource software division of Ross Systems, Inc. in exchange for $5,500,000 and a promissory note due to Ross for $1,000,000. The Ross note does not bear interest and has payment requirements of $250,000 and $750,000 due February 2002 and 2003, respectively. In addition, the loan agreement calls for various earn-out provisions to be paid to Ross if certain sales levels are achieved by NOW Solutions during the two years subsequent to the purchase. In addition to the Ross note, NOW Solutions received a $5,500,000 note payable to finance the purchase. The note bears interest at prime plus one and a half and is due the earlier of February 2006 or if terminated, by either party, in accordance with the terms of the loan agreement. The note calls for monthly principal payments of $91,500, plus interest. Pursuant to the declining pledge agreement, the Company guaranteed the note and provided a $1.5 million cash deposit as collateral for the $5.5 million loan. The terms of the declining pledge agreement provide that once the first 24 principal payments on the note ($2,200,000) have been paid in full, then the lender shall release the deposit accounts from the pledge. In the event that NOW Solutions makes all principal payments required to be paid under the note from March 2001 through October 2001, then the Company, subject to the lender's consent, may withdraw $33,333, and, providing that NOW Solutions continues to make its monthly principal payments, Company may withdraw $91,667 in each subsequent month as well as the right to withdraw sums equal to the aggregate amounts stated in the consent to withdrawal as submitted by lender. The lender has notified NOW Solutions that NOW Solutions is in default of certain covenants of the loan agreement. In August 2001 the Company borrowed $125,000 by issuing convertible debentures. The debentures accrue interest at a rate of six percent per year and are due in October 2006. The debenture is convertible at the holder's option into shares of common stock at either 120% of the closing bid price on the date of the debenture or 80% of the three lowest closing bid prices twenty days prior to the conversion. Also in August 2001, the Company borrowed $180,000. The loan bears interest at a rate of 12% per year and all unpaid principal and interest is due in February 2002. The Company pledged third party securities owned by the Company and available for sale as collateral for the note as well as shares of the Company's own common stock. In connection with the note, the Company issued 500,000 warrants to purchase shares of its common stock at an exercise price of $0.028. The warrants have a term of three years from the date of issuance. 22 Also in August 2001, the Company entered into the Equity Line of Credit Agreement with Cornell Capital Partners, L.P. Under the equity line, Cornell Capital Partners is committed to purchase up to $10.0 million of the Company's common stock over 36 months beginning on the effective date of the Company's registration statement registering the sale of the shares by Cornell Capital Partners. Under the equity line, the Company may request an advance by Cornell Capital Partners. The number of shares of common stock that Cornell Capital Partners will receive for each advance shall be determined by dividing the amount of the advance by the purchase price. The purchase price is 95% of the market price. The maximum advance amount will be equal to 150% of the average daily volume of the Company's common stock multiplied by the purchase price. The average daily volume shall be computed by using the forty trading days prior to the advance notice date. The advance notice date is the date Cornell Capital Partners receives a written notice from the Company requesting an advance amount under the equity line. The market price is the lowest closing bid price of the common stock over the five trading day period beginning on the first trading day after an advance notice date. The Company may request an advance every six trading days. Pursuant to the terms of the Equity Line of Credit Agreement, the Company is required to register the shares to be issued to Cornell Capital Partners financing under the Equity Line of Credit will become available after such registration statement is declared effective by the SEC. Upon each advance date, the Company will pay to Cornell Capital Partners an amount equal to 4% of the amount of the advance. Cornell Capital Partners is also entitled to a commitment fee of $400,000 payable in common stock. As of September 30, 2001, the Company issued 7,142,857 shares of common stock or $200,000 (i.e., the fair market value of shares issued) of the fee and accrued for the remaining portion, which is to be paid the earlier of the registration of shares that are to be issued in connection with the Equity Line of Credit or six months. As of September 30, 2001 no shares have been purchased. In October 2001, the Company borrowed $100,000 from a private investor. The loan bears interest at 12% per annum and all unpaid principal and interest is due February 2002. The note is secured by third party securities owned by the Company and by a pledge against the loan by the President of the Company to sell up to 5,225,00 shares of common stock owned by the President to cover any shortfall. Also in October 2001, the Company agreed to reduce its interest in Worldbridge Webscasting, LLC from 51% to 49% in consideration for extending the Company's obligation to make a capital contribution in the amount of $100,000 to January 15, 2001. In the event the Company does not make payment by January 15, 2002, its interest will be further reduced from 49% to 25%. In November 2001, the Company borrowed $100,000 from a private investor. The loan bears interest at 12% per annum and all unpaid principal and interest is due February 2002. The note is secured by third party securities owned by the Company and by a pledge against the loan by the President of the Company to sell up to 5,225,00 shares of common stock owned by the President to cover any shortfall. Also in November 2001, the Company purchased various assets of Adhesive Software, Inc. for 50,000 shares of the Company's Series C 4% Convertible Preferred Stock, a payment of $100,000 and a promissory note of $280,000. The note bears interest at 4% per annum and has average monthly principal and interest payments of $9,375 through the term of the note. All unpaid amounts are due June 2004. The note is secured by certain assets of the Company is reserved for issuance as collateral. In December 2001, the Company executed a $425,000 note payable with a third party. The Company received proceeds of $300,000 and paid a commitment fee of $125,000. The fee accrues interest at 12% per annum and is due January 31, 2002. The note is secured by 36,303,932 shares of common stock of the Company that is owned and controlled by the President of the Company, Richard Wade, and 15,000,000 shares of common stock of the Company that is owned by its Chief Technology Officer, Luiz Valdetaro, to cover any shortfall in the event of default 23 Going Concern Uncertainty The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the financial statements do not purport to represent realizable or settlement values. The report of the Company's Independent Certified Public Accountants for the December 31, 2000 financial statements included an explanatory paragraph expressing substantial doubt about the Company's ability to continue as a going concern. The Company is seeking additional funding and believes that this will result in improved operating results. There can be no assurance, however, that the Company, with the additional financing, will result in higher cash flows provided by operations. At this point in time, the Company has generated revenue, however it continues to suffer operating losses. The Company believes it can launch a number of products, services and other revenue generating programs. Additionally, the Company believes its three existing international in-country partners have the ability and resources to market its products concurrently in their respective country of origin. Furthermore, the Company is exploring certain opportunities with a number of companies to participate in the marketing of its products. The exact results of these opportunities are unknown at this time. The Company is continuing its efforts to secure working capital for operations, expansion and possible acquisitions, mergers, joint ventures, and/or other business combinations. However, there can be no assurance that the Company will be able to secure additional capital, or that if such capital is available, whether the terms or conditions would be acceptable to the Company. The consolidated financial statements contain no adjustment for the outcome of this uncertainty. 24 New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. Some of the Company's previous business combinations were accounted for using the purchase method of accounting. As of September 30, 2001, the net carrying amount of goodwill and other intangible assets is $6,071,759. Currently, the Company is assessing but has not yet determined how the adoption of SFAS 141 and SFAS 142 will impact its financial position and results of operations. SFAS 143, Accounting for Asset Retirement Obligations, was issued in June 2001 and is effective for fiscal years beginning after June 15, 2002. SFAS 143 requires that any legal obligation related to the retirement of long-lived assets be quantified and recorded as a liability with the associated asset retirement cost capitalized on the balance sheet in the period it is incurred when a reasonable estimate of the fair value of the liability can be made. SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, was issued in August 2001 and is effective for fiscal years beginning after December 15, 2001. SFAS 144 provides a single, comprehensive accounting model for impairment and disposal of long-lived assets and discontinued operations. SFAS 143 and SFAS 144 will be adopted on their effective dates, and adoption is not expected to result in any material effects on the Corporation's financial statements. 25 PART II OTHER INFORMATION Item 1. Legal Proceedings The Company is, from time to time, involved in various lawsuits generally incidental to its business operations, consisting primarily of collection actions and vendor disputes. In the opinion of management, the ultimate resolution of these matters, if any, will not have a significant effect on the financial position, operations or cash flows of the Company. In addition, the Company is involved in two additional litigated matters. The case entitled, Margaret Greco, et al., v. Vertical Computer Systems, Inc., filed in United States District Court for the Eastern District of New York (Case No. 00 Civ. 6551 (DRH)), involves allegations that the plaintiffs sustained damage as a result of an alleged improper rescission of a subscription agreement based on a November 1999 private placement memorandum. Plaintiffs seek damages based on the alleged increase in value of the stock since the private placement. The matter is open and the Company is vigorously defending this action. A second matter, entitled La Societe Francaise de Casinos v. Vertical Computer Systems, Inc., was filed in Los Angeles County, California, Superior Court, on January 19, 2001. This action was filed by a former customer of Externet World, Inc., a former wholly owned subsidiary, which claimed that the Company is liable to it for in excess of $500,000 in costs allegedly paid for an Internet casino software package to be developed and maintained by Externet World. The plaintiff also alleges that the Company has breached an agreement to pay the disputed sums flowing out of its October 2000 settlement of litigated matters with two former shareholders of the Company. The Company executed a Settlement and Mutual General Release Agreement on July 20, 2001. Pursuant to the settlement agreement, the Company received all right, title, and interest in and to the internet gaming software package developed by Externet World and Casino in exchange for payment of $400,000 by the Company to Casino, and payment of state and federal taxes on behalf of Externet World. Only a few nominal and non-contested matters remain open regarding (a) payment of state taxes and (b) transfer of domain names. Those issues should be resolved by January 2002. Item 2. Changes in Securities and Use of Proceeds On July 11, 2001, the Company entered into two consulting agreements, in which the Company agreed to issue approximately $200,000 in common stock to each consultant for business advisory services. 20% of the common stock was due on the agreement date, with an additional 20% due on the 30th and 60th day subsequent to the agreement date and the remaining 40% due on the 90th day subsequent to the agreement date. The number of shares to be issued to each consultant will be determined on the date each consulting fee is due. These shares were registered pursuant to the Form S-8 filed on July 13, 2001. The Company is also obligated to issue warrants to purchase 500,000 shares of Company's common stock to each consultant. As of September 30, 2001 the Company has issued 10,081,152 shares of its common stock in exchange for the consulting services provided and 1,000,000 warrants. The warrants have vested and are exercisable for five years from issuance at a strike price equal to the fair market value of the Company's common stock on the day of grant. As of September 30, 2001, the Company recognized approximately $248,000 in consulting expenses in relation to the common stock issued and $10,000 for the value of the warrants (the warrants were valued using the black-scholes valuation model). 26 In August 2001, the Company issued $125,000 of convertible debentures. The debt accrues interest at 6% per annum and is due October 2006. The debenture is convertible into shares of common stock at either 120% of the closing bid price on the date of agreement or 80% of the 3 lowest closing bid prices 20 days prior to the conversion. The debenture is convertible at the option of the holder, any time after purchase. The Company has recognized $31,250 as interest expense in relation to the beneficial feature conversion of the debentures. As of September 30, 2001 no conversions have taken place. In August 2001, the Company issued a $180,000 note, which is due February 2002 and bears interest at 12% per annum. In connection with the note, the Company issued warrants to purchase 500,000 shares of its common stock. The Company pledged third party securities owned by the Company and available for sale as collateral for the note. The warrants vested immediately, have a strike price of $0.028 per share and are exercisable for three years from issuance. The value of the warrants, $5,000 (valued using the black-scholes valuation model) has been deferred and will be amortized over the term of the loan. In August 2001, the Company entered into an Equity Line of Credit agreement, whereby up to $10,000,000 of the Company's common stock may be purchased. The shares must be registered before sale and the shares can be purchased at 95% of the closing bid price, on the date of purchase. The equity line of credit contains a fee of $400,000 payable in common stock. As of September 30, 2001, the Company issued 7,142,857 shares of common stock or $200,000 (fair market value of shares issued) of the fee and accrued for the remaining portion, which is to be paid the earlier of the registration of shares that are to be issued in connection with the Equity Line of Credit or six months. Also, as of September 30, 2001 no shares have been purchased. In August 2001, the Company issued 30,000 shares of its Series C 4% Cumulative Convertible Preferred Stock to acquire 100% of the outstanding common stock of Enfacet, Inc. ("Enfacet"), a Company involved in the development of website management software. The Series C 4% convertible stock eliminates on consolidation, since the shares were issued to Enfacet. As per the agreement, Enfacet shall distribute 15,000 shares to those employees still employed by Enfacet, one year from the anniversary date of the agreement. At that time the remaining shares may be used by Enfacet to acquire additional funding. The fair value of the liabilities assumed by the Company approximated $428,000, which was off set by assets with an approximate fair value of the same amount. The Series C 4% Preferred Stock is convertible into shares of the Company's common stock at a ratio of one to four hundred. Dividends on the stock are cumulative and accrue on a quarterly basis. In the event of a voluntary or involuntary liquidation, the Series C 4% shareholders are entitled to a liquidation preference of $100 per share. In October 2001 the Company executed a $100,000 promissory note. The note bears interest at 12% per annum and all unpaid principal and interest is due February 2002. The note is secured by third party securities owned by the Company which the Company intends to sell in order to repay the loan and by a pledge against the loan by the President of the Company, to sell up to 5,225,00 shares of common stock owned by the President to cover any shortfall. 27 In November 2001 Company executed a $100,000 promissory note. The note bears interest at 12% per annum and all unpaid principal and interest is due February 2002. The note is secured by third party securities owned by the Company which the Company intends to sell to repay the loan and by a pledge against the loan by the President of the Company, to sell up to 5,225,00 shares of common stock owned by the President to cover any shortfall. Also in November 2001 the Company purchased various assets of Adhesive Software, Inc. for $100,000 and a promissory note of $280,000. The note bears interest at 4% per annum and has average monthly principal and interest payments of $9,375 through out the term of the note. All unpaid amounts are due June 2004. The note is secured by certain assets of the Company and 50,000 shares of the Company's Series C 4% Convertible Preferred Stock is reserved as collateral. In December 2001, the Company executed a $425,000 note payable with a third party. The Company received proceeds of $300,000 and paid a commitment fee of $125,000. The fee accrues interest at 12% per annum and is due January 31, 2002. The note is secured by 36,303,932 shares of common stock of the Company that is owned and controlled by the President of the Company, Richard Wade, and 15,000,000 shares of common stock of the Company that is owned by its Chief Technology Officer, Luiz Valdetaro, to cover any shortfall in the event of default. As of December 19, 2001, warrants to purchase 1,657,250 shares of common stock at an average price of $0.023 were granted since September 30, 2001; all of those were unexercised and outstanding as of December 19, 2001. Item 3. Defaults Under Senior Securities NOW Solutions, LLC has been notified by a lender that it is in default of a loan agreement, in which the Company has pledged a $1.5 million deposit as collateral. This deposit is reflected as restricted cash on the balance sheets. Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None 28 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 3.1 Certificate of Designation Of Vertical Computers, Inc. Series "C" 4% Cumulative Convertible Preferred Stock 10.1 (a) Berche Promissory Note, dated August 13, 2001 (b) Berche Stock Pledge Agreement, dated August 13, 2001 (c) Berche Warrants, dated August 13, 2001 10.2 Equity Line Of Credit Agreement between Company and Cornell Capital Partners, L.P, dated August 16, 2001. 10.3 Securities Purchase Agreement between Company and third party buyers for $250,000 of Convertible Debentures, dated August 16, 2001 10.4 Enfacet, Inc. Stock Purchase Agreement, dated August 21, 2001 10.4 Enfacet, Inc. Stock Purchase Agreement, dated August 21, 2001 10.5 Agreement Between Enfacet and the Company, dated August 24, 2001 (b) Form 8-K None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: December 19, 2001 VERTICAL COMPUTER SYSTEMS, INC. By: /s/ Richard Wade Richard Wade Its: President By: /s/ Stephen R. Gunn Stephen R. Gunn Its: Chief Financial Officer 29 EX-3.1 3 ex3-1.txt CERTIFICATE OF DESIGNATION Exhibit 3.1 Certificate Of Designation Of Series "C" 4% Cumulative Convertible Preferred Stock - -------------------------------------------------------------------------------- CERTIFICATE OF DESIGNATION OF VERTICAL COMPUTER SYSTEMS, INC. - -------------------------------------------------------------------------------- Pursuant to Section 151 of the General Corporation Law of the State of Delaware, the undersigned duly authorized officers of Vertical Computer Systems, Inc. (the "Corporation"), a corporation organized and existing under the General Corporation Law of the State of Delaware, DO HEREBY CERTIFY: FIRST: That, pursuant to authority expressly vested in the Board of Directors of said corporation by the provisions of its Certificate of Incorporation as amended, said Board of Directors duly adopted the following resolution: RESOLVED: that the Board of Directors, pursuant to authority expressly vested in it by the provisions of the Certificate of Incorporation of the Corporation, hereby authorizes the issue from time to time of a series of Preferred Stock of the Corporation and hereby fixes the designation, preferences and relative, participating, optional or other rights, and the qualifications, limitations or restrictions of the series thereof, in addition to those set forth in said Certificate of Incorporation, to be in their entirety as follows: SERIES "C" 4% CUMULATIVE CONVERTIBLE PREFERRED STOCK Section I. Designation and Number. The series of Preferred Stock shall be designated and known as "Series "C" 4% Cumulative Convertible Preferred Stock." The number of shares constituting Series "C" 4% Cumulative Convertible Preferred Stock (hereinafter referred to as the "Series "C" Preferred Stock") shall be Two Hundred Thousand (200,000). For purposes of this Section, all equity securities of the corporation ranking as to dividends or distributions of assets on liquidation, dissolution or winding up of the corporation, junior to the Series "C" Preferred Stock, including the Common Stock, are sometimes hereinafter referred to as "Junior Securities." Section 2. Liquidation Rights. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the corporation, the holders of each share of the Series "C" Preferred Stock shall be entitled to receive, prior to and in preference to any distribution of any of the assets or surplus funds of the corporation to the holders of Junior Securities, by reason of their ownership thereof, an amount equal to One Hundred Dollars ($100.00) per share (the "Liquidation Value") plus any accrued but unpaid dividends on the Series "C" Preferred Stock. All of the preferential amounts to be paid to the holders of the Series "C" Preferred Stock under this Section 2 shall be paid or set apart for payment before the payment or setting apart for payment of any amount for, or the distribution of any assets of the corporation to, the holders of Junior Securities, in connection with such liquidation, dissolution or winding up. After the payment or the setting apart for payment to the holders of the Series "C" Preferred Stock of the preferential amounts so payable to them, the holders of Junior Securities shall be entitled to receive all remaining assets of the corporation in accordance with the Certificate of Incorporation of the corporation. If the assets or surplus funds to be distributed to the holders of the Series "C" Preferred Stock are insufficient to permit the payment to such holders of their full preferential amount, the assets and surplus funds legally available for distribution shall be distributed ratably among the holders of the Series "C" Preferred Stock in proportion to the full preferential amount each such holder is otherwise entitled to receive. Section 3. Voting Rights. Except as otherwise provided herein or by law, the holders of Series "C" Preferred Stock shall not be entitled to notice of any stockholder's meeting and shall not be entitled to vote, together with the holders of all other voting capital stock of the Company, including the holders of Common Stock, upon any matter submitted to the stockholders for a vote.. Section 4. Dividend Rights. The holders of the Series "C" Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors out of the funds of the corporation legally available therefore, cumulative cash dividends at the annual rate of four percent (4%) of the Liquidation Value, payable quarterly on the first day of April, July, October and January in each year beginning July 1, 2001. The initial dividend paid after the date of original issuance of any shares of the Series "C" Preferred Stock shall accrue from such date of issuance on a pro rata basis. Dividends payable for any period less than a full quarter shall be computed on the basis of a 360-day year with 12 equal months of 30 days. Dividends shall be payable to holders of record, as they appear on the stock books of the Corporation on such record dates as may be declared by the Board of Directors, not more than sixty (60) days nor less than ten (10) days preceding the payment dates of such dividends. If the dividend on the Series "C" Preferred Stock is not paid in full, the aggregate deficiency shall be cumulative and shall be fully paid or set apart for payment before any dividends shall be paid or set apart for, or any other distributions paid, or any payments made on account of the purchase, redemption or retirement of, Junior Securities other than, in the case of dividends or distributions, dividends or distributions paid in Junior Securities. No full dividends shall be declared by the Board of Directors or paid or set apart for payment by the corporation on any Junior Securities for any period unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum set apart sufficient for such payment on the Series "C" Preferred Stock for all dividend payment periods terminating on or prior to the date of payment of such full dividends on the Series "C" Preferred Stock shall not bear interest. Notwithstanding, any dividends payable pursuant to this Section 4 may, at the election of the Board of Directors, be paid, all or in part, in shares of the Corporation's Common Stock. Each such share of Common Stock shall be valued at the closing sale price on the record date of the Corporation's Common Stock on any exchange or over the counter market on which the Common Stock trades. If the Common Stock is not listed on any exchange or there is no market for the Common Stock, then the value set by the Board of Directors shall be determinative. Section 5. Covenants. So long as fifty percent (50%) of the shares of the Series "C" Preferred Stock authorized hereby shall be outstanding (as adjusted for all subdivision and combinations, the corporation shall not, without first obtaining the affirmative vote or written consent of not less than fifty-one percent (51%) of such outstanding shares of the Series "C" Preferred Stock: (a) amend or repeal any provision of, or add any provision to, the corporation's Certificate of Incorporation or Bylaws if such action would alter or change the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of the Series "C" Preferred Stock; provided that, the authorization of Junior Securities shall not be deemed to alter or change the preferences, rights, privileges or powers of, or the restriction provided for the benefit of the Series "C" Preferred Stock; (b) reclassify any Common Stock into shares having any preference or priority of the Series "C" Preferred Stock; (c) pay or declare any cash dividend on any Junior Securities or apply any of its assets to the redemption, retirement, purchase or other acquisition directly or indirectly, through subsidiaries or otherwise, of any Junior Securities or any rights, options, warrants to purchase, or securities convertible into, Junior Securities except for the acquisition of shares of Common Stock or options to purchase shares of Common Stock from officers or employees of, or consultants to, the corporation in accordance with any stock option or other agreement entered into by the corporation; (d) create or issue any securities of the corporation which have equity features and which rank senior to the Series "C" Preferred Stock upon payment of dividends or upon liquidation or other distribution of assets; (e) increase the authorized number of shares of the Series "C" Preferred Stock; Section 6. Conversion into Common Stock. The holder of any shares of Series "C" Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. Ninety (90) days after issuance, each share of Series "C" Preferred Stock shall be convertible, without the payment of any additional consideration by the holder thereof and at the option of the holder thereof, into four hundred (400) fully paid and nonassessable shares of common stock of the Company, subject to adjustment as outlined below. Each share of Series "C" Preferred Stock is convertible into four hundred (400) shares of the Company's common stock. In the event the Company shall, at any time prior to the expiration date of this conversion and prior to the exercise thereof: (i) declare or pay to the holders of the common stock a dividend payable in any kind of shares of stock of the Company; or (ii) change or divide or otherwise reclassify its common stock into the same or a different number of shares with or without par value, or into shares of any class or classes; or (iii) consolidate or merge with, or transfer its property as an entirety or substantially as an entirety to, any other corporation; then, upon subsequent exercise of this conversion, the holder thereof shall receive, in addition to or in substitution for the shares of common stock to which he would otherwise be entitled upon such exercise, such additional shares of stock of the Company, or such reclassified shares of stock of the Company, or such shares of the securities or property of the Company resulting from such consolidation or merger or transfer, which he would have been entitled to receive had he exercised this conversion prior to the happening of any of the foregoing events. (b) Mechanics of Conversion. Holders of Series "C" Preferred Stock may exercise their conversion rights at any time ninety (90) days after issuance. Before any holder of Series "C" Preferred Stock shall be entitled to convert the same into full shares of common stock, he shall surrender the certificate or certificates therefore, duly endorsed, at the office of the corporation or of any transfer agent for the Series "C" Preferred Stock, and shall give written notice to the corporation at such office that he elects to convert the same and shall state therein his name or the name or names of his nominees in which he wishes the certificate or certificates for shares of common stock to be issued. (c) The corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series "C" Preferred Stock, or to his nominee or nominees, a certificate or certificates for the number of shares of common stock to which he shall be entitled as aforesaid, together with cash in payment of any accrued unpaid dividends on the shares of Series "C" Preferred Stock converted through the date of conversion, and a certificate or certificates for such Series "C" Preferred Stock as were represented by the certificates surrendered and not converted. Such conversion shall be deemed to have been immediately prior to the close of business on the date of such surrender of the shares of Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such shares of Common stock on such date. (d) No Impairment. The corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the corporation but will at all times in good faith assist in the carrying out of all the provisions of this Section 6 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Series "C" Preferred Stock against impairment. (e) Notices of Record Date. In the event of any taking by the corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend which is the same as cash dividends paid in previous quarters) or other distribution, the corporation shall mail to each holder of Series "C" Preferred Stock at least ten (10) days prior to the date specified herein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend or distribution. (f) Common Stock Reserved. The corporation shall reserve and keep available out of its authorized but unissued Common Stock such number of shares of Common Stock as shall from time to time be sufficient to effect conversion of the Series "C" Preferred Stock. IN WITNESS WHEREOF, the officers named below acting for and on behalf of the corporation, have subscribed their names to this Certificate of Designation this 13th day of August, 2001. VERTICAL COMPUTER SYSTEMS, INC. a Delaware Corporation By: ________________________________________ Richard Wade, President By: ________________________________________ William Mills, Secretary EX-10.1(A) 4 ex10-1a.txt BERCHE PROMISSORY NOTE Exhibit 10.1 (a) Berche Promissory Note PROMISSORY NOTE $180,000.00 August 13, 2001 For valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned VERTICAL COMPUTER SYSTEMS, INC., a Nevada corporation ("Borrower"), promises to pay to the order of THE ANNE BERCHE FAMILY TRUST ("Lender"), in lawful money of the United States of America the principal amount of ONE HUNDRED EIGHTY Thousand Dollars ($180,000 U.S.), together with interest on the amount of such principal outstanding from time to time at the rate of twelve percent (12%) per annum, calculated on the basis of a three hundred sixty (360) day year containing twelve (12) months of thirty (30) days each (the "Basic Interest Rate"), at the times and in the manner provided herein. 1. Payment of Principal and Interest. Principal and interest shall be paid as follows: a. All principal then outstanding, and all interest, fees, charges, and other amounts owing hereunder and then unpaid shall be due and payable on February 13, 2002 (the "Maturity Date"). b. Borrower shall pay all amounts owing under this Note in immediately available funds to Lender at Lender's address as set forth herein, or at such other place as may be specified in writing by Lender. Each payment, when made, shall be credited first to interest then due, and then at the option of Lender to principal, late charges, and other fees and expenses outstanding hereunder in such order as Lender may determine. Payments received after 1:00 p.m. on any banking day or at any time on any Saturday, Sunday, or holiday shall be deemed received on the next banking day. 2. Collateral as Security. This Note is secured by certain collateral, which encumbers, among other things, the interest of Borrower in certain assets, as more particularly described therein (the "Collateral"). This Note and the Stock Pledge Agreement between Borrower and Lender of even date herewith, and any other documents or instruments given or to be given to Lender to secure the indebtedness evidenced by this Note are collectively referred to herein as the "Loan Documents". 3. Interest Rate Upon Default. Should Borrower fail to pay any amount owing hereunder as and when due, whether the same is due regularly as scheduled or by reason of acceleration following default or otherwise, then interest shall accrue on the past due amount at the Basic Interest Rate. Such interest shall be due and payable upon the earlier of demand or the first day of the calendar month following the month in which the same shall have accrued. 5. Default; Remedies. Each of the following occurrences and conditions shall constitute an Event of Default: a. failure of Borrower to pay as and when due any money, whether principal, interest, or otherwise, under this Note, or the breach or default of any obligation to pay money under or secured by the Security Agreement; or b. failure of Borrower to perform any obligation other than an obligation to pay money, as and when performance of such obligation is due under this Note or Loan Documents which failure continues for fifteen (15) days after notice thereof from Lender to Borrower; or c. failure by Borrower to comply with any of the terms, provisions, covenants, conditions or restrictions now or hereafter affecting the Collateral or any part thereof or contained in any agreement related or pertaining to the Collateral, which failure continues for fifteen (15) days after notice thereof from Lender to Borrower; or d. Borrower's making or at any time having made any representation, warranty or disclosure to Lender that is or was materially false or misleading on the date as of which made, whether or not that representation or disclosure appears in the Loan Documents; or e. the sale, transfer, conveyance, or lease of all or any portion of the Collateral or of any of Borrower's rights therein, whether voluntarily, involuntarily, or otherwise, or Borrower's entering into an agreement to do any of the foregoing, in each case except as expressly permitted in the Security Agreement; or At any time following the occurrence of any Event of Default, or following the occurrence of any event as a consequence of which the obligations evidenced hereby may be accelerated, then at the election of Lender and notwithstanding anything to the contrary herein or elsewhere, the entire amount of principal then outstanding under this Note and all interest, fees, charges, and other amounts owing and then unpaid hereunder shall become immediately due and payable, and Lender may exercise any and all rights that it may have under the Loan Documents, at law, in equity, and otherwise. 6. Attorneys' Fees. Borrower shall pay to Lender upon demand all costs and expenses incurred by Lender in connection with determination, protection, or enforcement of any and all of Lender's rights hereunder or under any of the Loan Documents, including enforcement of any and all obligations of Borrower hereunder and thereunder and protection, enhancement, or maintenance of the security interests securing such obligations or the priority of the same. Such costs and expenses shall be payable whether or not any suit is instituted, and the same shall include without limitation attorneys' fees, expert witness fees, costs of investigation, and all of such costs incurred in connection with any trial, appellate proceeding, or any case or proceeding under Chapters 7, 11, or 13 of the Bankruptcy Code or any successor thereto. 7. Waiver of Notice. Borrower and each endorser, guarantor and surety of this Note hereby waive diligence, demand, presentment for payment, notice of discharge, notice of nonpayment, protest and notice of protest, and specifically consent to and waive notice of any renewals or extensions of this Note, whether made to or in favor of Borrower or any other person or persons. Borrower and each endorser, guarantor and surety of this Note further waive and renounce all rights to the benefits of all statutes of limitation and any moratorium, appraisement, by any federal exception and homestead now or hereafter provided or state law or statute, including but not limited to exemptions provided by or allowed under the Bankruptcy Code, both as to each of themselves personally and as to all of their property, whether real or personal, against the enforcement and collection of the obligations evidenced by this Note and any and all extensions, renewals and modifications thereof. 8. Notices. All notices required hereunder or pertaining hereto shall be in writing and shall be deemed delivered and effective upon the earlier of (i) actual receipt, or (ii) the date of delivery or refusal of the addressee to accept delivery if such notice is sent by express courier service or United States mail, postage prepaid, certified or registered, return receipt requested, in either case to the applicable address as follows: To Lender: THE ANNE HECHE TRUST 9, Rue Alsace-Lorraine, 2400 Perigueux France C/o 124 Via Yella Newport Beach, CA 92663 Attn: Phillipe de Lespinay To Borrower: VERTICAL COMPUTER SYSTEMS, INC. 6336 Wilshire Boulevard Los Angeles, CA 90048 Attn: President Notwithstanding the foregoing, any notice under or pertaining to the Loan Documents or the obligations secured thereby given and effective in accordance with applicable law shall be effective for purposes hereof. Either party may change the address at which it is to receive notices hereunder to another business address within the United States (but not a post office box or similar mail receptacle) by giving notice of such change of address in accordance herewith. 9. Exercise of Rights. No single or partial exercise of any of Lenders rights or powers under this Note or any of the other Loan Documents shall preclude any other or further exercise thereof or the exercise of any other right or power. Lender at all times shall have the right to proceed against any portion of the security which secures payment of the indebtedness evidenced hereby in such order and manner as Lender may elect without waiving any rights with respect to any other portion of such security. Each and all rights and remedies of Lender hereunder and under the Loan Documents are cumulative and in addition to each and all other such rights and remedies. No exercise of any right or remedy shall preclude exercise of any other right or remedy. 10. No Waiver. No failure of Lender to insist upon strict performance of any obligation of Borrower or to exercise any right or remedy hereunder or under the Loan Documents, whether before or after any default, shall constitute or give rise to a waiver thereof, and no waiver of any default shall constitute a waiver of any future default or of any other default. No failure to accelerate the debt evidenced hereby by reason of default hereunder or otherwise, and no acceptance of any past due payment hereunder or acceptance of any amount less than the amount then due, and no other indulgence that may be granted by Lender from time to time shall (a) preclude the exercise of any right that Lender may have at law, in equity, by contract or agreement or otherwise, or (b) constitute or give rise to (i) a waiver of such right of acceleration or any other right, or (ii) a novation of this Note or a reinstatement of the debt evidenced hereby, or (iii) any waiver of Lender's rights to demand and receive from Borrower full and prompt payment and performance thereafter, to impose late charges retroactively, or to declare a default. Borrower and each endorser, guarantor, and surety of this Note hereby expressly waive the benefit of any statute or rule of law or equity which would produce any result contrary to or otherwise in conflict with any of the foregoing. 11. Assignment; Successors and Assigns. Lender may assign or otherwise transfer all or any part of its interest herein. Promptly following written notice of such assignment or other transfer, duly executed by Lender, Borrower shall render full and complete performance hereunder as and when due to the transferee so designated by Lender. Borrower shall not assign or transfer all or any of its interests or obligations hereunder, and any attempted or purported assignment or transfer by Borrower shall be void and of no force or effect, except to the extent that the same may be expressly permitted under the Security Agreement. Subject to the foregoing, the terms of this Note shall apply to, be binding upon, and inure to the benefit of ail parties hereto and their successors and assigns. 12. Modification. This Note shall not be modified, amended, or terminated, except by written agreement duly executed and delivered by both Lender and Borrower. 13. Conflicts. In the event of any conflict between any provision of this Note and any provision of the Security Agreement, which conflict cannot reasonably be resolved in such a way as to give effect to all provisions herein and therein contained, this Note shall govern. 14. Severability. If any provision of this Note or any payments pursuant to the terms hereof shall be invalid or unenforceable to any extent, the remainder of this Note and any other payments hereunder shall not be affected thereby and shall be enforceable to the greatest extent permitted by law. 15. Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, Borrower has executed and delivered this Note as of the date first written above. VERTICAL COMPUTER SYSTEMS, INC. By _____________________________________ Richard Wade, President EX-10.1(B) 5 ex10-1b.txt BERCHE STOCK PLEDGE AGREEMENT Exhibit 10.1 (b) Berche Stock Pledge Agreement STOCK PLEDGE AGREEMENT Date: August 13, 2001 TO: THE ANNE BERCHE FAMILY TRUST Pledge of Stock To induce you to make a loan of U.S. $180,000.00 to us as evidenced by our Promissory Note by and between VERTICAl COMPUTER SYSTEMS, INC., a Delaware corporation ("Company") and you in that amount dated the date of this Stock Pledge Agreement (the "Agreement"), bearing interest at the rate of twelve percent (12%) per annum, and payable to your order on February 13, 2002 (the "Note", which term will include any amendments thereto and substitutions therefor), and in consideration of your making said loan, and to secure payment of all amounts owing under the Note and this Agreement and performance of all of our other obligations under the Note and under this Agreement, the undersigned hereby pledge to you and grant you a security interest in FOUR HUNDRED THOUSAND (400,000) shares of EResource Capital Group common stock, represented by certificate(s) no. ___ and, provided the aforesaid shares have been sold or exhausted as Collateral prior to timely repayment of the Note, sufficient shares of Company common stock to account for the amount of the deficiency not yet paid. Definition of Collateral; Method of Selling Collateral and Repayment of Promissory Note The term "Collateral" means (i) the shares of stock pledged under the foregoing paragraph (collectively called the "Stock"), and (ii) any cash, securities or other property paid or otherwise distributed on, with respect to, or in exchange for any Collateral. Upon default under this Agreement, you may at any time transfer the stock or any other Collateral into your name or the name of your nominee. The method of repayment of the Promissory note is to be as follows: The Company shall open an account and deposit the 400,000 EResource Capital Group shares with a brokerage firm agreed upon by the parties. The brokerage firm shall be given instructions which are mutually agreeable to the parties to sell the 400,000 shares in such manner to timely repay all sums due the Lender pursuant to the Note. Warranties We hereby warrant to you that: a. The Company is duly incorporated and validly existing under the laws of the State of Delaware; b. We have taken all necessary corporate action to authorize the execution, delivery and performance of this Agreement and the Note, which constitute our legally binding obligations; c. we are the sole owner of the Stock; d. the Stock is validly issued, is fully paid and non-assessable, and is not subject to any claim, restriction, lien or other encumbrance except as provided in this Agreement; e. we may pledge and grant a security interest in the Stock without obtaining the approval of any other person, corporation, partnership, or other entity, or any governmental authority, Prohibition on Transfer of Collateral We agree that we will not sell, transfer, assign or encumber any of our rights in any of the Collateral or grant any rights in or to any of the Collateral except pursuant to this Agreement. Further Assurances We will, at our expense, take or cause to be taken such action and execute and deliver or cause to be executed and delivered such additional agreements and documents as you may request in connection with this Agreement or any of the Collateral or to perfect your security interest in any of the Collateral, including, without limitation, delivering any Collateral to you and executing and filing financing and other statements under the Uniform Commercial Code in effect in any state; and we hereby authorize you to sign any such agreement or document or statement on our behalf and to file any such statement with or without our signature. Default Upon a default under any of the provisions of the Note, or if any warranty by us hereunder is incorrect, or if we fail to perform any of our obligations under this Agreement (any such default or breach of warranty or failure being herein called "a default under this Agreement"), you may, without notice, take such action as you deem advisable with respect to the Collateral, including, without limitation, selling any of the Collateral at public or private sale on such terms as you deem appropriate; and you are also authorized as our attorney-in-fact to endorse or otherwise effect the transfer of any of the Collateral. At any such sale you may be the purchaser. Remedies; Order of Pursuit You shall not be required to resort to or pursue any of your rights or remedies under or with respect to any other agreement or any other collateral before pursuing any of your rights or remedies under this Agreement. You may pursue your rights and remedies in such order as you determine, and the exercise by you of any right or remedy will not preclude your exercising any other right or remedy. Delay; Waiver The failure or delay by you in exercising any of your rights hereunder or with respect to the Note or any other collateral securing the Note in any instance shall not constitute a waiver thereof in that or any other instance. You may waive your rights only by an instrument in writing signed by you. Expenses We agree to pay on demand (a) all expenses (including, without limitation, legal fees and disbursements) incurred by you in connection with the negotiation and preparation of this Agreement and the perfection of your security interest in any of the Collateral, and (b) all expenses of enforcing the provisions of this Agreement and your rights against any of the Collateral, including, without limitation, expenses and fees of legal counsel, court costs and the cost of appellate proceedings. Where to Make Payments All payments under this Agreement shall be made in lawful currency of the United States of America in immediately available funds at the address as provided in the Note, or in such other manner or at such other place as you shall designate in writing. Governing Law; Agent for Service of Process This Agreement and your rights and our obligations hereunder shall be governed by and construed in accordance with the law of the State of California. We agree that any legal action or proceeding with respect to this Agreement or any of the Collateral may be brought in the courts of the State of California and of the United States having jurisdiction in the County of Los Angeles and State of California and for the purpose of any such legal action or proceeding, we hereby submit to the non-exclusive jurisdiction of such courts and agree not to raise and waive any objection we may have based upon personal jurisdiction or the venue of any such court or forum non conveniens. We agree not to bring any action or other proceeding with respect to this Agreement or any of our obligations under this Agreement in any other court unless such courts of the State of California and of the United States determine that they do not have jurisdiction in the matter. For purposes of any proceeding involving this Agreement, we hereby irrevocably appoint Gary L. Blum, Esq., 3278 Wilshire Blvd., #603, Los Angeles, CA 90010, our agent to receive service of process for us and on our behalf. We will at all times maintain an agent to receive service of process in California, on our behalf with respect to this Agreement, and in the event that, for any reason, the agent named above or any successor agent shall no longer serve as our agent to receive service of process in California, we shall promptly appoint a successor and advise you thereof. Amendment This Agreement may only be amended by an instrument in writing signed by you and us. Very truly yours, PLEDGEE THE ANNE BERCHE FAMILY TRUST ---------------------------------------- By PLEDGOR AGREED: VERTICAL COMPUTER SYSTEMS, INC. ---------------------------------------- By: Richard Wade, President EX-10.1(C) 6 ex10-1c.txt BERCHE WARRANTS Exhibit 10.1 (c) Berche Warrants THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS. THE SALE TO THE HOLDER OF THIS SECURITY OF THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS SECURITY ARE NOT COVERED BY A REGISTRATION STATEMENT UNDER THE ACT OR REGISTRATION UNDER STATE SECURITIES LAWS. THIS SECURITY HAS BEEN ACQUIRED, AND SUCH SHARES OF COMMON STOCK MUST BE ACQUIRED, FOR INVESTMENT ONLY AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF REGISTRATION OF THE RESALE THEREOF OR AN OPINION OF COUNSEL REASONABLY ACCEPTABLE IN FORM, SCOPE AND SUBSTANCE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. No. _______ Right to Purchase 500,000 Shares of Common Stock of Vertical Computer Systems, Inc. VERTICAL COMPUTER SYSTEMS, INC. Common Stock Purchase Warrant VERTICAL COMPUTER SYSTEMS, INC., a Delaware corporation (the "Company"), hereby certifies that, for value received, Anne Berche, or registered assigns (the "Holder"), is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time up to and including three (3) years after the date hereof, and before 5:00 p.m., Los Angeles time, on August 13, 2004, Five Hundred Thousand (500,000) fully paid and nonassessable shares of Common Stock, $.00001 par value, of the Company at an Exercise Price per share initially equal to $0.028. The number of such shares of Common Stock and the Exercise Price are subject to adjustment as provided in this Warrant. 1. Exercise at Option of Holder. This Warrant may be exercised by the Holder hereof in full or in part at any time or from time to time during the exercise period specified in the first paragraph hereof, by surrender of this Warrant and the subscription form annexed hereto (duly executed) by such Holder to the Company and by making payment, in cash or by certified or official bank check payable to the order of the Company or wire transfer to the Company's account, in the amount obtained by multiplying (a) the number of shares of Common Stock designated by the Holder in the subscription form by (b) the Exercise Price then in effect. On any partial exercise the Company will forthwith issue and deliver to or upon the order of the Holder hereof a new Warrant or Warrants of like tenor, in the name of the Holder hereof or as such Holder (upon payment by such Holder of any applicable transfer taxes) may request, providing in the aggregate on the face or faces thereof for the purchase of the number of shares of Common Stock for which such Warrant or Warrants may still be exercised. 2. Delivery of Stock Certificates, etc., on Exercise. As soon as practicable after the exercise of this Warrant, and in any event within five business days thereafter, the Company at its expense (including the payment by it of any applicable issue or stamp taxes) will cause to be issued in the name of and delivered to the Holder hereof, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of fully paid and nonassessable shares of Common Stock to which such Holder shall be entitled on such exercise, in such denominations as may be requested by such Holder, plus, in lieu of any fractional share to which such Holder would otherwise be entitled, cash equal to such fraction multiplied by the then current fair market value of one full share, together with any other stock or other securities any property (including cash, where applicable) to which such Holder is entitled upon such exercise pursuant to Section 1 or otherwise. 3. Dilution. a. Dividends, Etc. If the Company shall pay to the holders of its Common Stock a dividend in shares of Common Stock or in securities convertible into Common Stock, the Exercise Price in effect immediately prior to the record date fixed for the determination of the holders of Common Stock entitled to such dividend shall be proportionately decreased, effective at the opening of business on the next following full business day. b. Splits, Combinations, Etc. If the Company shall split the outstanding shares of its Common Stock into a greater number of shares or combine the outstanding shares into a smaller number, the Exercise Price in effect immediately prior to such action shall be proportionately decreased in the case of a split or increased in the case of a combination, effective at the opening of business on the full business day next following the day such action becomes effective. 4. Protection in Case or Reclassification, Etc. In case of any reclassification or change of the terms of the outstanding shares of the class of Common Stock issuable upon the exercise of this Warrant, then upon exercise of this Warrant (other than a change relating to par value, or as a result of a subdivision or combination), or in case of any consolidation or merger of the Company with or into another company (other than a merger in which the Company is the continuing company or which does not result in any reclassification or change of outstanding shares of Common Stock of the class issuable upon exercise of this Warrant, other than a split or combination of shares), or in case of any sale or conveyance to any other person or entity of all or substantially all of the assets of the Company, the Company shall use its best efforts to execute an agreement providing that the holder of this Warrant shall have the right thereafter to exercise this Warrant for the kind and amount of shares of stock and other securities and property receivable upon such reclassification, change, dividend, distribution, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock of the Company for which this Warrant might have been exercised immediately prior to such reclassification, change, dividend, distribution, consolidation, merger, sale or conveyance. This Section 4 shall apply to successive reclassifications and changes of and dividends and distributions on shares of Common Stock and to successive consolidations, mergers, sales or conveyances. Notice of the execution of any agreement pertaining to such reclassification, change, dividend, distribution, consolidation, merger, sale or conveyance shall be given to the holder of this Warrant as soon as practicable and in any event not less than ten (10) business days before any such transaction is consummated. 5. "Piggy-Back" Registration. (a) Grant of Right. The Holder of this Warrant shall have the right for a period of three years from the date of grant of this Warrant to include all or any part of this Warrant and the shares of Common Stock underlying this Warrant (collectively, the "Registrable Securities") as part of any registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Act); provided, however, that if, in the written opinion of the Company's managing underwriter or underwriters, if any, for such offering determines that marketing factors require a limitation of the number of shares to be underwritten, the managing underwriter in its sole discretion may limit the number of Registrable Securities to be included in the registration, or may exclude Registrable Securities entirely from such registration. In such case, the Company shall so advise Holder whose Registrable Securities otherwise would be included in such registration, and the number of shares of Registrable Securities that may be included in such registration and underwritten offering shall be allocated among other selling shareholders requesting registration in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by Holder and registrable shares each of such other selling shareholders at the date of filing of the Registration Statement. If Holder disapproves of the terms and conditions of the underwritten offering, Holder may withdraw therefrom by written notice to the Company and the managing underwriter(s). Any Registrable Securities excluded or withdrawn from such underwritten offering shall be withdrawn from such registration. (b) Terms. The Company shall bear all fees and expenses attendant to registering the Registrable Securities, including any filing fees payable to the National Association of Securities Dealers, Inc. (NASD), but the Holder shall pay any and all underwriting commissions and the expenses of any legal counsel selected by the Holder to represent it in connection with the sale of the Registrable Securities. In the event of such a proposed registration, the Company shall furnish the then Holder of outstanding Registrable Securities with prompt written notice prior to the proposed date of filing of such registration statement. Such notice to the Holder shall continue to be given for each registration statement filed by the Company until such time as all of the Registrable Securities have been sold by the Holder. The Holder of the Registrable Securities shall exercise the "piggy-back" rights provided for herein by giving written notice, within twenty days of the receipt of the Company's notice of its intention to file a registration statement. Nothing contained in this Warrant shall be construed as requiring any Holder to exercise this Warrant or any part thereof prior to the initial filing of any registration statement or the effectiveness thereof. The Company shall have the right to terminate or withdraw any registration initiated by the Company under this Section 5 prior to the effectiveness of such registration whether or not Holder has elected to include Registrable Securities in such registration 6. Reservation of Stock, etc., Issuable on Exercise of Warrants. The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of this Warrant, all shares of Common Stock from time to time issuable on the exercise of this Warrant. 7. Register of Warrants. The Company shall maintain, at the principal office of the Company (or such other office as it may designate by notice to the Holder hereof), a register in which the Company shall record the name and address of the person in whose name this Warrant has been issued, as well as the name and address of each successor and prior owner of such Warrant. The Company shall be entitled to treat the person in whose name this Warrant is so registered as the sole and absolute owner of this Warrant for all purposes. 8. Exchange of Warrant. This Warrant is exchangeable, upon the surrender hereof by the Holder hereof at the office or agency of the Company referred to in Section 7, for one or more new Warrants of like tenor representing in the aggregate the right to subscribe for and purchase the number of shares of Common Stock which may be subscribed for purchase hereunder, each of such new Warrants to represent the right to subscribe for and purchase such number of shares as shall be designated by said Holder hereof at the time of such surrender. 9. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 10. Warrant Agent. The Company will act as the exercise agent for the purpose of issuing Common Stock on the exercise of this Warrant pursuant to Section 1. The Company may, by written notice to the Holder, appoint an agent having an office in the United States of America, for the purpose of issuing Common Stock on the exercise of this Warrant pursuant to Section 1, redeeming this Warrant pursuant to Section 2, exchanging this Warrant pursuant to Section 8, and replacing this Warrant pursuant to Section 9, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 10. No Rights or Liabilities as a Stockholder. This Warrant shall not entitle the Holder hereof to any voting rights or other rights as a stockholder of the Company, until properly exercised. 12. Notices, etc. All notices and other communications from the Company to the registered Holder of this Warrant shall be mailed by first class certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such Holder or at the address shown for such Holder on the register of Warrants referred to in Section 8. 13. Miscellaneous. This Warrant and any terms hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement or such change, waiver, discharge or termination is sought. This Warrant shall be construed and enforced in accordance with and governed by the internal laws of the State of California. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. IN WITNESS WHEREOF, Vertical Computer Systems, Inc. has caused this Warrant to be executed on its behalf by one of its officers thereunto duly authorized. Dated: August 13, 2001 VERTICAL COMPUTER SYSTEMS, INC. By: ------------------------------------- Richard Wade, President: FORM OF SUBSCRIPTION COMMON STOCK PURCHASE WARRANT OF VERTICAL COMPUTER SYSTEMS, INC. (To be signed only on exercise of Warrant) TO: VERTICAL COMPUTER SYSTEMS, INC. 6336 Wilshire Boulevard Los Angeles, California 90048 1. The undersigned Holder of the attached original, executed Warrant hereby elects to exercise its purchase right under such Warrant with respect to ________ shares of Common Stock, as defined in the Warrant, of Vertical Systems, Inc., a Delaware corporation (the "Company"). 2. The undersigned Holder pays the aggregate purchase price for such shares of Common Stock (i) by lawful money of the United States or the enclosed certified or official bank check payable in United States dollars to the order of the Company in the amount of $___________, or (ii) by wire transfer of United States funds to the account of the Company in the amount of $____________, which transfer has been made before or simultaneously with the delivery of this Form of Subscription pursuant to the instructions of the Company. 3. Please issue a stock certificate or certificates representing the appropriate number of shares of Common Stock in the name of the undersigned or in such other names as is specified below: Name: ------------------------------- Address: ------------------------------- ------------------------------- Dated: ------------------------ (Signature must conform to name of Holder as specified on the face of the Warrant) ---------------------------------------- ---------------------------------------- (Address) EX-10.2 7 ex10-2.txt EQUITY LINE OF CREDIT AGREEMENT Exhibit 10.2 Equity Line Of Credit Agreement between Company and Cornell Capital Partners, L.P, dated August 16, 2001. EQUITY LINE OF CREDIT AGEEMENT AGREEMENT dated as of the ___ day of August 2001, (the "Agreement") between CORNELL CAPITAL PARTNERS, L.P., a limited partnership (the "Investor") and VERTICAL COMPUTER SYSTEMS, INC., a corporation organized and existing under the laws of the State of Delaware (the "Company"). WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Company shall issue and sell to the Investor, from time to time as provided herein, and the Investor shall purchase from the Company up to Ten Million ($10,000,000) Dollars of the Company's common stock, par value $0.00001 per share (the "Common Stock"), for a total purchase price of Ten Million ($10,000,000) Dollars; and WHEREAS, such investments will be made in reliance upon the provisions of Regulation D ("Regulation D") of the Securities Act of 1933, as amended, and the regulations promulgated there under (the "Securities Act"), and or upon such other exemption from the registration requirements of the Securities Act as may be available with respect to any or all of the investments to be made hereunder; and WHEREAS, the Investor is a limited partnership and the business affairs of the Investor are managed by Yorkville Advisors, LLC ("Yorkville Advisors"), a Delaware limited liability company. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I. Certain Definitions Section 1.1. "Advance" shall mean the portion of the Commitment Amount requested by the Company in the Advance Notice. Section 1.2. "Advance Date" shall mean the date Butler Gonzalez LLP/First Union Escrow Account is in receipt of the funds from the Investor and Butler Gonzalez LLP, as the Investor's Counsel, is in possession of free trading shares from the Company and therefore an Advance by the Investor to the Company can be made and Butler Gonzalez LLP can release the free trading shares to the Investor. No Advance Date shall be less than seven (7) Trading Days after an Advance Notice Date. Section 1.3. "Advance Notice" shall mean a written notice to the Investor setting forth the Advance amount that the Company requests from the Investor and the Advance Date. Section 1.4. "Advance Notice Date" shall mean each date the Company delivers to the Investor an Advance Notice requiring the Investor to advance funds to the Company, subject to the terms of this Agreement. No Advance Notice Date shall be less than five (5) Trading Days after the prior Advance Notice Date. Section 1.5. "Bid Price" shall mean, on any date, the closing bid price (as reported by Bloomberg L.P.) of the Common Stock on the Principal Market or if the Common Stock is not traded on a Principal Market, the highest reported bid price for the Common Stock, as furnished by the National Association of Securities Dealers, Inc. Section 1.6. "Closing" shall mean one of the closings of a purchase and sale of Common Stock pursuant to Section 2.3. Section 1.7. "Commitment Amount" shall mean the aggregate amount of up to Ten Million Dollars ($10,000,000) which the Investor has agreed to provide to the Company in order to purchase the Company's Common Stock pursuant to the terms and conditions of this Agreement. Section 1.8. "Commitment Period" shall mean the period commencing on the earlier to occur of (i) the Effective Date, or (ii) such earlier date as the Company and the Investor may mutually agree in writing, and expiring on the earliest to occur of (x) the date on which the Investor shall have made payment of Advances pursuant to this Agreement in the aggregate amount of Ten Million Dollars ($10,000,000), (y) the date this Agreement is terminated pursuant to Section 2.5, or (z) the date occurring thirty six (36) months after the Effective Date. Section 1.9. "Common Stock" shall mean the Company's common stock, par value $0.00001 per share. Section 1.10. "Condition Satisfaction Date" shall have the meaning set forth in Section 7.2. Section 1.11. "Damages" shall mean any loss, claim, damage, liability, costs and expenses (including, without limitation, reasonable attorney's fees and disbursements and costs and expenses of expert witnesses and investigation). Section 1.12. "Effective Date" shall mean the date on which the SEC first declares effective a Registration Statement registering the resale of the Registrable Securities as set forth in Section 7.2(a). Section 1.13. "Escrow Agreement" shall mean the escrow agreement among the Company, the Investor, the Investor's Counsel and First Union National Bank dated the date hereof. Section 1.14. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated there under. Section 1.15. "Material Adverse Effect" shall mean any condition, circumstance, or situation that would prohibit or otherwise materially interfere with the ability of the Company to enter into and perform any of its obligations under this Agreement or the Registration Rights Agreement in any material respect. Section 1.16. "Market Price" shall mean the lowest closing Bid Price of the Common Stock during the Pricing Period. Section 1.17. "Maximum Advance Amount" shall be equal to seventy-five percent (75%) of the average daily volume of the Company's Common Stock during the forty (40) Trading Days immediately preceding the Advance Notice Date multiplied by the Purchase Price. Section 1.18. "NASD" shall mean the National Association of Securities Dealers, Inc. Section 1.19. "Person" shall mean an individual, a corporation, a partnership, an association, a trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. Section 1.20. "Pricing Period" shall mean the five (5) consecutive Trading Days after the Advance Notice Date. Section 1.21. "Principal Market" shall mean the Nasdaq National Market, the Nasdaq SmallCap Market, the American Stock Exchange or the New York Stock Exchange, whichever is at the time the principal trading exchange or market for the Common Stock. Section 1.22. "Purchase Price" shall be set at ninety five percent (95%) of the Market Price during the Pricing Period. Section 1.23. "Registrable Securities" shall mean the shares of Common Stock (i) in respect of which the Registration Statement has not been declared effective by the SEC, (ii) which have not been sold under circumstances meeting all of the applicable conditions of Rule 144 (or any similar provision then in force) under the Securities Act ("Rule 144") or (iii) which have not been otherwise transferred to a holder who may trade such shares without restriction under the Securities Act, and the Company has delivered a new certificate or other evidence of ownership for such securities not bearing a restrictive legend. Section 1.24. "Registration Rights Agreement" shall mean the Registration Rights Agreement dated the date hereof, regarding the filing of the Registration Statement for the resale of the Registrable Securities, entered into between the Company and the Investor. Section 1.25. "Registration Statement" shall mean a registration statement on Form S-1, SB-2 or Form S-3 (if use of such form is then available to the Company pursuant to the rules of the SEC and, if not, on such other form promulgated by the SEC for which the Company then qualifies and which counsel for the Company shall deem appropriate, and which form shall be available for the resale of the Registrable Securities to be registered there under in accordance with the provisions of this Agreement and the Registration Rights Agreement, and in accordance with the intended method of distribution of such securities), for the registration of the resale by the Investor of the Registrable Securities under the Securities Act. Section 1.26. "Regulation D" shall have the meaning set forth in the recitals of this Agreement. Section 1.27. "SEC" shall mean the Securities and Exchange Commission. Section 1.28. "Securities Act" shall have the meaning set forth in the recitals of this Agreement. Section 1.29. "SEC Documents" shall mean Annual Reports on Form 10-KSB, Quarterly Reports on Form 10-QSB, Current Reports on Form 8-KSB and Proxy Statements of the Company as supplemented to the date hereof, filed by the Company for a period of at least twelve (12) months immediately preceding the date hereof or the Advance Date, as the case may be, until such time as the Company no longer has an obligation to maintain the effectiveness of a Registration Statement as set forth in the Registration Rights Agreement. Section 1.30. "Trading Day" shall mean any day during which the New York Stock Exchange shall be open for business. ARTICLE II. Advances Section 2.1. Investments. (a) Advances. Upon the terms and conditions set forth herein (including, without limitation, the provisions of Article VII hereof), on any Advance Notice Date the Company may request an Advance by the Investor by the delivery of an Advance Notice. The number of shares of Common Stock that the Investor shall receive for each Advance shall be determined by dividing the amount of the Advance by the Purchase Price. No fractional shares shall be issued. Fractional shares shall be rounded to the next higher whole number of shares. The aggregate maximum amount of all Advances that the Investor shall be obligated to make under this Agreement shall not exceed the Commitment Amount. (b) Notwithstanding the foregoing the Company shall only be entitled to an Advance if the Closing Bid Price of the Company's Common Stock on the Advance Date is equal to or greater than the Purchase Price. Section 2.2. Mechanics. (a) Advance Notice. At any time during the Commitment Period, the Company may deliver an Advance Notice to the Investor, subject to the conditions set forth in Section 7.2; provided, however, the amount for each Advance as designated by the Company in the applicable Advance Notice shall not be more than the Maximum Advance Amount. The aggregate amount of the Advances pursuant to this Agreement shall not exceed the Commitment Amount, unless otherwise agreed by the Investor in the Investor's sole and absolute discretion. There will be a minimum of five (5) Trading Days between each Advance Notice Date. (b) Date of Delivery of Advance Notice. An Advance Notice shall be deemed delivered on (i) the Trading Day it is received by facsimile or otherwise by the Investor if such notice is received prior to 12:00 noon Eastern Time, or (ii) the immediately succeeding Trading Day if it is received by facsimile or otherwise after 12:00 noon Eastern Time on a Trading Day or at any time on a day which is not a Trading Day. No Advance Notice may be deemed delivered, on a day that is not a Trading Day. Section 2.3. Closings. On each Advance Date, which shall be seven (7) Trading Days after an Advance Notice Date, (i) the Company shall deliver to the Investor's Counsel, as defined pursuant to the Escrow Agreement, shares of the Company's Common Stock, representing the amount of the Advance by the Investor pursuant to Section 2.1 herein, registered in the name of the Investor which shall be delivered to the Investor, or otherwise in accordance with the Escrow Agreement and (ii) the Investor shall deliver to First Union National Bank (the "Escrow Agent") the amount of the Advance specified in the Advance Notice by wire transfer of immediately available funds which shall be delivered to the Company, or otherwise in accordance with the Escrow Agreement. In addition, on or prior to the Advance Date, each of the Company and the Investor shall deliver to the other through the Investor's Counsel all documents, instruments and writings required to be delivered or reasonably requested by either of them pursuant to this Agreement in order to implement and effect the transactions contemplated herein. Payment of funds to the Company and delivery of the Company's Common Stock to the Investor shall occur in accordance with the conditions set forth above and those contained in the Escrow Agreement; provided, however, that to the extent the Company has not paid the fees, expenses, and disbursements of the Investor or its Investor's counsel in accordance with Section 12.4, the amount of such fees, expenses, and disbursements may be deducted by the Investor (and shall be paid to the relevant party) from the amount of the Advance with no reduction in the amount of shares of the Company's Common Stock to be delivered on such Advance Date. Section 2.4. Termination of Investment. The obligation of the Investor to make an Advance to the Company pursuant to this Agreement shall terminate permanently (including with respect to an Advance Date that has not yet occurred) in the event that (i) there shall occur any stop order or suspension of the effectiveness of the Registration Statement for an aggregate of fifty (50) Trading Days, other than due to the acts of the Investor, during the Commitment Period, or (ii) the Company shall at any time fail materially to comply with the requirements of Section 6.3, 6.4 or 6.7; provided, however, that this termination provision shall not apply to any period commencing upon the filing of a post-effective amendment to such Registration Statement and ending upon the date on which such post effective amendment is declared effective by the SEC. Section 2.5. Agreement to Advance Funds. (a) The Investor agrees to advance the amount specified in the Advance Notice to the Company after the completion of each of the following conditions and the other conditions set forth in this Agreement: (i) the execution and delivery by the Company, and the Investor, of this Agreement, and the Exhibits hereto; (ii) Investor's Counsel shall have received the shares of Common Stock applicable to the Advance; (iii) the Company's Registration Statement with respect to the resale of the Registrable Securities in accordance with the terms of the Registration Rights Agreement shall have been declared effective by the SEC; (iv) the Company shall have obtained all material permits and qualifications required by any applicable state for the offer and sale of the Registrable Securities, or shall have the availability of exemptions there from. The sale and issuance of the Registrable Securities shall be legally permitted by all laws and regulations to which the Company is subject; (v) the Company shall have filed with the Commission in a timely manner all reports, notices and other documents required of a "reporting company" under the Exchange Act and applicable Commission regulations; (vi) the fees as set forth in Section 12.4 below shall have been paid or can be withheld as provided in Section 2.3; and (vii) the conditions set forth in Section 7.2 shall have been satisfied. Section 2.6. Lock Up Period. (i) During the term of this Agreement, the Company shall not, without the prior consent of the Investor, issue or sell (i) any Common Stock without consideration or for a consideration per share less than the Bid Price on the date of issuance or (ii) issue or sell any warrant, option, right, contract, call, or other security or instrument granting the holder thereof the right to acquire Common Stock without consideration or for a consideration per share less than the Bid Price on the date of issuance. (ii) On the date hereof, the Company shall obtain from each officer and director a lock-up agreement, as defined below, in the form annexed hereto as Schedule 2.6(b) agreeing to only sell in compliance with the volume limitation of Rule 144. ARTICLE III. Representations and Warranties of Investor Investor hereby represents and warrants to, and agrees with, the Company that the following are true and as of the date hereof and as of each Advance Date: Section 3.1. Organization and Authorization. The Investor is duly incorporated or organized and validly existing in the jurisdiction of its incorporation or organization and has all requisite power and authority to purchase and hold the securities issuable hereunder. The decision to invest and the execution and delivery of this Agreement by such Investor, the performance by such Investor of its obligations hereunder and the consummation by such Investor of the transactions contemplated hereby have been duly authorized and requires no other proceedings on the part of the Investor. The undersigned has the right, power and authority to execute and deliver this Agreement and all other instruments (including, without limitations, the Registration Rights Agreement), on behalf of the Investor. This Agreement has been duly executed and delivered by the Investor and, assuming the execution and delivery hereof and acceptance thereof by the Company, will constitute the legal, valid and binding obligations of the Investor, enforceable against the Investor in accordance with its terms. Section 3.2. Evaluation of Risks. The Investor has such knowledge and experience in financial tax and business matters as to be capable of evaluating the merits and risks of, and bearing the economic risks entailed by, an investment in the Company and of protecting its interests in connection with this transaction. It recognizes that its investment in the Company involves a high degree of risk. Section 3.3. No Legal Advice From the Company. The Investor acknowledges that it had the opportunity to review this Agreement and the transactions contemplated by this Agreement with his or its own legal counsel and investment and tax advisors. The Investor is relying solely on such counsel and advisors and not on any statements or representations of the Company or any of its representatives or agents for legal, tax or investment advice with respect to this investment, the transactions contemplated by this Agreement or the securities laws of any jurisdiction. Section 3.4. Investment Purpose. The securities are being purchased by the Investor for its own account, for investment and without any view to the distribution, assignment or resale to others or fractionalization in whole or in part. The Investor agrees not to assign or in any way transfer the Investor's rights to the securities or any interest therein and acknowledges that the Company will not recognize any purported assignment or transfer except in accordance with applicable Federal and state securities laws. No other person has or will have a direct or indirect beneficial interest in the securities. The Investor agrees not to sell, hypothecate or otherwise transfer the Investor's securities unless the securities are registered under Federal and applicable state securities laws or unless, in the opinion of counsel satisfactory to the Company, an exemption from such laws is available. Section 3.5. Accredited Investor. Investor is an "Accredited Investor" as that term is defined in Rule 501(a)(3) of Regulation D of the Securities Act. Section 3.6. Information. The Investor and its advisors (and its counsel), if any, have been furnished with all materials relating to the business, finances and operations of the Company and information it deemed material to making an informed investment decision. The Investor and its advisors, if any, have been afforded the opportunity to ask questions of the Company and its management. Neither such inquiries nor any other due diligence investigations conducted by such Investor or its advisors, if any, or its representatives shall modify, amend or affect the Investor's right to rely on the Company's representations and warranties contained in this Agreement. The Investor understands that its investment involves a high degree of risk. The Investor is in a position regarding the Company, which, based upon employment, family relationship or economic bargaining power, enabled and enables such Investor to obtain information from the Company in order to evaluate the merits and risks of this investment. The Investor has sought such accounting, legal and tax advice, as it has considered necessary to make an informed investment decision with respect to this transaction. Section 3.7. Receipt of Documents. The Investor and its counsel has received and read in their entirety: (i) this Agreement and the Exhibits annexed hereto; (ii) all due diligence and other information necessary to verify the accuracy and completeness of such representations, warranties and covenants; (iii) the Company's Form 10-KSB for the year ended year ended December 31, 2000 and Form 10-QSB for the periods ended March 31, 2001 and June 30, 2001; and (v) answers to all questions the Investor submitted to the Company regarding an investment in the Company; and the Investor has relied on the information contained therein and has not been furnished any other documents, literature, memorandum or prospectus. Section 3.8. Registration Rights Agreement and Escrow Agreement. The parties have entered into the Registration Rights Agreement and the Escrow Agreement, each dated the date hereof. Section 3.9. No General Solicitation. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) in connection with the offer or sale of the shares of Common Stock offered hereby. Section 3.10. Not an Affiliate. The Investor is not an officer, director or a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with the Company or any "Affiliate" of the Company (as that term is defined in Rule 405 of the Securities Act). Neither the Investor nor its Affiliates has an open short position in the Common Stock of the Investor, and the Investor agrees that it will not, and that it will cause its Affiliates not to, engage in any short sales of or hedging transactions with respect to the Common Stock, provided that the Company acknowledges and agrees that upon receipt of an Advance Notice the Investor will sell the Shares to be issued to the Investor pursuant to the Advance Notice, even if the Shares have not been delivered to the Investor. ARTICLE IV. Representations and Warranties of the Company Except as stated below or on the disclosure schedules attached hereto, the Company hereby represents and warrants to, and covenants with, the Investor that the following are true and correct as of the date hereof: Section 4.1. Organization and Qualification. The Company is duly incorporated or organized and validly existing in the jurisdiction of its incorporation or organization and has all requisite power and authority corporate power to own its properties and to carry on its business as now being conducted. Each of the Company and its subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect on the Company and its subsidiaries taken as a whole. Section 4.2. Authorization, Enforcement, Compliance with Other Instruments. (i) The Company has the requisite corporate power and authority to enter into and perform this Agreement, the Registration Rights Agreement and any related agreements, in accordance with the terms hereof and thereof, (ii) the execution and delivery of this Agreement, the Registration Rights Agreement, the Escrow Agreement and any related agreements by the Company and the consummation by it of the transactions contemplated hereby and thereby, have been duly authorized by the Company's Board of Directors and no further consent or authorization is required by the Company, its Board of Directors or its stockholders, (iii) this Agreement, the Registration Rights Agreement, the Escrow Agreement and any related agreements have been duly executed and delivered by the Company, (iv) this Agreement, the Registration Rights Agreement, the Escrow Agreement and assuming the execution and delivery thereof and acceptance by the Investor and any related agreements constitute the valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of creditors' rights and remedies. Section 4.3. Capitalization. As of the date hereof, the authorized capital stock of the Company consists of 1,000,000,000 shares of Common Stock, par value $0.00001 per share, of which 579,723,956 shares are issued and outstanding and 2,050,000 shares of preferred stock par value $.001 of which 82,200 shares are issued and outstanding. All of such outstanding shares have been validly issued and are fully paid and nonassessable. Except as disclosed in the SEC Documents (as defined in Section 4.5 hereof), no shares of Common Stock are subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or permitted by the Company. Except as disclosed in the SEC Documents, as of the date hereof, (i) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or any of its subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its subsidiaries or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, (ii) there are no outstanding debt securities and (iii) there are no agreements or arrangements under which the Company or any of its subsidiaries is obligated to register the sale of any of their securities under the Securities Act (except pursuant to the Registration Rights Agreement). There are no securities or instruments containing anti-dilution or similar provisions that will be triggered by this Agreement or any related agreement or the consummation of the transactions described herein or therein.. The Company has furnished to the Investor true and correct copies of the Company's Certificate of Incorporation, as amended and as in effect on the date hereof (the "Certificate of Incorporation"), and the Company's By-laws, as in effect on the date hereof (the "By-laws"), and the terms of all securities convertible into or exercisable for Common Stock and the material rights of the holders thereof in respect thereto. Section 4.4. No Conflict. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby will not (i) result in a violation of the Certificate of Incorporation, any certificate of designations of any outstanding series of preferred stock of the Company or By-laws or (ii) conflict with or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its subsidiaries is a party, or result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and the rules and regulations of the Principal Market on which the Common Stock is quoted) applicable to the Company or any of its subsidiaries or by which any material property or asset of the Company or any of its subsidiaries is bound or affected and which would cause a Material Adverse Effect. Except as disclosed in the SEC Documents, neither the Company nor its subsidiaries is in violation of any term of or in default under its Certificate of Incorporation or By-laws or their organizational charter or by-laws, respectively, or any material contract, agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or order or any statute, rule or regulation applicable to the Company or its subsidiaries. The business of the Company and its subsidiaries is not being conducted in violation of any material law, ordinance, regulation of any governmental entity. Except as specifically contemplated by this Agreement and as required under the Securities Act and any applicable state securities laws, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under or contemplated by this Agreement or the Registration Rights Agreement in accordance with the terms hereof or thereof. All consents, authorizations, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof. The Company and its subsidiaries are unaware of any fact or circumstance which might give rise to any of the foregoing. Section 4.5. SEC Documents; Financial Statements. Since January 1, 2001, the Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC under of the Exchange Act (all of the foregoing filed prior to the date hereof and all amendments thereto and all exhibits included therein and financial statements and schedules thereto and documents incorporated by reference therein, being hereinafter referred to as the "SEC Documents"). The Company has delivered to the Investor or its representatives, or made available through the SEC's website at http://www.sec.gov, true and complete copies of the SEC Documents. As of their respective dates, the financial statements of the Company disclosed in the SEC Documents (the "Financial Statements") complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). No other information provided by or on behalf of the Company to the Investor which is not included in the SEC Documents contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Section 4.6. 10b-5. The SEC Documents do not include any untrue statements of material fact, nor do they omit to state any material fact required to be stated therein necessary to make the statements made, in light of the circumstances under which they were made, not misleading. Section 4.7. No Default. Except as disclosed in Section 4.4 or the SEC Documents, the Company is not in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust or other material instrument or agreement to which it is a party or by which it is or its property is bound and neither the execution, nor the delivery by the Company, nor the performance by the Company of its obligations under this Agreement or any of the exhibits or attachments hereto will conflict with or result in the breach or violation of any of the terms or provisions of, or constitute a default or result in the creation or imposition of any lien or charge on any assets or properties of the Company under its Certificate of Incorporation, By-Laws, any material indenture, mortgage, deed of trust or other material agreement applicable to the Company or instrument to which the Company is a party or by which it is bound, or any statute, or any decree, judgment, order, rules or regulation of any court or governmental agency or body having jurisdiction over the Company or its properties, in each case which default, lien or charge is likely to cause a Material Adverse Effect on the Company's business or financial condition. Section 4.8. Absence of Events of Default. Except for matters described in the SEC Documents and/or this Agreement, no Event of Default, as defined in the respective agreement to which the Company is a party, and no event which, with the giving of notice or the passage of time or both, would become an Event of Default (as so defined), has occurred and is continuing, which would have a Material Adverse Effect on the Company's business, properties, prospects, financial condition or results of operations. Section 4.9. Intellectual Property Rights. The Company and its subsidiaries own or possess adequate rights or licenses to use all material trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets and rights necessary to conduct their respective businesses as now conducted. The Company and its subsidiaries do not have any knowledge of any infringement by the Company or its subsidiaries of trademark, trade name rights, patents, patent rights, copyrights, inventions, licenses, service names, service marks, service mark registrations, trade secret or other similar rights of others, and, to the knowledge of the Company, there is no claim, action or proceeding being made or brought against, or to the Company's knowledge, being threatened against, the Company or its subsidiaries regarding trademark, trade name, patents, patent rights, invention, copyright, license, service names, service marks, service mark registrations, trade secret or other infringement; and the Company and its subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing. Section 4.10. Employee Relations Neither the Company nor any of its subsidiaries is involved in any labor dispute nor, to the knowledge of the Company or any of its subsidiaries, is any such dispute threatened. None of the Company's or its subsidiaries' employees is a member of a union and the Company and its subsidiaries believe that their relations with their employees are good. Section 4.11. Environmental Laws. The Company and its subsidiaries are (i) in compliance with any and all applicable material foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval. Section 4.12. Title. Except as set forth in the SEC Documents, the Company has good and marketable title to its properties and material assets owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than such as are not material to the business of the Company. Any real property and facilities held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries. Section 4.13. Insurance. The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company and its subsidiaries are engaged. Neither the Company nor any such subsidiary has been refused any insurance coverage sought or applied for and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition, financial or otherwise, or the earnings, business or operations of the Company and its subsidiaries, taken as a whole. Section 4.14. Regulatory Permits. The Company and its subsidiaries possess all material certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, and neither the Company nor any such subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit. Section 4.15. Internal Accounting Controls. The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Section 4.16. No Material Adverse Breaches, etc. Except as set forth in the SEC Documents, neither the Company nor any of its subsidiaries is subject to any charter, corporate or other legal restriction, or any judgment, decree, order, rule or regulation which in the judgment of the Company's officers has or is expected in the future to have a Material Adverse Effect on the business, properties, operations, financial condition, results of operations or prospects of the Company or its subsidiaries. Neither the Company nor any of its subsidiaries is in breach of any contract or agreement which breach, in the judgment of the Company's officers, has or is expected to have a Material Adverse Effect on the business, properties, operations, financial condition, results of operations or prospects of the Company or its subsidiaries. Section 4.17. Absence of Litigation. Except as set forth in the SEC Documents, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending against or affecting the Company, the Common Stock or any of the Company's subsidiaries, wherein an unfavorable decision, ruling or finding would (i) have a Material Adverse Effect on the transactions contemplated hereby (ii) adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, this Agreement or any of the documents contemplated herein, or (iii) except as expressly disclosed in the SEC Documents, have a Material Adverse Effect on the business, operations, properties, financial condition or results of operation of the Company and its subsidiaries taken as a whole. Section 4.18. Subsidiaries. Except as disclosed in the SEC Documents, the Company does not presently own or control, directly or indirectly, any interest in any other corporation, partnership, association or other business entity. Section 4.19. Tax Status. The Company and each of its subsidiaries has made or filed all federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject and (unless and only to the extent that the Company and each of its subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim. Section 4.20. Certain Transactions. Except as set forth in the SEC Documents, none of the officers, directors, or employees of the Company is presently a party to any transaction with the Company (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner. Section 4.21. Fees and Rights of First Refusal. Except as set forth in the SEC Documents, the Company is not obligated to offer the securities offered hereunder on a right of first refusal basis or otherwise to any third parties including, but not limited to, current or former shareholders of the Company, underwriters, brokers, agents or other third parties. Section 4.22. Use of Proceeds. The Company represents that the net proceeds from this offering will be used for working capital purposes. However, in no event shall the net proceeds from this offering be used by the Company for the payment (or loaned to any such person for the payment) of any judgment, or other liability, incurred by any executive officer, officer, director, or employee of the Company. Section 4.23. Further Representation and Warranties of the Company. For so long as any securities issuable hereunder held by the Investor remain outstanding, the Company acknowledges, represents, warrants and agrees that it will use commercially reasonable efforts to maintain the listing of its Common Stock on the Principal Market Section 4.24. Opinion of Counsel. Investor shall receive an opinion letter from Kirkpatrick & Lockhart LLP, counsel to the Company (updated where applicable) on the date hereof. Section 4.25. Opinion of Counsel. The Company will obtain for the Investor, at the Company's expense, any and all opinions of counsel which may be reasonably required in order to sell the securities issuable hereunder without restriction. Section 4.26. Dilution. The Company is aware and acknowledges that issuance of shares of the Company's Common Stock could cause dilution to existing shareholders and could significantly increase the outstanding number of shares of Common Stock. ARTICLE V. Indemnification The Investor and the Company represent to the other the following with respect to itself: Section 5.1. Indemnification. (a) In consideration of the Investor's execution and delivery of this Agreement, and in addition to all of the Company's other obligations under this Agreement, the Company shall defend, protect, indemnify and hold harmless the Investor, and all of its officers, directors, partners, employees and agents (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "Investor Indemnitees") from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of whether any such Investor Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys' fees and disbursements (the "Indemnified Liabilities"), incurred by the Investor Indemnitees or any of them as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Company in this Agreement or the Registration Rights Agreement or any other certificate, instrument or document contemplated hereby or thereby, (b) any breach of any covenant, agreement or obligation of the Company contained in this Agreement or the Registration Rights Agreement or any other certificate, instrument or document contemplated hereby or thereby, or (c) any cause of action, suit or claim brought or made against such Investor Indemnitee not arising out of any action or inaction of an Investor Indemnitee, and arising out of or resulting from the execution, delivery, performance or enforcement of this Agreement or any other instrument, document or agreement executed pursuant hereto by any of the Investor Indemnitees. To the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities, which is permissible under applicable law. (b) In consideration of the Company's execution and delivery of this Agreement, and in addition to all of the Investor's other obligations under this Agreement, the Investor shall defend, protect, indemnify and hold harmless the Company and all of its officers, directors, shareholders, employees and agents (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "Company Indemnitees") from and against any and all Indemnified Liabilities incurred by the Company Indemnitees or any of them as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Investor in this Agreement, the Registration Rights Agreement, or any instrument or document contemplated hereby or thereby executed by the Investor, (b) any breach of any covenant, agreement or obligation of the Investor(s) contained in this Agreement, the Registration Rights Agreement or any other certificate, instrument or document contemplated hereby or thereby executed by the Investor, or (c) any cause of action, suit or claim brought or made against such Company Indemnitee based on misrepresentations or due to a breach by the Investor and arising out of or resulting from the execution, delivery, performance or enforcement of this Agreement or any other instrument, document or agreement executed pursuant hereto by any of the Company Indemnitees. To the extent that the foregoing undertaking by the Investor may be unenforceable for any reason, the Investor shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities, which is permissible under applicable law. ARTICLE VI. Covenants of the Company Section 6.1. Registration Rights. The Company shall cause the Registration Rights Agreement to remain in full force and effect and the Company shall comply in all material respects with the terms thereof. Section 6.2. Listing of Common Stock. The Company shall maintain the Common Stock's authorization for quotation on the National Association of Securities Dealers Over the Counter Bulletin Board. Section 6.3. Exchange Act Registration. The Company will cause its Common Stock to continue to be registered under Section 12(g) of the Exchange Act, will file in a timely manner all reports and other documents required of it as a reporting company under the Exchange Act and will not take any action or file any document (whether or not permitted by Exchange Act or the rules there under to terminate or suspend such registration or to terminate or suspend its reporting and filing obligations under said Exchange Act. Section 6.4. Transfer Agent Instructions. Upon each Closing and the effectiveness of the Registration Statement and resale of the Common Stock by the Investor, the Company will deliver instructions to its transfer agent to issue shares of Common Stock free of restrictive legends. Section 6.5. Corporate Existence. The Company will take all steps necessary to preserve and continue the corporate existence of the Company. Section 6.6. Notice of Certain Events Affecting Registration; Suspension of Right to Make an Advance. The Company will immediately notify the Investor upon its becoming aware of the occurrence of any of the following events in respect of a registration statement or related prospectus relating to an offering of Registrable Securities: (i) receipt of any request for additional information by the SEC or any other Federal or state governmental authority during the period of effectiveness of the Registration Statement for amendments or supplements to the registration statement or related prospectus; (ii) the issuance by the SEC or any other Federal or state governmental authority of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (iii) receipt of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; (iv) the happening of any event that makes any statement made in the Registration Statement or related prospectus of any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in the Registration Statement, related prospectus or documents so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the related prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (v) the Company's reasonable determination that a post-effective amendment to the Registration Statement would be appropriate; and the Company will promptly make available to the Investor any such supplement or amendment to the related prospectus. The Company shall not deliver to the Investor any Advance Notice during the continuation of any of the foregoing events. Section 6.7. Expectations Regarding Advance Notices. Within ten (10) days after the commencement of each calendar quarter occurring subsequent to the commencement of the Commitment Period, the Company must notify the Investor, in writing, as to its reasonable expectations as to the dollar amount it intends to raise during such calendar quarter, if any, through the issuance of Advance Notices. Such notification shall constitute only the Company's good faith estimate and shall in no way obligate the Company to raise such amount, or any amount, or otherwise limit its ability to deliver Advance Notices. The failure by the Company to comply with this provision can be cured by the Company's notifying the Investor, in writing, at any time as to its reasonable expectations with respect to the current calendar quarter. Section 6.8. Consolidation; Merger. The Company shall not, at any time after the date hereof, effect any merger or consolidation of the Company with or into, or a transfer of all or substantially all the assets of the Company to another entity (a "Consolidation Event") unless the resulting successor or acquiring entity (if not the Company) assumes by written instrument the obligation to deliver to the Investor such shares of stock and/or securities as the Investor is entitled to receive pursuant to this Agreement. Section 6.9. Issuance of the Company's Common Stock. The sale of the shares of Common Stock shall be made in accordance with the provisions and requirements of Regulation D and any applicable state securities law. ARTICLE VII. Conditions for Advance and Conditions to Closing Section 7.1. Conditions Precedent to the Obligations of the Company. The obligation hereunder of the Company to issue and sell the shares of Common Stock to the Investor incident to each Closing is subject to the satisfaction, or waiver by the Company, at or before each such Closing, of each of the conditions set forth below. (a) Accuracy of the Investor's Representations and Warranties. The representations and warranties of the Investor shall be true and correct in all material respects. (b) Performance by the Investor. The Investor shall have performed, satisfied and complied in all respects with all covenants, agreements and conditions required by this Agreement and the Registration Rights Agreement to be performed, satisfied or complied with by the Investor at or prior to such Closing. Section 7.2. Conditions Precedent to the Right of the Company to Deliver an Advance Notice and the Obligation of the Investor to Purchase Shares of Common Stock. The right of the Company to deliver an Advance Notice and the obligation of the Investor hereunder to acquire and pay for shares of the Company's Common Stock incident to a Closing is subject to the satisfaction or waiver by the Investor, on (i) the date of delivery of such Advance Notice and (ii) the applicable Advance Date (each a "Condition Satisfaction Date"), of each of the following conditions: (a) Registration of the Common Stock with the SEC. The Company shall have filed with the SEC a Registration Statement with respect to the resale of the Registrable Securities in accordance with the terms of the Registration Rights Agreement. As set forth in the Registration Rights Agreement, the Registration Statement shall have previously become effective and shall remain effective on each Condition Satisfaction Date and (i) neither the Company nor the Investor shall have received notice that the SEC has issued or intends to issue a stop order with respect to the Registration Statement or that the SEC otherwise has suspended or withdrawn the effectiveness of the Registration Statement, either temporarily or permanently, or intends or has threatened to do so (unless the SEC's concerns have been addressed and the Investor is reasonably satisfied that the SEC no longer is considering or intends to take such action), and (ii) no other suspension of the use or withdrawal of the effectiveness of the Registration Statement or related prospectus shall exist. The Registration Statement must have been declared effective by the SEC prior to the first Advance Notice Date. (b) Authority. The Company shall have obtained all permits and qualifications required by any applicable state in accordance with the Registration Rights Agreement for the offer and sale of the shares of Common Stock, or shall have the availability of exemptions there from. The sale and issuance of the shares of Common Stock shall be legally permitted by all laws and regulations to which the Company is subject. (c) Fundamental Changes. There shall not exist any fundamental changes to the information set forth in the Registration Statement which would require the Company to file a post-effective amendment to the Registration Statement. (d) Performance by the Company. The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement and the Registration Rights Agreement to be performed, satisfied or complied with by the Company at or prior to each Condition Satisfaction Date. (e) No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction that prohibits or directly and adversely affects any of the transactions contemplated by this Agreement, and no proceeding shall have been commenced that may have the effect of prohibiting or adversely affecting any of the transactions contemplated by this Agreement. (f) No Suspension of Trading in or Delisting of Common Stock. The trading of the Common Stock is not suspended by the SEC or the Principal Market (if the Common Stock is traded on a Principal Market). The issuance of shares of Common Stock with respect to the applicable Closing, if any, shall not violate the shareholder approval requirements of the Principal Market (if the Common Stock is traded on a Principal market). The Company shall not have received any notice threatening the continued listing of the Common Stock on the Principal Market (if the Common Stock is traded on a Principal Market). (g) Maximum Advance Amount. The amount of the advance requested by the Company does not exceed the Maximum Advance Amount. (h) No Knowledge. The Company has no knowledge of any event more likely than not to have the effect of causing such Registration Statement to be suspended or otherwise ineffective. (i) Other. On each Condition Satisfaction Date, the Investor shall have received and been reasonably satisfied with such other certificates and documents as shall have been reasonably requested by the Investor in order for the Investor to confirm the Company's satisfaction of the conditions set forth in this Section 7.2, including, without limitation, a certificate executed by an executive officer of the Company and to the effect that all the conditions to such Closing shall have been satisfied as at the date of each such certificate substantially in the form annexed hereto on Exhibit A. ARTICLE VIII. Due Diligence Review; Non-Disclosure of Non-Public Information Section 8.1. Due Diligence Review. Prior to the filing of the Registration Statement the Company shall make available for inspection and review by the Investor, advisors to and representatives of the Investor, any underwriter participating in any disposition of the Registrable Securities on behalf of the Investor pursuant to the Registration Statement, any such registration statement or amendment or supplement thereto or any blue sky, NASD or other filing, all financial and other records, all SEC Documents and other filings with the SEC, and all other corporate documents and properties of the Company as may be reasonably necessary for the purpose of such review, and cause the Company's officers, directors and employees to supply all such information reasonably requested by the Investor or any such representative, advisor or underwriter in connection with such Registration Statement (including, without limitation, in response to all questions and other inquiries reasonably made or submitted by any of them), prior to and from time to time after the filing and effectiveness of the Registration Statement for the sole purpose of enabling the Investor and such representatives, advisors and underwriters and their respective accountants and attorneys to conduct initial and ongoing due diligence with respect to the Company and the accuracy of the Registration Statement. Section 8.2. Non-Disclosure of Non-Public Information. (a) The Company shall not disclose non-public information to the Investor, advisors to or representatives of the Investor unless prior to disclosure of such information the Company identifies such information as being non-public information and provides the Investor, such advisors and representatives with the opportunity to accept or refuse to accept such non-public information for review. The Company may, as a condition to disclosing any non-public information hereunder, require the Investor's advisors and representatives to enter into a confidentiality agreement in form reasonably satisfactory to the Company and the Investor. (b) Nothing herein shall require the Company to disclose non-public information to the Investor or its advisors or representatives, and the Company represents that it does not disseminate non-public information to any investors who purchase stock in the Company in a public offering, to money managers or to securities analysts, provided, however, that notwithstanding anything herein to the contrary, the Company will, as hereinabove provided, immediately notify the advisors and representatives of the Investor and, if any, underwriters, of any event or the existence of any circumstance (without any obligation to disclose the specific event or circumstance) of which it becomes aware, constituting non-public information (whether or not requested of the Company specifically or generally during the course of due diligence by such persons or entities), which, if not disclosed in the prospectus included in the Registration Statement would cause such prospectus to include a material misstatement or to omit a material fact required to be stated therein in order to make the statements, therein, in light of the circumstances in which they were made, not misleading. Nothing contained in this Section 8.2 shall be construed to mean that such persons or entities other than the Investor (without the written consent of the Investor prior to disclosure of such information) may not obtain non-public information in the course of conducting due diligence in accordance with the terms of this Agreement and nothing herein shall prevent any such persons or entities from notifying the Company of their opinion that based on such due diligence by such persons or entities, that the Registration Statement contains an untrue statement of material fact or omits a material fact required to be stated in the Registration Statement or necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading. ARTICLE IX. Choice of Law/Jurisdiction Section 9.1. Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York without regard to the principles of conflict of laws. The parties further agree that any action between them shall be heard in New York City, New York, and expressly consent to the jurisdiction and venue of the Supreme Court of New York and the United States District Court for the Southern District of New York for the adjudication of any civil action asserted pursuant to this paragraph. ARTICLE X. Assignment; Termination Section 10.1. Assignment. Neither this Agreement nor any rights of the Company hereunder may be assigned to any other Person. Section 10.2. Termination. The obligations of the Investor to make Advances under Article II hereof shall terminate thirty six (36) months after the Effective Date. ARTICLE XI. Notices Section 11.1. Notices. Any notices, consents, waivers, or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile, provided a copy is mailed by U.S. certified mail, return receipt requested; (iii) three (3) days after being sent by U.S. certified mail, return receipt requested, or (iv) one (1) day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company, to: Vertical Computer Systems, Inc. 6336 Wilshire Blvd. Los Angeles, CA 90048 Attention: Richard Wade President Telephone: (323) 658-4211 Facsimile: (323) 658-4223 with a copy to: Kirkpatrick & Lockhart, LLP Miami Center- 20th Floor 201 South Biscayne Boulevard Miami, FL 33131-2399 Telephone: (305) 539-3300 Facsimile: (305) 358-7095 If to the Investor(s): Cornell Capital Partners, L.P. One World Trade Center, Suite 7705 New York, NY 10048 Attention: Mark Angelo Managing Director Telephone: (212) 488-4485 Facsimile: (212) 775-8166 Each party shall provide five (5) days' prior written notice to the other party of any change in address or facsimile number. ARTICLE XII. Miscellaneous Section 12.1. Counterparts. This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. In the event any signature page is delivered by facsimile transmission, the party using such means of delivery shall cause four (4) additional original executed signature pages to be physically delivered to the other party within five (5) days of the execution and delivery hereof Section 12.2. Entire Agreement; Amendments. This Agreement supersedes all other prior oral or written agreements between the Investor, the Company, their affiliates and persons acting on their behalf with respect to the matters discussed herein, and this Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Investor makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the party to be charged with enforcement. Section 12.3. Reporting Entity for the Common Stock. The reporting entity relied upon for the determination of the trading price or trading volume of the Common Stock on any given Trading Day for the purposes of this Agreement shall be Bloomberg, L.P. or any successor thereto. The written mutual consent of the Investor and the Company shall be required to employ any other reporting entity. Section 12.4. Fees and Expenses. The Company hereby agrees to pay the following fees: (a) Legal Fees. Each of the parties shall pay its own fees and expenses (including the fees of any attorneys, accountants, appraisers or others engaged by such party) in connection with this Agreement and the transactions contemplated hereby, except that the Company will pay the sum of Fifteen Thousand Dollars ($15,000), to Butler Gonzalez LLP for legal, administrative, and escrow fees, directly from the gross proceeds held in escrow of the convertible debenture transaction pursuant to the Securities Purchase Agreement dated the date hereof. Subsequently on each advance date, the Company will pay Butler Gonzalez LLP, the sum of Five Hundred Dollars ($500) for legal, administrative and escrow fees. (b) Commitment Fees. On each Advance Date the Company shall pay to the Investor, directly from the gross proceeds held in escrow, an amount equal to four percent (4%) of the amount of each Advance. The Company hereby agrees that if such payment, as is described above, is not made by the Company on the Advance Date, such payment will be made at the direction of the Investor as outlined and mandated by Section 2.3 of this Agreement. Furthermore, the Company shall issue and deliver to the Investor shares (the "Investor's Shares") of the Company's Common Stock in an amount equal to Four Hundred Thousand Dollars ($400,000) (the "Fee") calculated as follows: (i) Initial Installment. The initial installment of the Fee shall be paid on the Closing Date and the number of shares to be delivered to the Investor shall be equal to the quotient of $200,000 divided by the Closing Bid Price on the Closing Date. (ii) Second Installment. The second installment of the Fee shall be paid (the "Payment Date") on the earlier of (x) the effective date of the Registration Statement registering the shares underlying this Agreement or (y) six (6) months after the date of this Agreement and the number of shares to be delivered to the Investor shall be equal to the quotient of $200,000 divided by the Closing Bid Price on the Payment Date. (iii) Fully Earned. Any Investor's Shares delivered to the Investor in connection with either the first or the second installment shall be deemed fully earned upon delivery to the Investor. (iv) Registration Rights. The Investor's Shares will have demand and "piggy-back" registration rights. Section 12.5. Brokerage. Each of the parties hereto represents that it has had no dealings in connection with this transaction with any finder or broker who will demand payment of any fee or commission from the other party. The Company on the one hand, and the Investor, on the other hand, agree to indemnify the other against and hold the other harmless from any and all liabilities to any person claiming brokerage commissions or finder's fees on account of services purported to have been rendered on behalf of the indemnifying party in connection with this Agreement or the transactions contemplated hereby. Section 12.6. Confidentiality. If for any reason the transactions contemplated by this Agreement are not consummated, each of the parties hereto shall keep confidential any information obtained from any other party (except information publicly available or in such party's domain prior to the date hereof, and except as required by court order) and shall promptly return to the other parties all schedules, documents, instruments, work papers or other written information without retaining copies thereof, previously furnished by it as a result of this Agreement or in connection herein. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties hereto have caused this Line of Credit Agreement to be executed by the undersigned, thereunto duly authorized, as of the date first set forth above. COMPANY: VERTICAL COMPUTER SYSTEMS, INC. By:_____________________________________ Name: Richard Wade Title: President INVESTOR: CORNELL CAPITAL PARTNERS, L.P. By: Yorkville Advisors, LLC It's: General Partner By:_______________________________ Name: Mark Angelo Title: Portfolio Manager EXHIBIT A ADVANCE NOTICE/COMPLIANCE CERTIFICATE VERTICAL COMPUTER SYSTEMS, INC. The undersigned, ________________________________ hereby certifies, with respect to the sale of shares of Common Stock of Vertical Computer Systems, Inc., (the "Company") issuable in connection with this Advance Notice and Compliance Certificate dated ___________________ (the "Notice"), delivered pursuant to the Equity Line of Credit Agreement (the "Agreement"), as follows: 1. The undersigned is the duly elected President of the Company. 2. There are no fundamental changes to the information set forth in the Registration Statement which would require the Company to file a post effective amendment to the Registration Statement. 3. The Company has performed in all material respects all covenants and agreements to be performed by the Company on or prior to the Advance Date related to the Notice and has complied in all material respects with all obligations and conditions contained in the Agreement. 4. The Advance requested is _____________________. The undersigned has executed this Certificate this ____ day of _______________. VERTICAL COMPUTER SYSTEMS, INC. By:__________________________________ Name:________________________________ Title:_______________________________ SCHEDULED 2.6(b) VERTICAL COMPUTER SYSTEMS, INC. The undersigned hereby agrees that for a period commencing on the date hereof and expiring on the termination of the Agreement dated ________________ between Vertical Computer Systems, Inc., (the "Company") and Cornell Capital Partners, L.P., (the "Investor") (the "Lock-up Period"), he, she or it will not, directly or indirectly, without the prior written consent of the Investor, issue, offer, agree or offer to sell, sell, grant an option for the purchase or sale of, transfer, pledge, assign, hypothecate, distribute or otherwise encumber or dispose of except pursuant to Rule 144 of the General Rules and Regulations under the Securities Act of 1933, any securities of the Company, including common stock or options, rights, warrants or other securities underlying, convertible into, exchangeable or exercisable for or evidencing any right to purchase or subscribe for any common stock (whether or not beneficially owned by the undersigned), or any beneficial interest therein (collectively, the "Securities"). In order to enable the aforesaid covenants to be enforced, the undersigned hereby consents to the placing of legends and/or stop-transfer orders with the transfer agent of the Company's securities with respect to any of the Securities registered in the name of the undersigned or beneficially owned by the undersigned, and the undersigned hereby confirms the undersigned's investment in the Company. Dated: _______________, 2001 Signature ________________________________________ Address:________________________________ City, State, Zip Code:__________________ ________________________________________ Print Social Security Number or Taxpayer I.D. Number EX-10.3 8 ex10-3.txt ENFACET, INC. STOCK PURCHASE AGREEMENT Exhibit 10.3 Securities Purchase Agreement between Company and third party buyers for $250,000 of Convertible Debentures, dated August 16, 2001 SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of August ___, 2001, by and among VERTICAL COMPUTER SYSTEMS, INC., a Delaware corporation, with headquarters located at 6336 Wilshire Boulevard, Los Angeles, California 90048 (the "Company"), and the Buyers listed on Schedule I attached hereto (individually, a "Buyer" or collectively "Buyers"). WITNESSETH: WHEREAS, the Company and the Buyer(s) are executing and delivering this Agreement in reliance upon an exemption from securities registration pursuant to Section 4(2) and/or Rule 506 of Regulation D ("Regulation D") as promulgated by the U.S. Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933 Act"); WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Company shall issue and sell to the Buyer(s), as provided herein, and the Buyer(s) shall purchase Two Hundred and Fifty Thousand Dollars ($250,000) of convertible debentures (the "Convertible Debentures"), which shall be convertible into shares of the Company's common stock, (the "Common Stock") (as converted, the "Conversion Shares"), for a total purchase price of Two Hundred and Fifty Thousand Dollars ($250,000) (the "Purchase Price") in the respective amounts set forth opposite each Buyer(s) name on Schedule I ( the "Subscription Amount"); and WHEREAS, contemporaneously with the execution and delivery of this Agreement, the parties hereto are executing and delivering a Registration Rights Agreement substantially in the form attached hereto as Exhibit A (the "Investor Registration Rights Agreement") pursuant to which the Company has agreed to provide certain registration rights under the 1933 Act and the rules and regulations promulgated there under, and applicable state securities laws; and WHEREAS, the aggregate proceeds of the sale of the Convertible Debentures contemplated hereby shall be held in escrow pursuant to the terms of an escrow agreement substantially in the form of the Escrow Agreement attached hereto as Exhibit B. NOW, THEREFORE, in consideration of the mutual covenants and other agreements contained in this Agreement the Company and the Buyer(s)hereby agree as follows: PURCHASE AND SALE OF CONVERTIBLE DEBENTURES. Purchase of Convertible Debentures. Subject to the satisfaction (or waiver) of the terms and conditions of this Agreement, each Buyer agrees, severally and not jointly, to purchase at Closing (as defined herein below) and the Company agrees to sell and issue to each Buyer, severally and not jointly, at Closing, Convertible Debentures in amounts corresponding with the Subscription Amount set forth opposite each Buyer's name on Schedule I hereto. Upon execution hereof by a Buyer, the Buyer shall wire transfer the Subscription Amount set forth opposite his name on Schedule I in same-day funds or a check payable to "First Union National Bank, as Escrow Agent for Vertical Computer Systems, Inc. / Cornell Capital Partners, LP", which Subscription Amount shall be held in escrow pursuant to the terms of the Escrow Agreement (as hereinafter defined) and disbursed in accordance therewith. Notwithstanding the foregoing, a Buyer may withdraw his Subscription Amount and terminate this Agreement as to such Buyer at any time after the execution hereof and prior to Closing (as hereinafter defined). Closing Date. The closing of the purchase and sale of the Convertible Debentures (the "Closing") shall take place at 10:00 a.m. Eastern Standard Time on the fifth business day ("Closing Date") following the date hereof, subject to notification of satisfaction (or waiver) of the conditions to the Closing set forth in Sections 6 and 7 below (or such later date as is mutually agreed to by the Company and the Buyers). The Closing shall occur on the Closing Date at the offices of Butler Gonzalez, LLP, 1000 Stuyvesant Avenue, Suite 6, Union, NJ 07083 (or such other place as is mutually agreed to by the Company and the Buyers). Escrow Arrangements; Form of Payment. Upon execution hereof by Buyer(s) and pending Closing, the aggregate proceeds of the sale of the Convertible Debentures to Buyer(s) pursuant hereto, plus the fees and expenses of the Yorkville Advisors Management, LLC (the "Consultant"), shall be deposited in a non-interest bearing escrow account with First Union National Bank, as escrow agent ("Escrow Agent"), pursuant to the terms of an escrow agreement between the Company, the Consultant and the Escrow Agent in the form attached hereto as Exhibit B (the "Escrow Agreement"). Subject to the satisfaction of the terms and conditions of this Agreement, on the Closing Date, (i) the Escrow Agent shall deliver to the Company in accordance with the terms of the Escrow Agreement such aggregate gross proceeds for the Convertible Debentures to be issued and sold to such Buyer(s) at the Closing minus the fees and expenses of the Consultant, by wire transfer of immediately available funds in accordance with the Company's written wire instructions, and (ii) the Company shall deliver to each Buyer, Convertible Debentures which such Buyer(s) is purchasing in amounts indicated opposite such Buyer's name on Schedule I, duly executed on behalf of the Company. BUYER'S REPRESENTATIONS AND WARRANTEES. Each Buyer represents and warrants, severally and not jointly, that: Investment Purpose. Each Buyer is acquiring the Convertible Debentures and, upon conversion of Convertible Debentures, the Buyer will acquire the Conversion Shares then issuable, for its own account for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof, except pursuant to sales registered or exempted under the 1933 Act; provided, however, that by making the representations herein, such Buyer reserves the right to dispose of the Conversion Shares at any time in accordance with or pursuant to an effective registration statement covering such Conversion Shares or an available exemption under the 1933 Act. Accredited Investor Status. Each Buyer is an "Accredited Investor" as that term is defined in Rule 501(a)(3) of Regulation D. Reliance on Exemptions. Each Buyer understands that the Convertible Debentures are being offered and sold to it in reliance on specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying in part upon the truth and accuracy of, and such Buyer's compliance with, the representations, warranties, agreements, acknowledgments and understandings of such Buyer set forth herein in order to determine the availability of such exemptions and the eligibility of such Buyer to acquire such securities. Information. Each Buyer and its advisors (and his or, its counsel), if any, have been furnished with all materials relating to the business, finances and operations of the Company and information he deemed material to making an informed investment decision regarding his purchase of the Convertible Debentures and the Conversion Shares, which have been requested by such Buyer. Each Buyer and its advisors, if any, have been afforded the opportunity to ask questions of the Company and its management. Neither such inquiries nor any other due diligence investigations conducted by such Buyer or its advisors, if any, or its representatives shall modify, amend or affect such Buyer's right to rely on the Company's representations and warranties contained in Section 3 below. Each Buyer understands that its investment in the Convertible Debentures and the Conversion Shares involves a high degree of risk. Each Buyer is in a position regarding the Company, which, based upon employment, family relationship or economic bargaining power, enabled and enables such Buyer to obtain information from the Company in order to evaluate the merits and risks of this investment. Each Buyer has sought such accounting, legal and tax advice, as it has considered necessary to make an informed investment decision with respect to its acquisition of the Convertible Debentures and the Conversion Shares. No Governmental Review. Each Buyer understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Convertible Debentures or the Conversion Shares, or the fairness or suitability of the investment in the Convertible Debentures or the Conversion Shares, nor have such authorities passed upon or endorsed the merits of the offering of the Convertible Debentures or the Conversion Shares. Transfer or Resale. Each Buyer understands that except as provided in the Registration Rights Agreement: (i) the Convertible Debentures have not been and are not being registered under the 1933 Act or any state securities laws, and may not be offered for sale, sold, assigned or transferred unless (A) subsequently registered thereunder, or (B) such Buyer shall have delivered to the Company an opinion of counsel, in a generally acceptable form, to the effect that such securities to be sold, assigned or transferred may be sold, assigned or transferred pursuant to an exemption from such registration requirements; (ii) any sale of such securities made in reliance on Rule 144 under the 1933 Act (or a successor rule thereto) ("Rule 144") may be made only in accordance with the terms of Rule 144 and further, if Rule 144 is not applicable, any resale of such securities under circumstances in which the seller (or the person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the 1933 Act) may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC there under; and (iii) neither the Company nor any other person is under any obligation to register such securities under the 1933 Act or any state securities laws or to comply with the terms and conditions of any exemption there under. The Company reserves the right to place stop transfer instructions against the shares and certificates for the Conversion Shares. Legends. Each Buyer understands that the certificates or other instruments representing the Convertible Debentures and or the Conversion Shares shall bear a restrictive legend in substantially the following form (and a stop transfer order may be placed against transfer of such stock certificates): THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED SOLELY FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TOWARD RESALE AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS. The legend set forth above shall be removed and the Company shall issue a certificate without such legend to the holder of the Conversion Shares upon which it is stamped, if, unless otherwise required by state securities laws, (i) in connection with a sale transaction, provided the Conversion Shares are registered under the 1933 Act or (ii) in connection with a sale transaction, such holder provides the Company with an opinion of counsel, in form acceptable to the Company and its counsel, to the effect that a public sale, assignment or transfer of the Conversion Shares may be made without registration under the 1933 Act. Authorization, Enforcement. This Agreement has been duly and validly authorized, executed and delivered on behalf of such Buyer and is a valid and binding agreement of such Buyer enforceable in accordance with its terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and other similar laws relating to, or affecting generally, the enforcement of applicable creditors' rights and remedies. Receipt of Documents. Each Buyer and his or its counsel has received and read in their entirety: (i) this Agreement and each representation, warranty and covenant set forth herein, the Investor Registration Rights Agreement, and the Escrow Agreement; (ii) all due diligence and other information necessary to verify the accuracy and completeness of such representations, warranties and covenants; (iii) the Company's Form 10-KSB for the fiscal year ended December 31, 2000; (iv) the Company's Form 10-QSB for the fiscal quarter ended March 2001 and June 2001; and (v) answers to all questions the Buyer submitted to the Company regarding an investment in the Company; and the Buyer has relied on the information contained therein and has not been furnished any other documents, literature, memorandum or prospectus. Due Formation of Corporate and Other Buyers. If the Buyer(s) is a corporation, trust, partnership or other entity that is not an individual person, it has been formed and validly exists and has not been organized for the specific purpose of purchasing the Convertible Debentures and is not prohibited from doing so. Due Authorization of Fiduciary Buyers. If the Buyer(s) is purchasing the Convertible Debentures in a fiduciary capacity for another person or entity, including, without limitation, a corporation, partnership, trust or any other entity, the Buyer(s) has been duly authorized and empowered to execute this Agreement and such other person fulfills all the requirements for purchase of the Convertible Debentures and agrees to be bound by the obligations, representations, warranties, and covenants contained herein. Upon request of the Company, the Buyer(s) will provide true, complete and current copies of all relevant documents creating the Buyers, authorizing its investment in the Company and/or evidencing the satisfaction of the foregoing. Further Representations by Foreign Buyers. If the Buyer(s) is not a U.S. Person (as defined below), such Buyer hereby represents that such Buyer(s) is satisfied as to full observance of the laws of such Buyer's jurisdiction in connection with any invitation to subscribe for the securities or any use of this Agreement, including: (i) the legal requirements of such Buyer's jurisdiction for the purchase of the securities, (ii) any foreign exchange restrictions applicable to such purchase, (iii) any governmental or other consents that may need to be obtained, and (iv) the income tax and other tax consequences, if any, which may be relevant to the purchase, holding, redemption, sale, or transfer of the securities. Such Buyer's subscription and payment for, and such Buyer's continued beneficial ownership of, the securities will not violate any applicable securities or other laws of such Buyer's jurisdiction. The term "U.S. Person" as used herein shall mean any person who is a citizen or resident of the United States or Canada, or any state, territory or possession thereof, including, but not limited to, any estate of any such person, or any corporation, partnership, trust or other entity created or existing under the laws thereof, or any entity controlled or owned by any of the foregoing. No Legal Advice From the Company. Each Buyer acknowledges, that it had the opportunity to review this Agreement and the transactions contemplated by this Agreement with his or its own legal counsel and investment and tax advisors. Each Buyer is relying solely on such counsel and advisors and not on any statements or representations of the Company or any of its representatives or agents for legal, tax or investment advice with respect to this investment, the transactions contemplated by this Agreement or the securities laws of any jurisdiction. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each of the Buyers that: Organization and Qualification. The Company and its subsidiaries are corporations duly organized and validly existing in good standing under the laws of the jurisdiction in which they are incorporated, and have the requisite corporate power to own their properties and to carry on their business as now being conducted. Each of the Company and its subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries taken as a whole. Authorization, Enforcement, Compliance with Other Instruments. (i) The Company has the requisite corporate power and authority to enter into and perform this Agreement, the Investor Registration Rights Agreement and any related agreements, and to issue the Convertible Debentures and the Conversion Shares in accordance with the terms hereof and thereof, (ii) the execution and delivery of this Agreement, the Registration Rights Agreement and any related agreements by the Company and the consummation by it of the transactions contemplated hereby and thereby, including, without limitation, the issuance of the Convertible Debentures the Conversion Shares and the reservation for issuance and the issuance of the Conversion Shares issuable upon conversion or exercise thereof, have been duly authorized by the Company's Board of Directors and no further consent or authorization is required by the Company, its Board of Directors or its stockholders, (iii) this Agreement and the Investor Registration Rights Agreement and any related agreements have been duly executed and delivered by the Company, (iv) this Agreement, the Investor Registration Rights Agreement and any related agreements constitute the valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of creditors' rights and remedies. Capitalization. The authorized capital stock of the Company consists of 1,000,000,000 shares of Common Stock, $0.00001 par value, and 2,050,000 shares of Preferred Stock, $0.001 par value. As of August 1, 2001, the Company had 579,723,956 shares of Common Stock and 82,200 shares of Preferred Stock issued and outstanding. All of such outstanding shares have been validly issued and are fully paid and nonassessable. Except as disclosed in the SEC Documents (as defined in Section 3(f)) as amended, no shares of Common Stock are subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or permitted by the Company. Except as disclosed in the SEC Documents, as of the date of this Agreement, (i) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or any of its subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its subsidiaries or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, (ii) there are no outstanding debt securities and (iii) there are no agreements or arrangements under which the Company or any of its subsidiaries is obligated to register the sale of any of their securities under the 1933 Act (except pursuant to the Registration Rights Agreement). There are no securities or instruments containing anti-dilution or similar provisions that will be triggered by the issuance of the Convertible Debentures as described in this Agreement. The Company has furnished to the Buyer true and correct copies of the Company's Certificate of Incorporation, as amended and as in effect on the date hereof (the "Certificate of Incorporation"), and the Company's By-laws, as in effect on the date hereof (the "By-laws"), and the terms of all securities convertible into or exercisable for Common Stock and the material rights of the holders thereof in respect thereto other than stock options issued to employees and consultants. Issuance of Securities. The Convertible Debentures are duly authorized and, upon issuance in accordance with the terms hereof, shall be duly issued, fully paid and nonassessable, are free from all taxes, liens and charges with respect to the issue thereof. The Conversion Shares issuable upon conversion of the Convertible Debentures have been duly authorized and reserved for issuance. Upon conversion or exercise in accordance with the Convertible Debentures the Conversion Shares will be duly issued, fully paid and nonassessable. No Conflicts. Except as disclosed in SEC Documents, the execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby will not (i) result in a violation of the Certificate of Incorporation, any certificate of designations of any outstanding series of preferred stock of the Company or the By-laws or (ii) conflict with or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its subsidiaries is a party, or result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and the rules and regulations of the Nasdaq Stock Market Inc.'s OTC Bulletin Board on which the Common Stock is quoted) applicable to the Company or any of its subsidiaries or by which any property or asset of the Company or any of its subsidiaries is bound or affected. Except as disclosed in the SEC Documents, neither the Company nor its subsidiaries is in violation of any term of or in default under its Certificate of Incorporation or By-laws or their organizational charter or by-laws, respectively, or any material contract, agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or order or any statute, rule or regulation applicable to the Company or its subsidiaries. The business of the Company and its subsidiaries is not being conducted, and shall not be conducted in violation of any material law, ordinance, or regulation of any governmental entity. Except as specifically contemplated by this Agreement and as required under the 1933 Act and any applicable state securities laws, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under or contemplated by this Agreement or the Registration Rights Agreement in accordance with the terms hereof or thereof. Except as disclosed in the SEC Documents, all consents, authorizations, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof. The Company and its subsidiaries are unaware of any facts or circumstance, which might give rise to any of the foregoing. SEC Documents: Financial Statements. Since January 1, 2001, the Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC under of the Securities Exchange Act of 1934, as amended (the "1934 Act") (all of the foregoing filed prior to the date hereof or amended after the date hereof and all exhibits included therein and financial statements and schedules thereto and documents incorporated by reference therein, being hereinafter referred to as the "SEC Documents"). The Company has delivered to the Buyers or their representatives, or made available through the SEC's website at http://www.sec.gov., true and complete copies of the SEC Documents. As of their respective dates, the financial statements of the Company disclosed in the SEC Documents (the "Financial Statements") complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such Financial Statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). No other information provided by or on behalf of the Company to the Buyer which is not included in the SEC Documents, including, without limitation, information referred to in Section 2(d) and (i) of this Agreement, contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. 10(b)-5. The SEC Documents do not include any untrue statements of material fact, nor do they omit to state any material fact required to be stated therein necessary to make the statements made, in light of the circumstances under which they were made, not misleading. Absence of Litigation. Except as disclosed in the SEC Documents, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending against or affecting the Company, the Common Stock or any of the Company's subsidiaries, wherein an unfavorable decision, ruling or finding would (i) have a material adverse effect on the transactions contemplated hereby (ii) adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, this Agreement or any of the documents contemplated herein, or (iii) except as expressly disclosed in the SEC Documents, have a material adverse effect on the business, operations, properties, financial condition or results of operation of the Company and its subsidiaries taken as a whole. Acknowledgment Regarding Buyer's Purchase of the Convertible Debentures. The Company acknowledges and agrees that the Buyer(s) is acting solely in the capacity of an arm's length purchaser with respect to this Agreement and the transactions contemplated hereby. The Company further acknowledges that the Buyer(s) is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated hereby and any advice given by the Buyer(s) or any of their respective representatives or agents in connection with this Agreement and the transactions contemplated hereby is merely incidental to such Buyer's purchase of the Convertible Debentures or the Conversion Shares. The Company further represents to the Buyer that the Company's decision to enter into this Agreement has been based solely on the independent evaluation by the Company and its representatives. No General Solicitation. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the 1933 Act) in connection with the offer or sale of the Convertible Debentures or the Conversion Shares. No Integrated Offering. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would require registration of the Convertible Debentures or the Conversion Shares under the 1933 Act or cause this offering of the Convertible Debentures or the Conversion Shares to be integrated with prior offerings by the Company for purposes of the 1933 Act. Employee Relations. Neither the Company nor any of its subsidiaries is involved in any labor dispute nor, to the knowledge of the Company or any of its subsidiaries, is any such dispute threatened. None of the Company's or its subsidiaries' employees is a member of a union and the Company and its subsidiaries believe that their relations with their employees are good. Intellectual Property Rights. The Company and its subsidiaries own or possess adequate rights or licenses to use all trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets and rights necessary to conduct their respective businesses as now conducted. The Company and its subsidiaries do not have any knowledge of any infringement by the Company or its subsidiaries of trademark, trade name rights, patents, patent rights, copyrights, inventions, licenses, service names, service marks, service mark registrations, trade secret or other similar rights of others, and, to the knowledge of the Company there is no claim, action or proceeding being made or brought against, or to the Company's knowledge, being threatened against, the Company or its subsidiaries regarding trademark, trade name, patents, patent rights, invention, copyright, license, service names, service marks, service mark registrations, trade secret or other infringement; and the Company and its subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing. Environmental Laws. The Company and its subsidiaries are (i) in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval. Title. Any real property and facilities held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries. Insurance. The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company and its subsidiaries are engaged. Neither the Company nor any such subsidiary has been refused any insurance coverage sought or applied for and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition, financial or otherwise, or the earnings, business or operations of the Company and its subsidiaries, taken as a whole. Regulatory Permits. The Company and its subsidiaries possess all material certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, and neither the Company nor any such subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit. Internal Accounting Controls. The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, and (iii) the recorded amounts for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. No Material Adverse Breaches, etc. Except as set forth in the SEC Documents, neither the Company nor any of its subsidiaries is subject to any charter, corporate or other legal restriction, or any judgment, decree, order, rule or regulation which in the judgment of the Company's officers has or is expected in the future to have a material adverse effect on the business, properties, operations, financial condition, results of operations or prospects of the Company or its subsidiaries. Neither the Company nor any of its subsidiaries is in breach of any contract or agreement which breach, in the judgment of the Company's officers, has or is expected to have a material adverse effect on the business, properties, operations, financial condition, results of operations or prospects of the Company or its subsidiaries. Tax Status. The Company and each of its subsidiaries has made or filed all federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject and (unless and only to the extent that the Company and each of its subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim. Certain Transactions. Except as set forth in the SEC Documents and except for arm's length transactions pursuant to which the Company makes payments in the ordinary course of business upon terms no less favorable than the Company could obtain from third parties and other than the grant of stock options disclosed in the SEC Documents, none of the officers, directors, or employees of the Company is presently a party to any transaction with the Company (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner. Fees and Rights of First Refusal. The Company is not obligated to offer the securities offered hereunder on a right of first refusal basis or otherwise to any third parties including, but not limited to, current or former shareholders of the Company, underwriters, brokers, agents or other third parties. COVENANTS. Best Efforts. Each party shall use its best efforts timely to satisfy each of the conditions to be satisfied by it as provided in Sections 6 and 7 of this Agreement. Form D. The Company agrees to file a Form D with respect to the Conversion Shares as required under Regulation D and to provide a copy thereof to each Buyer promptly after such filing. The Company shall, on or before the Closing Date, take such action as the Company shall reasonably determine is necessary to qualify the Conversion Shares, or obtain an exemption for the Conversion Shares for sale to the Buyers at the Closing pursuant to this Agreement under applicable securities or "Blue Sky" laws of the states of the United States, and shall provide evidence of any such action so taken to the Buyers on or prior to the Closing Date. Reporting Status. Until the earlier of (i) the date as of which the Investor(s) (as that term is defined in the Registration Rights Agreement) may sell all of the Conversion Shares without restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or successor thereto), or (ii) the date on which (A) the Buyer(s) shall have sold all the Conversion Shares and (B) none of the Convertible Debentures are outstanding (the "Registration Period"), the Company shall use its commercially reasonable efforts to file in a timely manner all reports required to be filed with the SEC pursuant to the 1934 Act and the regulations of the SEC there under, and the Company shall not terminate its status as an issuer required to file reports under the 1934 Act even if the 1934 Act or the rules and regulations there under would otherwise permit such termination. Use of Proceeds. The Company will use the proceeds from the sale of the Convertible Debentures for general corporate purposes. Reservation of Shares. The Company shall take all action reasonably necessary to at all times have authorized, and reserved for the purpose of issuance, such number of shares of Common Stock as shall be necessary to effect the issuance of the Conversion Shares. If at any time the Company does not have available such shares of Common Stock as shall from time to time be sufficient to effect the conversion of all of the Conversion Shares of the Company shall call and hold a special meeting of the shareholders within sixty (60) days of such occurrence, for the sole purpose of increasing the number of shares authorized. The Company's management shall recommend to the shareholders to vote in favor of increasing the number of shares of Common Stock authorized. Management shall also vote all of its shares in favor of increasing the number of authorized shares of Common Stock. Listings or Quotation. The Company shall promptly secure the listing or quotation of the Conversion Shares upon each national securities exchange, automated quotation system or Over-The-Counter Bulletin Board or other market, if any, upon which shares of Common Stock are then listed or quoted (subject to official notice of issuance) and shall use its best efforts to maintain, so long as any other shares of Common Stock shall be so listed, such listing of all Conversion Shares from time to time issuable under the terms of this Agreement. The Company shall maintain the Common Stock's authorization for quotation in the over-the counter market. Expenses. Each of the Company and the Buyer(s) shall pay all costs and expenses incurred by such party in connection with the negotiation, investigation, preparation, execution and delivery of this Agreement and the Registration Rights Agreement. The costs and expenses of the Consultant, its counsel, and Kirkpatrick & Lockhart LLP shall be paid for by the Company at Closing in accordance with the terms of the Consulting Agreement between the Company and the Consultant, of even date herewith. Corporate Existence. So long as any of the Convertible Debentures remain outstanding, the Company shall not directly or indirectly consummate any merger, reorganization, restructuring, consolidation, sale of all or substantially all of the Company's assets or any similar transaction or related transactions (each such transaction, a "Sale of the Company") unless, prior to the consummation of a Sale of the Company, the Company makes appropriate provision to insure that, upon the consummation of such Sale of the Company, each of the holders of the Convertible Debentures will thereafter have the right to acquire and receive such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for the number of shares of Common Stock immediately theretofore acquirable and receivable upon the conversion of such holder's Convertible Debentures had such Sale of the Company not taken place. In any such case, the Company will make appropriate provision with respect to such holders' rights and interests to insure that the provisions of this Section 4(h) will thereafter be applicable to the Convertible Debentures. Transactions With Affiliates. So long as any Convertible Debentures are outstanding, the Company shall not, and shall cause each of its subsidiaries not to, enter into, amend, modify or supplement, or permit any subsidiary to enter into, amend, modify or supplement any agreement, transaction, commitment, or arrangement with any of its or any subsidiary's officers, directors, person who were officers or directors at any time during the previous two (2) years, stockholders who beneficially own five percent (5%) or more of the Common Stock, or Affiliates (as defined below) or with any individual related by blood, marriage, or adoption to any such individual or with any entity in which any such entity or individual owns a five percent (5%) or more beneficial interest (each a "Related Party"), except for (a) customary employment arrangements and benefit programs on reasonable terms, (b) any investment in an Affiliate of the Company, (c) any agreement, transaction, commitment, or arrangement on an arms-length basis on terms no less favorable than terms which would have been obtainable from a person other than such Related Party, (d) any agreement transaction, commitment, or arrangement which is approved by a majority of the disinterested directors of the Company, for purposes hereof, any director who is also an officer of the Company or any subsidiary of the Company shall not be a disinterested director with respect to any such agreement, transaction, commitment, or arrangement. "Affiliate" for purposes hereof means, with respect to any person or entity, another person or entity that, directly or indirectly, (i) has a ten percent (10%) or more equity interest in that person or entity, (ii) has ten percent (10%) or more common ownership with that person or entity, (iii) controls that person or entity, or (iv) shares common control with that person or entity. "Control" or "controls" for purposes hereof means that a person or entity has the power, direct or indirect, to conduct or govern the policies of another person or entity. Transfer Agent. The Company covenants and agrees that, in the event that the Company's agency relationship with the transfer agent should be terminated for any reason prior to a date which is two (2) years after the Closing Date, the Company shall immediately appoint a new transfer agent and shall require that the transfer agent execute and agree to be bound by the terms of the Irrevocable Instructions (as defined herein) to Transfer Agent. TRANSFER AGENT INSTRUCTIONS. The Company shall issue irrevocable instructions in the form attached hereto as Exhibit C to its transfer agent to issue certificates, registered in the name of the Buyer(s) or its respective nominee(s), for the Conversion Shares representing such amounts of Convertible Debentures as specified from time to time by the Buyer(s) to the Company upon conversion of the Convertible Debentures (the "Irrevocable Transfer Agent Instructions"). Prior to registration of the Conversion Shares under the 1933 Act, all such certificates shall bear the restrictive legend specified in Section 2(g) of this Agreement. The Company warrants that no instruction other than the Irrevocable Transfer Agent Instructions referred to in this Section 5, and stop transfer instructions to give effect to Section 2(f) hereof (in the case of the Conversion Shares prior to registration of such shares under the 1933 Act) will be given by the Company to its transfer agent and that the Conversion Shares shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement and the Registration Rights Agreement. Nothing in this Section 5 shall affect in any way the Buyer's obligations and agreement to comply with all applicable securities laws upon resale of Conversion Shares. If the Buyer(s) provides the Company with an opinion of counsel, reasonably satisfactory in form, and substance to the Company, that registration of a resale by the Buyer(s) of any of the Conversion Shares is not required under the 1933 Act, the Company shall permit the transfer and, promptly instruct its transfer agent to issue one or more certificates in such name and in such denominations as specified by the Buyer. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Buyer by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Section 5 will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Section 5, that the Buyer(s) shall be entitled, in addition to all other available remedies, to an injunction restraining any breach and requiring immediate issuance and transfer, without the necessity of showing economic loss and without any bond or other security being required. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The obligation of the Company hereunder to issue and sell the Convertible Debentures to the Buyer(s) at the Closing is subject to the satisfaction, at or before the Closing Date, of each of the following conditions, provided that these conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion: Each Buyer shall have executed this Agreement and the Registration Rights Agreement and delivered the same to the Company. The Buyer(s) shall have delivered to the Escrow Agent the Purchase Price for Convertible Debentures in respective amounts as set forth next to each Buyer as outlined on Schedule I attached hereto and the Escrow Agent shall have delivered such funds to the Company by wire transfer of immediately available U.S. funds pursuant to the wire instructions provided by the Company. The representations and warranties of the Buyer(s) shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at that time (except for representations and warranties that speak as of a specific date), and the Buyer(s) shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Buyer(s) at or prior to the Closing Date. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE. The obligation of the Buyer(s) hereunder to purchase the Convertible Debentures at the Closing is subject to the satisfaction, at or before the Closing Date, of each of the following conditions, provided that these conditions are for the Buyer's sole benefit and may be waived by the Buyer(s) at any time in its sole discretion: The Company shall have executed this Agreement and the Registration Rights Agreement, and delivered the same to the Buyer(s). The Common Stock shall be authorized for quotation on The National Association of Securities Dealers, Inc. OTC Bulletin Board, trading in the Common Stock shall not have been suspended for any reason and all of the Conversion Shares issuable upon conversion of the Convertible Debentures shall be approved for listing or quotation on The National Association of Securities Dealers, Inc. OTC Bulletin Board. The representations and warranties of the Company shall be true and correct in all material respects (except to the extent that any of such representations and warranties is already qualified as to materiality in Section 3 above, in which case, such representations and warranties shall be true and correct without further qualification) as of the date when made and as of the Closing Date as though made at that time (except for representations and warranties that speak as of a specific date) and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the Closing Date. The Buyer shall have received a certificate, executed by the President of the Company, dated as of the Closing Date, to the foregoing effect and as to such other matters as may be reasonably requested by the Buyer including, without limitation an update as of the Closing Date regarding the representation contained in Section 3(c) above. The Company shall have executed and delivered to the Buyer(s) the Convertible Debentures in the respective amounts set forth opposite each Buyer(s) name on Schedule I attached hereto. As of the Closing Date, the Company shall have reserved out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of the Convertible Debentures, shares of Common Stock to effect the conversion of all of the Conversion then outstanding. The Irrevocable Transfer Agent Instructions, in form and substance satisfactory to the Buyer, shall have been delivered to and acknowledged in writing by the Company's transfer agent. INDEMNIFICATION. In consideration of the Buyer's execution and delivery of this Agreement and acquiring the Convertible Debentures and the Conversion Shares hereunder, and in addition to all of the Company's other obligations under this Agreement, the Company shall defend, protect, indemnify and hold harmless the Buyer(s) and each other holder of the Convertible Debentures and the Conversion Shares, and all of their officers, directors, employees and agents (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "Buyer Indemnitees") from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of whether any such Buyer Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys' fees and disbursements (the "Indemnified Liabilities"), incurred by the Buyer Indemnitees or any of them as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Company in this Agreement, the Convertible Debentures or the Registration Rights Agreement or any other certificate, instrument or document contemplated hereby or thereby, (b) any breach of any covenant, agreement or obligation of the Company contained in this Agreement, or the Registration Rights Agreement or any other certificate, instrument or document contemplated hereby or thereby, or (c) any cause of action, suit or claim brought or made against such Indemnitee and arising out of or resulting from the execution, delivery, performance or enforcement of this Agreement or any other instrument, document or agreement executed pursuant hereto by any of the Indemnities, any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of the issuance of the Convertible Debentures or the status of the Buyer or holder of the Convertible Debentures the Conversion Shares, as a Buyer of Convertible Debentures in the Company. To the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities, which is permissible under applicable law. In consideration of the Company's execution and delivery of this Agreement, and in addition to all of the Buyer's other obligations under this Agreement, the Buyer shall defend, protect, indemnify and hold harmless the Company and all of its officers, directors, employees and agents (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "Company Indemnitees") from and against any and all Indemnified Liabilities incurred by the Indemnitees or any of them as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Buyer(s) in this Agreement, , instrument or document contemplated hereby or thereby executed by the Buyer, (b) any breach of any covenant, agreement or obligation of the Buyer(s) contained in this Agreement, the Investor Registration Rights Agreement or any other certificate, instrument or document contemplated hereby or thereby executed by the Buyer, or (c) any cause of action, suit or claim brought or made against such Company Indemnitee based on material misrepresentations or due to a material breach and arising out of or resulting from the execution, delivery, performance or enforcement of this Agreement, the Investor Registration Rights Agreement or any other instrument, document or agreement executed pursuant hereto by any of the Company Indemnities. To the extent that the foregoing undertaking by each Buyer may be unenforceable for any reason, each Buyer shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities, which is permissible under applicable law. GOVERNING LAW: MISCELLANEOUS. Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York without regard to the principles of conflict of laws. The parties further agree that any action between them shall be heard in New York City, New York, and expressly consent to the jurisdiction and venue of the Supreme Court of New York and the United States District Court for the Southern District of New York for the adjudication of any civil action asserted pursuant to this Paragraph. Counterparts. This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. In the event any signature page is delivered by facsimile transmission, the party using such means of delivery shall cause four (4) additional original executed signature pages to be physically delivered to the other party within five (5) days of the execution and delivery hereof. Headings. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. Severability. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. Entire Agreement, Amendments. This Agreement supersedes all other prior oral or written agreements between the Buyer(s), the Company, their affiliates and persons acting on their behalf with respect to the matters discussed herein, and this Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor any Buyer makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the party to be charged with enforcement. Notices. Any notices, consents, waivers, or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) upon confirmation of receipt, when sent by facsimile; (iii) three (3) days after being sent by U.S. certified mail, return receipt requested, or (iv) one (1) day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company, to: Vertical Computer Systems, Inc. 6336 Wilshire Boulevard Los Angeles, CA 90048 Attention: Richard Wade President Telephone: (323) 658-4211 Facsimile: (323) 658-4223 With a copy to: Kirkpatrick & Lockhart LLP 201 South Biscayne Boulevard - Suite 2000 Miami, FL 33131 Attention: Clayton E. Parker, Esq. Telephone: (305) 539-3300 Facsimile: (305) 358-7095 If to the Transfer Agent, to: If to the Investor: At the address listed on Schedule A. If to the Buyer(s), to its address and facsimile number on Schedule I, with copies to the Buyer's counsel as set forth on Schedule I. Each party shall provide five (5) days' prior written notice to the other party of any change in address or facsimile number. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns. Neither the Company nor any Buyer shall assign this Agreement or any rights or obligations hereunder without the prior written consent of the other party hereto. No Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person. Survival. Unless this Agreement is terminated under Section 9(l), the representations and warranties of the Company and the Buyers contained in Sections 2 and 3, the agreements and covenants set forth in Sections 4, 5 and 9, and the indemnification provisions set forth in Section 8, shall survive the Closing for a period of one (1) year following the date on which the Convertible Debentures are converted in full. The Buyer(s) shall be responsible only for its own representations, warranties, agreements and covenants hereunder. Publicity. The Company and the Buyer(s) shall have the right to approve, before issuance any press release or any other public statement with respect to the transactions contemplated hereby made by any party; provided, however, that the Company shall be entitled, without the prior approval of the Buyer(s), to issue any press release or other public disclosure with respect to such transactions required under applicable securities or other laws or regulations (the Company shall use its best efforts to consult the Buyer(s) in connection with any such press release or other public disclosure prior to its release and Buyer(s) shall be provided with a copy thereof upon release thereof). Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. Termination. In the event that the Closing shall not have occurred with respect to the Buyers on or before five (5) business days from the date hereof due to the Company's or the Buyer's failure to satisfy the conditions set forth in Sections 6 and 7 above (and the non-breaching party's failure to waive such unsatisfied condition(s)), the non-breaching party shall have the option to terminate this Agreement with respect to such breaching party at the close of business on such date without liability of any party to any other party; provided, however, that if this Agreement is terminated pursuant to this Section 9(l), the Company shall remain obligated to reimburse the Buyer(s) for the expenses described in Section 4(g) above. No Strict Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. [REMAINDER PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the Buyers and the Company have caused this Securities Purchase Agreement to be duly executed as of the date first written above. COMPANY: VERTICAL COMPUTER SYSYTEMS INC. By:_____________________________________ Name: Richard Wade Title: President INVESTOR: By:_____________________________________ Name: EXHIBIT A FORM OF REGISTRATION RIGHTS AGREEMENT EXHIBIT B FORM OF ESCROW AGREEMENT EXHIBIT C TRANSFER AGENT INSTRUCTIONS SCHEDULE I SCHEDULE OF BUYERS Amount of Name Address/Facsimile Number of Buyer Subscription - ---- --------------------------------- ------------ EX-10.4 9 ex10-4.txt STOCK PURCHASE AGREEMENT Exhibit 10.4 ENFACET, INC. STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT is entered into as of August 21, 2001, by and between ENFACET, INC., a Texas corporation (hereinafter the "Corporation"), and VERTICAL COMPUTER SYSTEMS, INC., a Delaware corporation (hereinafter "Buyer"). In consideration of the mutual agreements, covenants, representations and warranties contained in this Agreement, the parties agree as follows: RECITALS A. Buyer desires to acquire one hundred percent (100%) of the issued and outstanding capital stock of the Corporation (the "Stock")on the terms and conditions hereinafter set forth; and B. Corporation is engaged in the business of website software management development (the "Business"); and 1. Authorization and Sale of Stock. a. Acquisition of Stock. Subject to the terms and conditions of this Agreement, Buyer agrees to purchase at the Closing (as defined below), Corporation shall convey, transfer and assign, upon the terms and conditions herein set forth, to Buyer, free and clear of all liens, security interests, pledges, claims and encumbrances of every kind, nature and description, and Buyer shall accept from the Corporation TEN THOUSAND (10,000) shares of the issued and outstanding capital stock of Corporation which represents one hundred percent (100%) of the issued and outstanding capital stock of Corporation in exchange for THIRTY THOUSAND (30,000) shares of Buyer's Cumulative four percent (4%) Convertible Series C Preferred Stock (the "Preferred Stock") with a liquidation preference of $100 per share (the "Purchase Shares"). Each share of Series C Preferred Stock shall be convertible into four hundred (400) fully paid and non-assessable shares of common stock of the Corporation. b. Closing. Subject to the terms and conditions hereof, the Closing of the purchase of the Stock (hereinafter the "Closing") shall occur on or about August 29, 2001, at 10:00 a.m., Pacific Time, or at such other time which the Corporation shall determine (the date of the Closing is hereinafter referred to as the "Closing Date"). c. Delivery. At the Closing: (1) The Corporation will deliver to Buyer Certificates for TEN THOUSAND (10,000) shares of the issued and outstanding Corporation's common stock, fully endorsed in blank, or with stock transfer powers executed by in blank attached to the stock; (2) Buyer shall deliver to the Corporation a certificate for THIRTY THOUSAND (30,000) shares of the Preferred Stock; (3) The Corporation will deliver to Buyer Certificates of the President or a Vice-President of the Corporation, dated as of the Closing Date, confirming (a) the truth and correctness of all of the representations and warranties of the Corporation contained herein in Section 2 as of the Closing Date and as of all times between the date hereof and the Closing Date, and (b) that all agreements and covenants of the Corporation specified herein have been complied with; (4) The Corporation will deliver to Buyer the Certificate of the Secretary or an Assistant Secretary of Company, dated the Closing Date, certifying minutes of meetings of the Corporation's Board of Directors and shareholders relating to this Agreement and the transactions provided for herein; (5) The Corporation will deliver to Buyer a "good standing" certificate for the Corporation' and a certified copy of the Articles of Incorporation and all amendments thereto issued by the Department of State of Texas, and dated as of a date within five (5) days prior to the Closing Date; and (6) The Corporation will deliver to Buyer a Certificate of the President or a Vice-President of the Corporation, dated as of the Closing Date, confirming that the Master Reseller Agreement, between Adhesive Technology, Inc. ("Adhesive") and the Corporation, or any other agreement by which the Corporation licenses technology (the "Technology") (a) is in effect, (b) is legally valid and enforceable against the Corporation, and (c) the Technology will not violate or infringe any patent, copyright, trademark, service mark, right of privacy or other right, will not contain any libelous or defamatory material or any material which the Corporation is not duly authorized to use, and will not misuse or misappropriate any trade secret or confidential information, (d) that any approvals or permissions required in connection with the production, manufacture, use or exploitation of the Technology has been obtained or will have been obtained prior to the Closing, and (e) that the Corporation has the right, power and authority to grant to the Buyer the rights it has granted under this Agreement. 2. Corporation's Representations and Warranties. The Corporation hereby represents and warrants as of the Closing as follows: 2.1 Organization and Corporate Power. The Corporation is a corporation which will be, at the time of Closing, duly organized, in good standing under the laws of Texas and is qualified as a foreign corporation in all jurisdictions in which the nature of its property owned or leased by it or the conduct of its business requires such qualification except for such jurisdiction where the failure to so qualify would not materially and adversely affect the business, operations or financial condition of the Corporation. The Corporation has all requisite corporate power and authority necessary to own and operate its properties and to carry on its business as now conducted and, subject to obtaining such permits, licenses, consents and the like as may be required in any jurisdiction in which the Corporation intends to conduct business, which the Corporation intends to conduct business, which the Corporation has no knowledge or reason to believe will not be reasonably obtained, as proposed or contemplated to be conducted in the future and enter into and to carry out the provisions of this Agreement and the transactions contemplated hereby. 2.2 Corporate Capitalization. a. Authorized Capital Stock. Immediately prior to the Closing, (i) the Corporation's authorized capital stock shall consist of TEN MILLION (10,000,000) shares of the Stock, of which, NINE MILLION (9,000,000) are common shares, par value $0.01 per share, and ONE MILLION are preferred shares, and only TEN THOUSAND (10,0000) shares of common stock shall be issued and outstanding and (ii) all of the issued and outstanding shares of the Stock will be duly authorized and validly issued, fully paid and non-assessable and will be issued in compliance with all applicable state and federal securities laws. b. Restrictions on Transfer. Except for any restrictions imposed by applicable state and federal securities laws, there is no right of first refusal, co-sale right, right of participation, right of first offer, option or other restriction on transfer applicable to any shares of the Corporation's Stock. The Corporation is not a party to, or is subject to any agreement that affects or relates to the voting or giving of written consent with respect to any shares of the Corporation's Stock. 2.3 Corporate Compliance; Authorization. a. Compliance with Instruments. To the Corporation's knowledge, the Corporation is not in violation, breach or default of any term of its Certificate of Incorporation or Bylaws, or of any material term or provision of any judgment, decree, order statute, rule or regulation applicable to or binding upon the material adverse affect on the Corporation's business or financial condition. b. Authorization. The Corporation has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement, and all corporate action on the part of the Corporation, its officers, directors and shareholders, necessary for the sale and transfer of the Stock has been taken. This Agreement, the Certificate of Incorporation and all agreements attached hereto as Exhibits, are each legal, valid and binding obligations of the Corporation enforceable in accordance with their respective terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws and equitable principals relating to or affecting the enforcement of creditors' rights in general and by general principals of equity. The execution, delivery and compliance with the performance by the Corporation of this Agreement does not and will not (1) conflict with or result in a breach of the terms, conditions and provisions of any contractual obligation, (2) result in the creation of any, material lien, security interest, charge or encumbrance upon the Corporation's capital stock or assets. 2.4 Absence of Litigation. In good faith and to the best of the Corporation's knowledge, there are no (a) actions proceedings, arbitrations or investigations pending or any threat thereof, or verdicts or judgments entered against the Corporation before any court or before any administrative agency or officer which might result in any material adverse change in the business, properties or condition, financial or otherwise, of the Corporation or (b) violations by the Corporation of any foreign, federal, state or local laws, regulations or order, including but not limited to laws pending to workplace safety and environmental clean-up, the violation of which would have a material adverse effect on the business of the Corporation. 2.5 Tax Returns and Payments. In good faith and to the best of the Corporation's knowledge, the Corporation has filed or caused to be filed and accurately prepared all federal and state income tax returns and all other federal and state tax returns which are required to be filed by the Corporation. The Corporation has paid or caused to be paid or set aside adequate reserves for all taxes, penalties, and interests due or which may become due as shown on such returns. 2.6 Material Licenses, Agreements and Related Party Agreements. In good faith and to the best of the Corporation's knowledge, the Corporation is not party to, nor is its property bound by (a) any agreement (i) requiring the performance by the Corporation of any obligation for a period of time extending beyond one year from the Closing, or (ii) calling for or which could result in the receipt of consideration or payment of more than $50,000 individually. There is no default or event that with notice or lapse of time, or both, would constitute a material default by any party to any of the above agreements. All of such agreements, whether written or oral, shall be referred to in this Agreement as "Material Agreements." The Corporation has not received notice nor does it have reasonable grounds to believe that any party to a*ny of the Material Agreements intends to cancel or terminate any Material Agreements intends to cancel or terminate any Material Agreements or to exercise or not exercise any options under any of these agreements or to seek a renegotiation or judgment of any material provisions. 2.7 Material Change. Since May 30, 2001, there has not occurred: a. Any material adverse change in the assets, liabilities, business, prospects, condition (financial or otherwise), or operating results of the Corporation; b. Any material increase in the indebtedness or liabilities of the Corporation over the level thereof; c. Any material increase in the compensation (including, without limitation, the rate of commissions) payable to, or any payment of a cash salary bonus to, any officer, director or employee of, or consultant to, the Corporation; d. Any material change in the manner of keeping the book accounts or records of the Corporation or in the accounting practices therein reflected; or e. Any declaration or payment of any dividends or distribution to the Corporation's Shareholders by the Corporation, any acquisition or redemption by the Corporation of any of its equity securities or loan by the Corporation to any of its security holders. 2.8 Extent of Offering. Except as contemplated in this Agreement, neither the Corporation, nor any agent acting on its behalf, has offered or will offer or solicit any offers to sell any securities to any person or persons so as to require the issuance or sale of the Stock to be registered to the provisions of ss. 5 of the Securities Act, or prevent the Corporation from utilizing the provisions of ss. 4(2) or Regulation D of the Securities Act or any applicable state securities law exemption from qualification. 2.9 Fees, Commissions and Expenses. The Corporation has made no agreements or arrangements for brokerage commissions, finders' fees or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or agreement binding upon the Corporation. 2.10 Validity of Issuance. The Stock to be purchased and sold pursuant to this Agreement, when issued, sold, and delivered, be duly and validly issued, fully paid and nonassessable, and will be free and clear of any liens or encumbrances caused or created by the Corporation and, assuming the accuracy and completeness of the Buyer's and the Corporation's representations hereunder, will have been issued in compliance with all the applicable state and federal securities laws. 2.11 Disclosure. Neither this Agreement, nor any of the schedules, attachments, exhibits, written statements, documents, certificates or other materials prepared or supplied by the Corporation with respect to the transactions contemplated hereby contain any untrue statements of a material fact or omit a material fact to make the statements contained herein or therein not misleading. 2.12 Due Diligence. Buyer and its legal and accounting advisors, underwriters and lenders shall have completed, and in their sole discretion be satisfied with the results of, their due diligence investigation of the Corporation, including, but not limited to with respect to the efficacy of the Corporation's intellectual property. 2.13 Private Offering. The offer to sell the Stock was directly communicated to the Buyer by the Corporation. At no time did the Corporation present to Buyer or any other persons, or solicit Buyer or any other person with, any leaflet, newspaper or magazine article, radio or television advertisement, or any other form of general advertising or solicitation, nor did the Corporation invite Buyer or any other to attend a promotional meeting otherwise than in connection and concurrently with such communicated offer. 2.14 Buyer Representation. The Corporation has a reasonable basis to believe that representations and warranties of Buyer set forth in this Agreement are true and accurate. 3. Buyer Representations and Warranties. The Buyer represents and warrants to the Corporation that: a. Investment. Buyer is acquiring the Stock, the Warrants, and any Warrant Stock, for investment for its own account and not with a view to, or resale in connection with, any distribution thereof, and such Buyer has no present intention of selling or distributing the Stock, the Warrants, or any Warrant Stock. It understands that the Stock, the Warrant and the Warrant Stock have not been registered under the Securities Act by reason of a ss. 4(2) exemption. b. Limitations on Resale or Transfer. Buyer understands and acknowledges that Buyer's ability to sell the Stock, the Warrants and any Warrant Stock, may be limited by the lack of a ready market in which to sell the Stock, the Warrants, and any Warrant Stock, and that the certificates issued will carry the following 144 legend: "THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1993, OR APPLICABLE STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1993 OR APPLICABLE STATE SECURITIES LAWS OR RECEIPT OF AN NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION THAT SUCH REGISTRATION IS NOT REQUIRED." c. Access to Data. The Buyer has had an opportunity to discuss the Corporation's business, management and financial affairs with its management and to obtain any additional information necessary or appropriate for deciding whether or not to purchase the Stock, the Warrant and the Warrant Stock. Buyer acknowledges that no representation or warranties, oral and written, have been made by the Corporation, or any other agent thereof except as set forth in this Agreement. d. Private Offering. The offer to sell the Stock, the Warrants and any Warrant Stock was directly communicated to Buyer by the Corporation. At no time was Buyer presented or solicited by any leaflet, newspaper or magazine article, radio or television advertisement, or any form of general advertising or solicited or invited to attend a promotional meeting otherwise than in connection and concurrently with such communicated offer. e. Authorization. Buyer is a resident of the State of California. Buyer has all requisite authorization to execute and deliver the Agreement. 4. Lock Up. In the event of an underwritten public offering of shares of Corporation's Stock, Buyer agrees to not sell any Stock or Warrant Stock or any derivative thereof it holds for a period of 180 days following the effective date of a registration statement relating to such public offering and shall execute any customary form of underwriter lock up agreement in connection with such offering. 5. Termination. a. This Agreement may be terminated at any time prior to the Closing Date: (1) By the written agreement of Buyer and the Corporation; (2) By Buyer by written notice to the other parties if (i) the representations and warranties of the Corporation shall not have been true and correct in all respects (in the case of a representation or warranty containing a materiality qualification) or in all material respects (in the case of a representation or warranty without a materiality qualification) as of the date when made, or (ii) any of the conditions set forth in Section 2 shall not have been, or if it becomes apparent that any of such conditions will not be, fulfilled by 5:00 p.m. PST on August 31, 2001, unless such failure shall be due to the failure of Buyer to perform or comply with any of the covenants, agreements or conditions hereof to be performed or complied with by it prior to the Closing. b. In the event of the termination of this Agreement pursuant to Section 5, this Agreement shall become void, without any liability to any party in respect hereof or of the transactions contemplated hereby on the part of any party hereto, or any of its directors, officers, employees, agents, consultants, representatives, or advisers, stockholders, and except for any liability resulting from such party's breach of this Agreement. 6. Miscellaneous. a. Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. b. No Third-Party Beneficiaries. The terms and provisions of this Agreement are intended solely for the benefit of each party hereto and their respective successors and assigns, and it is not the intention of the parties to confer third-party beneficiary rights upon any other person. c. Entire Agreement. This Agreement and the exhibits attached hereto and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the Corporation and Buyer with regard to the subjects hereof and thereof. d. Amendments and Modifications. This Agreement may not be amended or modified other than by an agreement in writing signed by all of the parties. e. Notice. Any notice, payment, report or other communication required or permitted to be given by one to any other party by this Agreement shall be in writing and either (i) served personally on the other party or parties; (ii) sent by express, registered or certified first class mail, postage prepaid, addressed to the other party or parties at its or their address or addresses as indicated next to their signatures below, or to such other address as any addressee shall have therefore furnished to the other parties by like notice; (iii) delivered by commercial courier to the other party or parties; or (iv) sent by facsimile with the original sent by U.S. Mail. Such notice shall be deemed received on the second day after transmittal if sent by one day courier together with a transmission of such notice by facsimile if the recipient has the capability to receive a facsimile. f. Statutory References. A reference in this Agreement to a statute or statutory provision shall mean such statute or statutory provision as it has been amended through the date as of which the particular Agreement provision is to take effect, or to any successor statute or statutory provision relating to the same subject as the statutory provision referred to in this Agreement, and to any then applicable rules or regulations promulgated thereunder. g. Waiver of Jury Trial. THE PARTIES HEREBY EXPRESSLY WAIVE THE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BROUGHT BY OR AGAINST EITHER OF THEM RELATING TO THIS AGREEMENT. [BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX TRANSACTIONS ARE MORE QUICKLY AND ECONOMICALLY RESOLVED BY AN EXPERIENCED AND EXPERT PERSON, THE PARTIES PREFER, BASED ON THE ADVICE OF THEIR COUNSEL, THAT ANY DISPUTE BE RESOLVED BY A JUDGE APPLYING APPLICABLE LAW. h. Jurisdiction; Service of Process. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement may shall be brought against any of the parties only in the courts of the State of California, County of Los Angeles, or, if it has or can acquire the necessary jurisdiction, in the United States District Court for the Central District of California, and each of the parties consents to the exclusive jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and irrevocably waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served on any party anywhere in the world. The provisions of this Section shall also apply to any actions involving directors, officers, shareholders, controlling persons and affiliates of Buyer brought by or against them in their respective capacities as such. i. Enforcement. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. Accordingly, it is agreed that the parties shall be entitled to seek an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any court of the United States located in the State of California or in any California state court, this being in addition to any other remedy to which they are entitled at law or in equity. In addition, each of the parties hereto (a) consents to the personal jurisdiction of any federal court located in the State of California or of any California state court in the event any dispute arises out of this Agreement or any of the transactions contemplated by this Agreement, (b) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court, and (c) agrees that it will not bring any action relating to this Agreement or any of the transactions contemplated by this Agreement in any court other than a federal or state court sitting in the State of California. j. Recovery of Fees by Prevailing Party. In the event of a lawsuit to enforce or interpret the provisions of this Agreement, the prevailing party shall pay the other party reasonable attorneys' fees and other costs and expenses including expert witness fees in such amount as the court shall determine. In addition, such non-prevailing party shall pay reasonable attorneys' fees incurred by the prevailing party in enforcing, or on appeal from, a judgment in favor of the prevailing party. The preceding sentence is intended by the parties hereto to be severable from the other provisions of this Agreement and to survive and not be merged into such judgment. k. Time of the Essence. With regard to all dates and time periods set forth or referred to in this Agreement, time is of the essence. l. Confidentiality; Publicity. The parties acknowledge that the transaction described herein is of a confidential nature and shall not be disclosed prior to the Closing except to consultants, and advisors, or as required by law. None of the parties hereto shall make any public disclosure of the terms of this Agreement prior to the Closing, except as required by law, such requirement to substantiated by a written opinion of counsel. The parties shall endeavor to make only those press releases or other public disclosures as are required by law; provided, however, that no press release or other public disclosure shall be made without a minimum of hours' prior consultation with the other parties. m. Construction. The construction of this Agreement shall not take into consideration the party who drafted or whose representative drafted any portion of this Agreement, and no canon of construction shall be applied that resolves ambiguities against the drafter of a document. The parties acknowledge that they were advised by competent counsel that each has chosen to represent such party and each party has had a full opportunity to comment upon and negotiate the terms of this Agreement. The language used in this Agreement shall be deemed to be [is] the language chosen by the parties hereto to express their mutual intent as a result of arm's length bargaining. n. Finder's Fee and Broker's Fees. The Corporation and Buyer hereto represents and warrants that it has retained no finder or broker in connection with the transactions by this Agreement, and hereby agrees to indemnify and to hold the other harmless from any liability for any finder's or broker's fee to any broker or other person or firm (and the cost and expenses of defending against such liability or asserted liability) for which such indemnifying per, or any of its employees or representatives, are responsible. o. Titles and Subtitles. The titles of the Sections and subsections of this Agreement are for the convenience of reference only and are to be considered in construing this Agreement. p. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be original, but all of which together shall constitute one instrument. q. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year hereinabove first written. "CORPORATION" ENFACET, INC. By:_____________________________________ Vasu Vijayaraghavan, President 1524 S. IH 35, Suite 312 Austin, TX 78704 "BUYER" VERTICAL COMPUTER SYSTEMS, INC. By:_____________________________________ Richard Wade, President 6336 Wilshire Blvd. Los Angeles, CA 90048 (323) 658-4205 EX-10.5 10 ex10-5.txt AGREEMENT DATED AUGUST 24, 2001 Exhibit 10.5 Agreement Between Enfacet and the Company, dated August 24, 2001 August 24, 2001 Vasu Vijayaraghavan, President ENFACET, INC. 1524 S. IH 35, Suite 312 Austin, TX 78704 Re: Vertical Computer Systems, Inc. Stock Purchase Dear Vasu: This letter will confirm that with respect to Vertical Computer Systems, Inc.'s ("Vertical") purchase of one hundred percent (100%) of the outstanding and issued stock of Enfacet, Inc. ("Enfacet"), pursuant to that certain Stock Purchase Agreement, by and between Vertical and Enfacet, dated as of August 21, 2001 (the "SPA"), we have agreed to the following additional terms: 1. Vertical shall transfer to Enfacet by Monday, August 24, 2001, the sum of FIVE THOUSAND DOLLARS (US $5,000.00) for its short term cash flow needs; 2. Next week, after Vertical has received its anticipated interim financing, Vertical will transfer to Enfacet an additional TWENTY-FIVE THOUSAND DOLLARS (US $25,000.00) for its short term cash flow needs; 3. On or after August 20, 2002 (the "Anniversary Date"), Enfacet shall distribute one-half of the 30,000 shares Vertical Preferred Series C Stock, received in consideration of the execution of the SPA, to those Enfacet employees employed by Enfacet on the Anniversary Date ("Initial Employees")who were employed continuously by Enfacet from the date of execution of the SPA to and through the Anniversary Date; the remaining 15,000 shares of Vertical Preferred Series C Stock will be used for additional funding or similar purposes, at a later date, by EnFacet's current management. 4. Vertical shall issue to the Initial Employees employed with Enfacet after Ninety days from the execution of the SPA options or warrants for the total of FIVE MILLION (5,000,000) shares of Vertical's common stock, at (current market price as on 8/24/01) of $0.0250 (the "Options"). A portion of these shares shall be in the form of registered/free trading shares. These shall be covered under the standard Vertical leak-out agreement. The Options shall be distributed to such eligible Initial Employees in accordance with a plan submitted by you and approved by Vertical. The SPA shall not otherwise be modified. By executing a copy of this letter, you hereby indicated you acknowledged and agreement to the terms outlined herein. Sincerely, VERTICAL COMPUTER SYSTEMS, INC. By: ____________________________________ Richard Wade, President ACKNOWLEDGED, ACCEPTED AND AGREED: ENFACET, INC. By: ____________________________________ Vasu Vijayaraghavan, President -----END PRIVACY-ENHANCED MESSAGE-----