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The following is an excerpt from a 10KSB SEC Filing, filed by VERTICAL COMPUTER SYSTEMS INC on 3/31/2005.
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VERTICAL COMPUTER SYSTEMS INC - 10KSB - 20050331 - PART_I

PART I

ITEM 1. DESCRIPTION OF BUSINESS

Vertical Computer Systems, Inc. ("Vertical" or the "Company) was incorporated in the State of Delaware in March 1992. The Company operated as a non-reporting public shell company, with a wholly owned subsidiary, which was sold at the time of acquiring Externet World, Inc. In October 1999, the Company acquired all the outstanding capital stock of Externet World, an Internet service provider ("ISP"), and became an operating entity. In December 1999, the Company acquired the Web technology of Emily Solutions. The Emily framework consists of executable programs, files, configuration data and documentation needed to create websites that communicate via Extensible Markup Language ("XML") and Hypertext Transfer Protocol ("HTTP"). In April 2000, the Company acquired 100% of the outstanding common stock of Scientific Fuel Technology, Inc., ("SFT"), a company with no operations. In connection with this acquisition, the Company issued 2,000,000 shares of common stock of the Company to the former SFT shareholders. Also in April 2000, the Company merged SFT into the Company. In connection with the merger, the outstanding shares of SFT were cancelled, the Company became the surviving entity, and the Company assumed SFT's reporting obligations under successor issuer status pursuant to Section 12g-3(a) under the Securities Exchange Act of 1934, as amended (the "1934 Act").

In May 2000, the Company acquired Globalfare.com, Inc. (Globalfare). In April 2003, Globalfare, entered into a services agreement whereby Globalfare would provide fulfillment services for all leisure travel services booked through the Zegato Services Concourse, for a commission on all sales. In March 2003, Globalfare entered into an agreement with Picasso Travel, Inc. (Picasso) to provide the fulfillment requirement for the Zegato agreement.

Also in May 2000, the Company paid $400,000 to acquire a 2.5% equity interest in iNetPurchasing, Inc. ("iNet"), and another $100,000 to receive a royalty on all iNetPurchasing transactions for 20 years.

In June 2000, the Company acquired Pointmail.com, Inc.

In October 2000, the Company agreed to provide $250,000 in funding to TranStar Systems, Inc. (TranStar), formerly Apollo Industries, Inc., a Nevada corporation, in exchange for a 30% equity interest. In April 2003, the Company and Mike Radlovic (Radlovic) entered into an agreement whereby Radlovic would purchase the Company's interest in TranStar. Pursuant to this agreement, the Company transferred all of its ownership representing 3,000,000 shares of TranStar common stock to Radlovic. In consideration of this sale, Radlovic issued a $250,000 note bearing interest at 10% per annum due in April 2007. The note is secured by 5,000,000 shares of TranStar common stock. Radlovic is currently the President, CEO, and a major shareholder of TranStar. In October 2000, in consideration for $25,000 from the Company, TranStar agreed to pay a royalty of 2% of all transaction fees up to $275,000 and 1% up to $3,000,000. In June 2002, Apollo Industries, Inc. changed is name to TranStar Services, Inc. In April 2003, the Company and TranStar Systems, Inc. (TranStar) agreed to amend two $24,000 promissory notes bearing interest at 10% payable to the Company by TranStar, dated April 19 and May 8, 2001, as well as the royalty agreement, dated October 14, 2000. As part of the purchase by Radlovic of the Company's TranStar ownership interest, the due date for the two $24,000 notes was extended to April 5, 2006. The royalty rate in the royalty agreement dated October 2000 was increased to 3% of any transaction fees and any other revenues generated in perpetuity. In August 2004, the Company accepted an $8,000 payment from TranStar in full satisfaction of one of the $24,000 loans and the Company cancelled the note and returned 500,000 TranStar's shares held as collateral. In connection with April 2003 transactions, TranStar also released and indemnified the Company from any obligations owed to TranStar or any third party.

On February 28, 2001, the Company invested $1,000,000 to obtain a 60 % majority interest in Now Solutions, Inc. ("Now Solutions"). In order to facilitate the financing process, the Company had pledged a $1,500,000 deposit as collateral pursuant to a deposit pledge agreement to guarantee the payments of the loan to finance the purchase of Human Resource Information System ("HRIS"). In March 2001, Now Solutions acquired the Renaissance CS(R) Human Resources and Payroll assets from Ross Systems, Inc. ("Ross") for $6,100,000 and financed the purchase with a $5,500,000 loan from Coast Bank. The Renaissance Payroll System, which serves small and growing businesses, was a human resources software system and used by over 150 companies in North America. In April 2002 the Company took control of the Executive Committee of Now Solutions by appointing the fifth representative thus giving the Company three representatives on the five member board.

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In January 2004, in connection with settlement of certain disputes, the Company purchased from the largest minority owner of Now Solutions, Arglen Acquisitions LLC ("Arglen") its 35% interest in Now Solutions for $1,400,000 in the form of a note and 20,000,000 unregistered shares of common stock of the Company, subject to registration rights and a "lock up" provision. The Company's purchase of Arglen's interest resulted in the Company recognizing $1,680,000 of goodwill, which was written off in 2004. The $1,400,000 was payable as follows:
(a) $800,000, which was paid at the closing and (b) $600,000, pursuant to a non-interest bearing secured promissory note providing for payments of $200,000 in April 2004, $100,000 in June 2004, and $300,000 in September 2004, which was issued at closing. When the Company did not make the April 2004 payment under the note, the Company began accruing interest under the note at the rate of 10% from its inception. Arglen bought suit to enforce the terms of the note and in August 2004, Arglen obtained a default judgment in Los Angeles court for the outstanding principal, plus attorney's fees and interest. The Company filed a motion in the Delaware court to stay the enforcement of the judgment pending resolution of the Delaware action. Pursuant to a settlement agreement between the Company and Arglen, the Company cancelled warrants to purchase 80,763,943 common shares of the Company that were issued to Arglen in connection with the Company's acquisition of its 60% majority interest in Now Solutions. In December 2004, the Company recorded the expense of issuing 5,000,000 unregistered shares to Arglen at a fair market value of $82,273. These shares were issued pursuant to Arglen's settlement agreement whereby the Company was obligated to issue 5,000,000 unregistered shares of common stock of the Company to Arglen, due to the Company's failure to file a registration statement within 180 days from the closing date of the settlement. In March 2005, the Company issued the 5,000,000 shares to Arglen. In January 2004, the Company purchased the remaining 5% minority interest in Now Solutions from Stephen Parnes for $77,000 and 1,000,000 unregistered shares of the Company's common stock, which is subject to "piggy back" registration rights and a "lock up" provision. This transaction resulted in the Company recognizing $80,000 of goodwill, which was written off in 2004. In March 2004, Now Solutions, LLC was converted into a corporation named Now Solutions, Inc.

In May 2001, the Company paid $2,500 and issued 3-year warrants to purchase 1,000,000 shares of common stock at a strike price of $0.05 per share for exclusive licensing rights to a patent-pending fiber optics technology application created and owned by Aluizio Cruz. The United States Patent and Trademark Office (the "USPTO") granted a patent (No. 6,718,103) for an invention for "Transmission of Images over a Single Filament Fiber Optic Cable" in April 2004 in connection with this fiber optics technology application.

In August 2001, the Company acquired EnFacet, Inc. ("EnFacet")

In November 2001, the Company acquired certain assets of Adhesive Software, including the SiteFlash technology. EnFacet sold two products, NewsFlash, which catered to the publishing industry and newspapers in particular, and SiteFlash, an affiliation/syndication Web product). The Company continues to develop and market its other SiteFlash based products - ResponseFlash, AffiliateFlash, and UniversityFlash. In April 2003, the Company entered into a software reseller agreement with Infotec, Inc., a Japanese systems integrator and outsourcer to market SiteFlash's dynamic web content management product in Japan. On November 30, 2004, the USPTO granted a patent (No. 6,826,744) for an invention for "System and Method for Generating Web Sites in an Arbitrary Object Framework". This patent is the foundation of SiteFlash(TM), and forms the basis of the ResponseFlash(TM), NewsFlash(TM), UniversityFlash(TM) and AffiliateFlash(TM) products.

In November 2001, the Company entered into a license agreement with iNet whereby it licensed the Emily software and technology for use in connection with iNet's e-procurement system in Texas, Maine and Idaho.

In October 2002, the Company's wholly owned subsidiary, Emily Solutions, Inc., a Nevada corporation, changed its name to Government Internet Systems, Inc. ("GIS"). The Company is licensing its proprietary technology ResponseFlash for use by GIS. GIS will market and distribute ResponseFlash and other technologies to government entities of the United States.

In February 2004, the Company purchased a 21% ownership interest in MedData Solutions, Inc. ("MedData") for 9,000,000 unregistered shares of common stock of the Company. Since the Company could not ascertain the fair market value of MedData, the investment was written off in 2004. MedData is a provider of Internet and Palm-based software for real-time emergency medical services ("EMS") and trauma data management.

In August 2004, the Company licensed the use of the Forums and calendar applications of the Company's SiteFlash technology to Basix1, Inc. ("Basix1") for use in Basix1's Enterprise Knowledge Gateway ("EKG") software. Pursuant to the terms of the license, Basix1 is obligated to pay the Company 10% of all license fees generated from the exploitation Basix1's EKG software. Mr. Kensicki is a Director of GIS and of Now Solutions, Inc. and the President of Basix1.

During 2004, the Company and its subsidiaries have entered into various marketing and co-marketing agreements with Total Care Solutions, InfraHealth, Inc. and Basix1. The Company is refocusing its resources to capitalize on its proprietary technology through either licensing the technology to third parties or marketing the technology through subsidiaries that are funded at the subsidiary level. The Company intends to become a software developer and distributor of products through subsidiaries that will specialize in niche markets except for GIS, which will market the ResponseFlash and other products particularly those in the homeland security sector to the United States government.

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The Company's software products that are presently being sold are HRIS emPath 6.3, ResponseFlash, SiteFlash, NewsFlash, and Emily. Now Solutions is marketing its new web-based human resource payroll and information system in the United States and Canadian markets as well as launching a hosted solution. The Company intents to market its other software products in the United States, either through the Company or through its subsidiaries via agreements with national distributors.

Business Overview

The Company is a multinational provider of administrative software, internet core technologies, and derivative software application products through its distribution network. The Company's main administrative software product is emPath 6.3, which is developed and distributed by Now Solutions, Inc., the Company's subsidiary. The Company's primary internet core technologies include SiteFlash and the Emily XML Scripting Language, which can be used to build web services. The Company attempts to acquire and operate companies whose products, in the Company's belief: are proven and best of the breed; are profitable or on the path to profitability; complement each other; and provide cross-product distribution channels. The Company's ownership interest is typically a controlling interest. The Company's business model combines complementary, integrated software products, internet core technologies, and a multinational distribution system of partners, in order to create a distribution matrix that we believe is capable of penetrating multiple sectors through cross promotion.

The Company's current products address the following market segments:

MARKET                                       PRODUCT             OWNERSHIP            LICENSEE
------                                       -------             ---------            --------
Human Resources and Payroll                  emPath 6.3          Now Solutions        Now Solutions
Large Corporations and Universities          SiteFlash           Vertical Computer    Vertical Computer
Government Sector- Emergency Response        ResponseFlash       Vertical Computer    GIS
Publishing Content                           NewsFlash           Vertical Computer    EnFacet
Emily XML Scripting Language                 Emily               Vertical Computer    VIS

Administrative Software

The Company's primary administrative software technology is emPath 6.3, a human resources/payroll software, which is developed, marketed and maintained by its subsidiary, Now Solutions. The Company's administrative software is web-based, meaning that it can be accessed on the Internet, and exploratory analysis is being done to develop an application service provider application for emPath 6.3. 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.

Internet Core Technologies

Internet core technologies provide the software foundation to support internet-based platforms for the delivery of individual software products that can be sold independently or combined with another software product for rapid deployment of all software products throughout the Company's distribution system. The Company acquired its internet core technologies, continuing to develop specialized software applications that the Company can utilize in new products.

The Company's primary core internet technology is SiteFlash. The SiteFlash technology utilizes XML and publishes content on the web, enabling the user to build and efficiently operate websites with the unique ability to separate form, function, and content. SiteFlash uses an advanced component-based structure to separate, parse, and store the various components of even the most complex web pages, which permits these components to be named, organized, filed and eventually redeployed onto the web pages of a website. Once all of the components of the web page are converted into "objects," they can be grouped, as required by the user, into the three main types of web page components: content, form and function. Content consists of text, pictures or multimedia. Form includes graphics and web site colors, layout and design. Function refers to the activities performed by or actions executed on the website. In this way, each element of a web site created using SiteFlash is interchangeable with any other similar element, and these elements may be grouped together in almost any combination to create complex web sites. This separation of form, function, and content also allows for the rapid creation of affiliated websites. This unique ability is patented (U.S. Patent number 6,826,744) and has many applications in the web arena.

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The Company offers SiteFlash as a stand-alone product and also as a technology platform for products targeted at specific vertical markets. The SiteFlash technology focuses on content management, e-commerce, and workflow and has led to the development of two additional software application products:
ResponseFlash and NewsFlash. ResponseFlash has been installed and approved and is currently being implemented by the Metropolitan Emergency Communications Agency in Marion County, which includes Indianapolis, Indiana. NewsFlash is used by newspapers (e.g. La Opinion and Japan's Hochi), UniversityFlash is being used in higher education (e.g., California State Fullerton University), and SiteFlash is used by consulting organizations for resale (e.g., Infotec in Japan). SiteFlash architectural concepts enable integration with existing technological components within many organizations. Additional key features that differentiate SiteFlash from other products are its affiliation/syndication capability, its multi-lingual capability and its multi-modal (any output device including PDAs, wireless phones, etc) framework. Initially, Government Internet Systems, a majority owned subsidiary of the Company, will focus in marketing ResponseFlash, a web based emergency communication system, in the homeland security area to all government sectors excluding the public education (i.e., schools, colleges, and universities).

The second core Internet technology the Company has developed is the patent-pending Emily XML scripting language, which is Java compatible. XML (Extensible Markup Language) is a flexible way to create common information formats and share both the format and the date on the World Wide Web, intranets, and elsewhere.

BUSINESS OPERATIONS AND DIVISIONS

The Company markets SiteFlash directly. SiteFlash is a technology that provides dynamic web content management, e-commerce and workflow. SiteFlash allows for massive affiliation/replication/syndication of content and application services and has both multi-lingual and multi-modal capabilities (meaning it is accessible through any output device, including computers, cell phones, blackberry pagers, and PDAs). This core product is rooted in a patented (US Patent number 6,826,744) technology that layers the web site into three distinct components - form, function and content. SiteFlash then allows an arbitrary combination of these components - which means that re-usability of code, graphical user interface ("GUI") elements and content can be increased, without significant additional programming. SiteFlash is XML-enabled and easily integrates with diverse software systems that may exist in the target environment. In addition, the Company continues to develop and market its other SiteFlash based products: ResponseFlash, NewsFlash, AffiliateFlash, and UniversityFlash. The Company intends to market ResponseFlash through its subsidiary GIS and NewsFlash through its subsidiary EnFacet.

The Company's business operations are grouped into the following divisions: Now Solutions, GIS, Vertical Internet Solutions ("VIS"), EnFacet, Globalfare.com ("Globalfare"), Pointmail, minority and other limited interests, joint ventures, and strategic partnerships. Each of these divisions is discussed below.

Now Solutions, Inc.

On February 28, 2001, the Company acquired 60% of Now Solutions, a Delaware corporation which develops and maintains human resource software. The remaining 40% of Now Solutions was purchased from Arglen and Stephen Parnes in 2004 as described above.

In March 2001, Now Solutions purchased the rights to HRIS and various other assets and liabilities relating to HRIS fromRoss in exchange for approximately $5,100,000 in cash and a promissory note of $1,000,000.

Now Solutions is a company specializing in end-to-end, fully integrated human resource and payroll solutions to large and mid-size companies. Now Solutions has over 120 clients, encompassing private businesses to governmental agencies, who typically employ 500 or more employees. Now Solutions has recently released a new version of their product offering called "emPath 6.3", which handles complex human resource and payroll situations where the clients may have employees from different unions, multiple state locations, and intricate compensation circumstances. The Company believes that the competitive advantage of emPath 6.3 is its speed of implementation through a formula-builder technology, which may increase the customer's return on investment. Now Solutions' product suite is targeted to address the needs of management in today's dynamic business environment and gives organizations a "user friendly" and flexible software solution, without the multi-million dollar implementation budgets of the major competitors.

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The existing revenue model of Now Solutions is based upon three components: licensing fees, professional consulting services, and renewable maintenance fees. However, Now Solutions intends to offer its software on an application service provider ("ASP") model in order to be able to service small customers, which management believes will increase the market reach of its products. When this is implemented, Now Solutions plans to collect service fees associated with this service.

For the twelve months ended December 31, 2004, Now Solutions had approximately $3,700,000 of total assets, revenues of approximately $6,300,000 and a net loss of approximately $423,000.

Government Internet Systems, Inc.

The Company's 85% owned subsidiary, GIS, a Nevada corporation was formerly Emily Solutions, Inc. The Company will license its proprietary technology, ResponseFlash, to GIS to market and distribute this technology to government entities (excluding state universities and schools) in the United States. GIS seeks to enter into agreements to distribute other non-Company products particularly in the homeland security sector. GIS has already entered into co-marketing agreements with Basix1 and InfraHealth. The Company has completed development and installation of ResponseFlash for the Metropolitan Emergency Communications Agency, Indiana. The Company is in the process of submitting proposals to various city, county and state governments.

For the twelve months ended December 31, 2004, GIS had no assets and no material revenue or expenses.

Vertical Internet Solutions, Inc

VIS., a California corporation, is a wholly-owned subsidiary of the Company formed in May 2000. The Company acquired the rights to Emily Solutions Web technology in December 1999. The Emily Solutions' work platform, "the Emily Framework", consists of executable programs, files, configuration data and documentation needed to create Web-based applications that communicate via XML and HTTP. HTTP is the set of rules for exchanging files (text, graphic images, sound, video, and other multimedia files) on the Web. The Emily Framework was developed to be an engineering package comparable to other Web development tools, such as Allaire Cold Fusion or Microsoft FrontPage. The primary component of the Emily Framework is Markup Language Executive ("MLE"), a programming language that runs on Windows, Linux and several UNIX platforms. The Emily scripting language has been enabled to work on Java. The Company has various patents pending on the Emily technology. Emily's marketing is currently on hold.

For the twelve months ended December 31, 2004, VIS had no assets and no material revenue or expenses.

EnFacet, Inc.

EnFacet is a software-products company that markets NewsFlash. NewsFlash is based on SiteFlash, which is a patented (US patent number 6,826,744) technology. NewsFlash caters to the publishing industry and newspapers in particular.

For the twelve months ended December 31, 2004, EnFacet had no material assets, revenue of $4,000, and a net loss of approximately $32,000.

Globalfare.com

In May 2000, the Company acquired Globalfare. After the terrorist attacks at the World Trade Center, the Company had suspended website and travel fulfillment operations. In April 2003, Globalfare entered into a services agreement whereby Globalfare would provide fulfillment services for all leisure travel services booked through the Zegato Services Concourse, for a commission on all sales. In March 2003, Globalfare entered into an agreement with Picasso Travel, Inc. (Picasso) to provide the fulfillment requirement for the Zegato agreement. The interface between Picasso and Zegato became operational in November 2004.

For the twelve months ended December 31, 2004, Globalfare.com had no assets, no revenue and no expenses.

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Pointmail.com, Inc.

In June 2000, the Company acquired Pointmail, which owned a web based e-mail software, to compliment the Company's existing "ThePostmaster.Net" Internet email service. "ThePostmaster.Net" is currently inactive and the Company has no plans for "ThePostmaster.Net" at this time.

For the twelve months ended December 31, 2004, Pointmail.com had no assets, no revenues and no expenses.

Minority Interests and Royalty Interests

MedData Solutions, Inc.

In February 2004, the Company purchased a 21% ownership interest in MedData from Robert Farias, who is currently a director of Now Solutions. MedData is a provider of Internet and Palm-based software for real-time EMS and trauma data management.

Basix1, Inc.

In August 2004, the Company licensed the use of the Forums and calendar applications of the Company's SiteFlash technology to Basix1 for use in Basix1's EKG software. Pursuant to the terms of the license, Basix1 is obligated to pay the Company 10% of all license fees generated from the exploitation Basix1's EKG software. Also in August 2004, the Company and its subsidiaries have entered into various marketing and co-marketing agreements with Basix1. Mr. Chuck Kensicki, the President of Basix1, is currently a Director of GIS and of Now Solutions, Inc.

iNet Purchasing, Inc.

In May 2000, the Company acquired a 2.5% minority interest in iNet and is entitled to a royalty on all iNet transactions for 20 years. iNet, based in Bethesda, Maryland, is a developer of Internet-based procurement services targeted at the specific needs of public sector purchasing in the state and local government arena through PublicBuy.net. In November 2001, the Company entered into a license agreement with iNet, where the Emily software and technology were licensed for use in connection with iNet's e-procurement system in Texas, Maine, and Idaho in exchange for a 20% commission on subscription fees. The Company is entitled to retain the entire $495 sales price for sales to any vendors., although no royalties have been received from iNet as of March 29, 2005.

As of December 31, 2004, all of the iNet investments and advances paid for royalties were fully reserved. There have been no revenues or expenses in relation to the investments for the twelve months ended December 31, 2004.

TranStar, Inc.

TranStar, formerly Apollo, is based in Claremont, California. TranStar is a systems integrator and consulting firm that is establishing an e-business platform focused on multiple-application smart card based solutions for credit, debit and other high volume informational transactions with a large customer base.

As of December 31, 2004, the investment in notes receivable and all of the advances paid to TranStar for royalties have been fully reserved. No royalties have been received from TranStar as of March 29, 2005.

Joint Ventures

ZAP Quote, S.A. In March 2000, the Company entered into two joint ventures with ZAP Quote, S.A. ("Zap") Both joint venture ownerships are held 50% by the Company and 50% by ZAP. As of March 29, 2005, neither joint venture is operational.

Wireless Learning Systems, LLC. In June 2001, Epsylon Technologies, Taurus Global, LLC and the Company formed Wireless Learning Systems, LLC ("Wireless Learning"), which was formulating plans to develop wireless solutions for schools to support teacher and student wireless educational systems. As of March 29, 2005, this joint venture is not operational.

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For the twelve months ended December 31, 2004, all of the joint venture investments are fully reserved. There have been no revenues or expenses in relation to the investments for the twelve months ended December 31, 2004.

Software Distributors and Strategic Marketing Alliances

Infotec, Inc. In April 2003, the Company and Infotec, Inc., a Japanese corporation entered into a software reseller agreement whereby Infotec agreed to market, distribute, provide maintenance and technical support for the Company's SiteFlash software in the territory of Japan and pay the Company a fee on all sales and maintenance fees.

Defense Solutions, LLC. In November 2002, GIS, a majority owned subsidiary of the Company, and Defense Solutions, L.L.C., entered into an agreement whereby Defense Solutions agreed to assist in the marketing of the its web based emergency response management products and services to federal, state, and local governments of the United States in exchange for one seat on GIS's Board of Directors, and a fifteen percent commission on all contracts and first year maintenance fees from any United State's government, non-government, or commercial enterprise or organization resulting from a contact initiated by Defense Solutions. In connection with this agreement, the Company issued 3-year warrants to purchase 4,000,000 shares of the Company's common stock at a strike price of $0.0075.

During 2004, the Company, GIS and Now Solutions entered into marketing agreements with Total Care Technologies, Basix1, and InfraHealth, Inc. The Company has also retained consultants to advise the Company regarding the government sector.

Competition

In general, the Company has substantial competition from software and hardware vendors, system integrators, and multinational corporations focused upon information technology. Now Solutions' competitors include PeopleSoft, Oracle, Lawson, Cyborg/Hewitt, Kronos, DLGL, Ultimate and SAP. The Company's competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than the Company. The Company cannot guarantee that it will be able to compete successfully against current or future competitors or that competitive pressures will not have a material and adverse effect on the Company's financial position, results of operations and cash flows.

The Company's ability to compete will also depend upon its ability to continually improve its products and services, the enhancements the Company develops, the quality of its customer service, and the ease of use, performance, price and reliability of its products and services.

Strategic Overview

The Company believes that each of Vertical's business units has distinct marketing advantages for the niche markets they serve. The Company plans to find national marketers, such as Defense Solutions, LLC, and international resellers such as Infotec, who can commercially exploit the Company's products in these niche markets. By utilizing the strategic advantages each individual business unit possesses, the Company plans to leverage its strengths and exploit the network of customers, vendors, and support agencies that the Company has built. The Company has three business units in North America (Now Solutions, GIS, Globalfare) that focus either in a selective targeted market like GIS does for the federal governmental market with ResponseFlash or with marketing a best-of-breed software product to all potential markets such as Now Solutions. The Company currently seeks to use a combination of direct marketing and strategic partnerships to commercially exploit its products derived from SiteFlash, namely NewsFlash, UniversityFlash, and AffiliateFlash. In this way the Company hopes to define the best potential markets for its SiteFlash products, and then license the product to one of the Company's subsidiaries to exploit. At this time, the Company has placed both its Emily software and international bridge network on hold while it concentrates on these immediate opportunities within its existing business units.

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One of the Company's strategies is to enter into co-marketing agreements with other companies, particularly those with best-of-breed products that compliment its business units. The existing strategy with potential co-marketing partners is to segregate the co marketing agreements whereby each business unit will have a separate agreement with the co- marketing partner for their particularly target market. For example, Basix1 and InfraHealth have separate agreements with Now Solutions and GIS and the Company. Additionally, the business units will enter into agreements with each other where the opportunity exist to cross-promote/market their products. For example GIS will promote Now Solutions' products to federal governmental agencies.

The Company believes it possesses certain competitive advantages because of its proprietary software, including the recently issued patent for SiteFlash. The Company is exploring various opportunities to exploit the proprietary software, which includes the possibility of licensing the software to major companies in non-competitive niche markets.

Although the Company's current marketing effort focuses upon several sectors, it has recently concentrated on the United States government for the following reasons: (i) companies which it either controls or is affiliated with have government clients which has created the potential to cross-promote/market the Company's products and web services; (ii) products which are suited to the current governmental environment demanding for cross-agency and federal, state and local interface like ResponseFlash; and (iii) the increased security environment caused by the terrorist attacks of September 11, 2001 necessitates improvements in secure communications and agency-to-agency contacts that can be facilitated by ResponseFlash.

Proprietary Rights

The Company relies upon a combination of contract provisions and patent, copyright, trademark and trade secret laws to protect its proprietary rights in its products and services. The Company distributes its products and services under agreements that grant users or customers a license to use its products and services and relies on the protections afforded by the copyright laws to protect against the unauthorized reproduction of its products. In addition, the Company protects its trade secrets and other proprietary information through agreements with employees and consultants. Now Solutions' emPath software technology is protected by copyright and trademark. The USPTO granted a patent (No. 6,718,103) for an invention for "Transmission of Images over a Single Filament Fiber Optic Cable" in April 2004. This patent is in a theoretical stage only and is intended to be used for transmitting images on fiber optics that might improve in orders of magnitude today's capacity of fiber optics to transmit images and data. The Company has filed for a Continuation in Part for patent number 6,718,103 to pursue possible additional derivative patents. The USPTO granted a patent (No. 6,826,744) for an invention for "System and Method for Generating Web Sites in an Arbitrary Object Framework" on November 30, 2004. The Company has filed for a Continuation in Part for patent number 6,826,744 to pursue possible additional derivative patents. This patent is the foundation of Vertical's product, SiteFlash(TM), and forms the basis of the ResponseFlash(TM), NewsFlash(TM), UniversityFlash(TM) and AffiliateFlash(TM) products. In addition, the Company has also filed for a number of patents related to Emily: (a) one patent application related to the Emily programming language; (b) one patent application related to the Emily XML Enabler Agent and Emily XML Broker. The patent application for the Emily XML Scripting Language was published in February 2003.

Although the Company intends to protect its rights as described above, there can be no assurance that these measures will be successful. Policing unauthorized use of Vertical's products and services is difficult and the steps taken may not prevent the misappropriation of its technology and intellectual property rights. In addition, effective patent, trademark, trade secret and copyright protection may be unavailable or limited in certain foreign countries. The Company seeks to protect the source code of its products as a trade secret and as an unpublished copyright work. Source code for certain products has been or will be published in order to obtain patent protection or to register copyright in such source code. The Company believes that its products, trademarks and other proprietary rights do not infringe on the proprietary rights of third parties. There can be no assurance that third parties will not assert infringement claims against the Company in the future with respect to current or future features or contents of services or products or that any such assertion may not result in litigation or require the Company to enter into royalty arrangements.

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Regulatory Environment; Public Policy

In the United States and most countries in which the Company conducts its operations, the Company is generally not regulated other than pursuant to laws applicable to businesses in general and value-added services specifically. In some countries, the Company is subject to specific laws regulating the availability of certain material related to, or to the obtaining of, personal information. Adverse developments in the legal or regulatory environment relating to the interactive online services and Internet industry in the United States, Europe, Asia, Latin America or elsewhere could have a material adverse effect on the Company business, financial condition and operating results. A number of legislative and regulatory proposals from various international bodies and foreign and domestic governments in the areas of telecommunications regulation, particularly related to the infrastructures on which the Internet rests, access charges, encryption standards and related export controls, content regulation, consumer protection, advertising, intellectual property, privacy, electronic commerce, and taxation, tariff and other trade barriers, among others, have been adopted or are now under consideration. The Company is unable at this time to predict which, if any, of the proposals under consideration may be adopted and, with respect to proposals that have been or will be adopted, whether they will have a beneficial or an adverse effect on the Company's business, financial condition and operating results.

Employees

As of March 29, 2005, the Company has 25 full-time employees, 1 part-time employee and 21 consultants, of which 21 full-time employees and 1 part-time employee is employed at Now Solutions (of which 14 are employed in the United States and 7 are employed in Canada).. The Company is not a party to any collective bargaining agreements.

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ITEM 2. DESCRIPTION OF PROPERTY

The Company and Now Solution's headquarters are currently located at 201 Main Street, Suite 1175, Fort Worth, Texas, and comprises approximately 3,450 square feet. In addition, Now Solutions has an office at 6205 Airport Road, Building B, Suite 100, Mississauga, Ontario, Canada, which comprises 2,800 square feet. All of the locations are leased from third parties and the premises are in good condition. The Company believes that its facilities are adequate for its present needs and its near term growth, and that additional facilities will be available at acceptable rates as the Company needs them. The Company's other subsidiaries may be reached through the Company's Texas headquarters.

ITEM 3. LEGAL PROCEEDINGS

The Company is, from time to time, involved in various lawsuits. In the opinion of management, the ultimate resolution of these matters, if any, may have a significant effect on the financial position, operations or cash flows of the Company.

In addition, the Company is involved in the following additional ongoing matters:

In February 2003, the Company filed a lawsuit and a derivative action in New York Supreme Court Case against defendants Ross Systems, Inc. ("Ross"), Arglen Acquisitions, LLC ("Arglen"), James Patrick Tinley ("Tinley"), and Garry Gyselen ("Gyselen"). The Company filed a derivative action on behalf of its subsidiary Now Solutions when Arglen refused to authorize a lawsuit against any parties who were alleged to have acted against the best interest of Now Solutions. In conjunction with the Company's claim, Now Solutions withheld its payments on the remaining $750,000 note that was due in February 2003 in connection with the acquisition of Ross against the unpaid maintenance fees and gave notice in February 2003 to Ross of Now Solutions' claim of offset. Now Solutions claimed a total amount of approximately $3,562,000 to offset against the note, plus other damages. The Company's original claims sought damages and equitable relief arising out of actions of the defendants constituting breach of contract, fraud, conspiracy and breach of fiduciary duty in connection with certain transactions entered into between Ross and Now Solutions; Ross and Arglen; Arglen and Now Solutions; Gyselen and Now Solutions; and the Company and Arglen.

This action concerns offsets of payment on the note payable to Ross by the maintenance fee charged by Now Solutions to Ross to which Now Solutions was entitled per the asset purchase agreement between Now Solutions and Ross regarding the HRIS assets Now Solutions purchased from Ross in 2001; an undisclosed transaction between Ross and Gyselen around the time of the purchase of these assets; and the failure of Gyselen to enforce the offset provisions which caused Coast Business Credit to declare Now Solutions in default of the $5,500,000 loan to purchase the HRIS asset from Ross covenant in 2001 (which has since been cured). In November 2003, the New York Supreme Court dismissed all claims against Ross and Tinley and stayed the Derivative Action against Arglen and Gyselen pending conclusion of the Arbitration. The portion of the lawsuit involving Arglen and Gyselen was settled in December 2003 and, pursuant to the settlement, dismissed in February 2004. The court dismissed the entire action against Ross and Tinley. The Company appealed the decision with regard to its claim for breach of contract for Ross' failure to give the proper maintenance fee adjustment. On June 1, 2004, the appeal of the dismissal of the action against Ross was submitted to the court for decision. On appeal, the claims against Ross were reinstated pursuant to the order of the Appellate Division, dated October 26, 2004. In November 2004, Ross filed an answer containing affirmative defenses in the Derivative Action.

In March 2003, Ross commenced an action in New York Supreme Court by filing a motion for summary judgment in lieu of complaint against Now Solutions to collect the note payable in the amount of $750,000 plus 10% interest. In August 2003, the New York Supreme Court denied the motion and dismissed Ross's action without prejudice. In October 2003, the motion of Ross for reargument was denied. Ross appealed the August 2003 court order, but subsequently abandoned its appeal.

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In December 2003, the Company settled its arbitration and litigation with Arglen, a minority partner of Now Solutions, regarding issues related to Now Solutions. The settlement resolved various allegations by the Company and Arglen concerning violations of Now Solutions' Operating Agreement. The arbitration has been dismissed and any actions with respect to Arglen and Gary Gyselen and the Company and its related parties, including Now Solutions, were also dismissed, except that the California Superior Court, Los Angeles County retained jurisdiction regarding the terms of the settlement between the parties. In February 2004, the Company completed the settlement with Arglen. Pursuant to the terms of the settlement, the Company purchased Arglen's interest in Now Solutions for $1,400,000 as follows: (a) $800,000, which was paid at the closing and (b) $600,000, pursuant to a non-interest bearing secured promissory note providing for payments of $200,000 in April 2004, $100,000 in June 2004, and $300,000 in September 2004, which was issued at closing. The Company's purchase of Arglen's interest resulted in the Company recognizing $1,680,000 of goodwill, which was written off in 2004. When the Company did not make the April 2004 payment, the Company began accruing interest on the note at the rate of 10% from its inception. The security interest of Now Solutions' assets on the secured promissory note is junior to Now Solutions' present indebtedness to WAMCO 32, Ltd. The note is in default. In August 2004, Arglen obtained a default judgment in Los Angeles court for the outstanding principal, plus attorney's fees and interest at the rate of 10% per annum. The Company has filed a motion in the Delaware court to stay the enforcement of the judgment pending resolution of the Delaware action. Also at the closing of the settlement, the Company cancelled 80,763,943 warrants held by Arglen and issued to Arglen 20,000,000 unregistered shares of the common stock of the Company (at a fair market value of $280,000), which is subject to a "lock up" provision. In December 2004, the Company recorded the expense of issuing 5,000,000 unregistered shares to Arglen at a fair market value of $82,273, which was based on an average share price during 11 days of August 2004. These shares were due pursuant to the settlement agreement whereby the Company was obligated to issue 5,000,000 unregistered shares of common stock of the Company to Arglen, due to its failure to file a registration statement within 180 days from the closing date of the settlement. In March 2005, the Company issued these 5,000,000 shares to Arglen.

In March 2004, Ross commenced an action in the New York Supreme Court by filing a motion for summary judgment in lieu of complaint against Now Solutions to collect the note payable in the amount of $750,000 plus 10% interest and attorneys fees. Now Solutions filed its opposition to Ross' motion, which was submitted to the court for decision on May 20, 2004. Now Solutions opposed the Ross motion and, on October 7, 2004, the Court ruled in favor of Now Solutions and denied the motion for summary judgment. Pursuant to New York State law, in the event a motion for summary judgment in lieu of complaint is denied, the action continues and the pleadings supporting the motion are deemed to constitute the complaint. Accordingly, Now Solutions filed an answer containing affirmative defenses and nine (9) counterclaims against Ross. The affirmative defenses asserted by Now Solutions include the same grounds which comprise the causes of action against Ross in the Derivative Action, namely Ross' breach of the Asset Purchase Agreement as a result of its failure to credit Now Solutions with adjustments at closing in an amount not less than $3,562,201. All of the counterclaims asserted by Now Solutions against Ross relate to the Asset Purchase Agreement and Ross' breaches thereof. The counterclaims include: (i) breach of the covenant not to compete, whereby Now Solutions seeks damages in excess of $10,000,000; (ii) breach of the covenant to deliver all assets to Now Solutions at closing, whereby Now Solutions seeks damages in an amount not less than $300,000; (iii) breach of a certain Transitional Services Agreement (executed in conjunction with the Asset Purchase Agreement), whereby Now Solutions seeks damages in an amount not less than $73,129; and (iv) reasonable attorney's fees. In December 2004, Ross filed a motion to dismiss two of Now Solutions' nine counterclaims: one which alleges that Ross and Chinadotcom used Ross to breach a covenant not to compete and the second which requested that Ross be enjoined from further competition with Now Solutions in violation of the covenant. In February 2005, Ross' motion was granted based upon a procedural default. Thereafter, Now Solutions filed a motion to vacate the default, which motion was granted thereby reinstating the two counterclaims. However, at the same hearing, Ross' motion to dismiss was granted on the merits over the objection of Now Solutions. Now Solutions intends to appeal this decision. Now Solutions' remaining seven counterclaims remain unaffected.

In March 2004, Ross commenced an action in the Court of Chancery, State of Delaware by filing a summons and complaint against the Company, Now Solutions and Arglen alleging a fraudulent transfer in connection with the Company's payment of monies to Arglen pursuant to the settlement dated December 2003. The Company and Now Solutions have filed a motion to stay the Delaware action pending the resolution of the parties' rights in Supreme Court, New York County and Appellate Division. Specifically, Ross seeks a judgment against the Company:
(i) attaching the assets transferred to Arglen pursuant to the Settlement Agreement; (ii) enjoining the Company and Now Solutions from making further transfers to Arglen pursuant to the Arglen Note; (iii) avoiding the transfers to the Company and Arglen or for judgment in the amount equivalent to the value of the asserts transferred to them pursuant to the Settlement Agreement; and (iv) appointing a receiver to take possession of the assets transferred to the Company and Arglen pursuant to the Settlement Agreement. In July 2004, the Company and Now Solutions filed a motion to stay the Delaware Action pending the resolution of the parties' rights in the Derivative Action and Ross Action. In October 2004, the motion was granted and the Delaware action has been stayed.

In January 2005, Parker, Mills, and Patel filed a lawsuit in Los Angeles Superior Court to collect the outstanding balance of $23,974 due under the promissory note issued to them by the Company and for failure to pay fees for professional services in the amount of $89,930 rendered to the Company, plus interest. In March 2005, the Company filed a demurrer.

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Matters Involving the United States Securities and Exchange Commission

In December 2004, the Company was notified by the United States Securities Exchanges Commission ("SEC") that the SEC had suspended trading of VCSY common stock for the period of December 1, 2004 through December 14, 2004 pursuant to an Order Filed by the SEC because the Company had been delinquent in its periodic filing obligations under Section 13(a) of the Securities Exchange Act of 1934, as amended, since the period ending September 30, 2003.

Also in December 2004, the Company was notified by the SEC of an administrative proceeding pursuant to the filing of an "Order Instituting Administrative Proceedings and Notice of Hearing Pursuant to Section 12(j) of the Securities Exchange Act of 1934" due to the delinquency of filing of the Form 10-KSB for the year ended 2003 and the Form 10-QSB for the first three quarters of 2004.

The Company filed its Form 10-KSB for the year ended 2003 on January 19, 2005. The Company filed its Form 10-QSB for the three months ended March 31, 2004 and its Form 10-QSB for the three months ended June 30, 2004 on March 7, 2005. The Company filed its Form 10-QSB for the three months ended September 30, 2004 on March 8, 2005.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

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BROKERAGE PARTNERS