Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Year Ended: September 30, 2002
0-15066
Commission file number
Vertex Interactive, Inc.
(Exact name of Company as specified in its charter)
New Jersey 22-2050350
(State of incorporation) (I.R.S. Employer Identification No.)
140 Route 17 North, Paramus NJ 07652
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (201) 634 - 1991
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.005 per share
Indicate by check mark whether the Company (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Company was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the Company's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
Indicate by check mark whether the Company is an accelerated filer
(as defined in Rule 12b-2 of the Act.
Yes ___ No X
As of June 30, 2003 the aggregate market value of the voting
common stock held by non-affiliates of the Company was $1,528,079
based upon the closing price of the common stock as reported on
the "Pink Sheets" on that date.
1
As of June 30, 2003 the Company had 38,201,978 shares of
Common Stock outstanding.
Preferred stock, Series "A", par value $.01 per share: 1,356,852
shares outstanding as of June 30, 2003.
Preferred stock, Series "B", par value $.01 per share: 1,000
shares outstanding as of June 30, 2003.
Preferred stock, Series "C", par value $.01 per share: 997 shares
outstanding as of June 30, 2003.
DOCUMENTS INCORPORATED BY REFERENCE:
Exhibits to the Company's Registration Statement on Form S-18 (No.33-
897-NY) filed under the Securities Act of 1933, as amended and
effective June 2, 1986, Current Reports filed on Form 8-K dated
May 14, 2002, April 9, 2002, September 7, 2001, March 2, 2001
(and amended on March 14, 2001), October 2, 2000, April 12, 2000,
and October 7, 1999, Quarterly Report on Form 10Q filed on May
20, 2002, February 20, 2002, and August 14, 2001, Annual Report
on Form 10-K filed on January 25, 2002 and December 18, 2000 and
Transition Report on Form 10K filed on January 13, 2000.
2
PART I
ITEM 1. BUSINESS
General
Vertex Interactive, Inc. ("Vertex" or "we") is a provider of
supply chain management ("SCM") technologies, including
enterprise software systems and applications, and software
integration solutions, that enable our customers to manage their
order, inventory and warehouse management needs, consultative
services, and software and hardware service and maintenance. We
serve our clients through three general product and service
lines: (1) enterprise solutions; (2) point solutions; and, (3)
service and maintenance for our products and services, including
service and maintenance of software and hardware we resell for
third parties. Our enterprise solutions include a suite of Java-
architected software applications, applications devoted to the
AS/400 customer base, as well as a portfolio of "light-directed"
systems for inventory, warehouse and distribution center
management. Our point solutions provide an array of products and
services designed to solve more specific customer needs from
managing a mobile field workforce, mobile data collection,
distributed bar code printing capabilities, compliance labeling
applications, automated card devices, software development tools
and proprietary software serving SAP R/3 users. We provide a full
range of software and hardware services and maintenance on a 24-
hour, 7-days a week, 365-days a year basis, including the
provision of wireless and wired planning and implementation
services for our customers' facilities.
We have achieved our current focused product and service
portfolio as a result of various acquisitions over the past four
years described in the "Acquisitions" section of Note 2 to the
Consolidated Financial Statements and through the sale and/or
disposal of certain businesses no longer core to the Company's
strategy over the past two years as described in the "Disposals"
Section of Note 2 to the Consolidated Financial Statements.
Our customers are able to maximize the efficiency of the flow
of inventory through their supply chains, by implementing our
integrated systems. Our customers use our software to reduce
procurement and distribution costs, and manage and control inventory
along the supply chain, thereby increasing sales and improving
customer satisfaction and loyalty. We also resell third party
software and hardware as part of our integrated solutions. We
provide service and support for all of our software and systems
from established facilities in North America.
We have sold our products and services worldwide, but now
primarily in North America, through a direct sales force and
through strategic reseller alliances with complementary
software vendors and consulting organizations. We target customers
with a need to manage high volumes of activity along their
supply chains from order intake and fulfillment, through inventory,
warehouse and distribution center management to the ultimate
delivery of goods to end users.
3
Our total revenues for the fiscal year ended September 30, 2002 were
$36.1 million, approximately 43% of which were generated by our
North American operations. For the comparable period ended
September 30, 2001 we reported $59.1 million in revenues,
approximately 51% of which were generated by our North American
operations.
Our principal executive offices are located at 140 Route 17
North, Paramus, New Jersey and its telephone number is (201) 634-
1991. The Company was organized in the State of New Jersey in
November 1974.
Outlook
The successful implementation of our business plan has required,
and will require on an ongoing basis, substantial funds to
finance (i) continuing operations, (ii) the further development
of our enterprise software technologies, (iii) expected future
operating losses, (iv) the settlement of existing liabilities,
including past due payroll obligations to its employees, officers and
directors, and (v) from time to time, selective acquisitions. We do
not anticipate reaching the point at which we generate cash in excess
of our operating expenses until December 2003 at the earliest, about
which there can be no assurance. In order to meet future
cash flow needs, we are aggressively pursuing additional
equity and debt financings including through our enterprise software
subsidiary XeQute Solutions, Inc., and continued cost cutting measures.
Historically, we have financed these activities through both equity
and debt offerings. There can be no assurance that we will
continue to be successful in these efforts. As a result there is
substantial doubt as to our ability to continue as a going
concern. (See Management's Discussion and Analysis, Liquidity
and Capital Resources.)
Throughout the fiscal year, the Company experienced continued
weakness in its core markets, continued operating losses and a
concomitant shortfall in working capital. In order to survive in
these circumstances, the Company adopted a strategy to focus on its core
enterprise level products, while selling or disposing of businesses not
key to its enterprise business to provide cash to fund continuing
operations. To this end the Company sold its TMS product line to
Pitney Bowes in April 2002; its Irish point solutions business in
May 2002; and its Netweave product line in June 2002.
By the summer of 2002, it became apparent that the sharp downturn
in capital spending in the Company's major markets was likely to
continue for the foreseeable future. This factor combined with
the continuing working capital shortfall (which had already
caused the Company to focus on its enterprise level software and
sell off non-core businesses to raise cash to fund current
operations as mentioned above) required the Company to look anew
at its operations with a view to raising additional working
capital and to reducing costs further. In light of the depressed
price of the Company's common stock and the related shrinking
trading volumes, the Company elected to fund its enterprise
software group separately from the Company in order to achieve
better values than could be obtained by funding through Vertex
directly. At the same time as mentioned above, the Company needed
to further contain costs and streamline operations.
4
Thus, during the fourth fiscal quarter, the Company completed the
disposal of all remaining operations in Europe: the sale
of its point solutions business in Germany in July 2002; the sale
of its hardware maintenance businesses in Benelux, France and the
UK and the sale of its Benelux point solutions business all in
July and August 2002; the sale of DynaSys S.A. in France in
August 2002; and the filing for liquidation of its remaining
businesses in the UK, France and Italy in September 2002.
In addition, continued economic weakness in the North American
wireless and cable installation division, particularly in its
telecommunications market, together with a lack of working
capital caused the Company to close down this division in July
2002. See the section "Disposals" under Note 2 of the Consolidated
Financial Statements.
On August 24, 2001, we announced an agreement to a merger of
equals with Plus Integration Supply Chain Solutions, B.V., a
private company based in Haarlem, Holland. This agreement was
terminated in March, 2002.
In August 2002, the Company formed a wholly owned subsidiary,
XeQute Solutions, Inc., ("XeQute") into which, effective October 1,
2002, the Company transferred all of the assets and certain of the
liabilities of its Enterprise Software Division. This action was
intended to consolidate all of the enterprise level products and
services in one entity, under a single brand, namely XeQute Solutions,
to streamline operations, reduce costs, provide a more effective route
to market, and also to provide a new platform for hiring. Then in
October 2002 the Company entered into an agreement with underwriter
Charles Street Securities ("CSS")to raise approximately $3.8 million
of equity into XeQute, on a best efforts basis, in a United Kingdom
offering of XeQute Solutions Plc, the parent company of XeQute, under
the terms of which the Company would retain control of XeQute.
Pending completion of this offering, which is currently on hold
until completion and filing of this Annual Report on Form 10K; CSS
procured on our behalf a bridge loan in an amount of $500,000;
$250,000 equally from the Aryeh Trust and MidMark Capital.
The Supply Chain Management Industry
The term "supply chain management" refers to a wide spectrum of
software applications, consulting services, maintenance services
and hardware products intended to enable businesses to manage
their chains of supply. The primary goals of successful supply
chain planning and execution are to reduce the costs of sales,
recognize early opportunities and act on them to increase sales
and to detect problems as they emerge to address them promptly to
reduce their impact on the operations of the business. The SCM
industry is evolving toward a more software-driven model as
enterprises increasingly seek ways to manage their supply chains
in real-time at a lower cost and in a more decentralized
environment.
SCM spending falls within the Information Technology industry,
which Gartner Dataquest forecasted to account for $1.7 trillion in
worldwide sales in 2002. Because SCM technologies and services
enable enterprises to manage a critical aspect of their
5
operations, namely the chain of supply of components into
products to be manufactured, sold and delivered to end customers,
the Company believes that, despite some cyclicality that may
always characterize investment in software, over the long-term,
SCM solutions are likely to remain significant factors in
corporate IT budgeting. Management believes that applications and
value-added services such as implementation and consulting will
play a more significant role in the overall IT investment of
companies in our target market, as enterprises increasingly focus
on generating the highest return possible on their asset base-
the primary focus of SCM technology.
The Opportunity
Recent analysis from Gartner Dataquest concludes that as
macroeconomic factors that adversely affected spending on
technology in 2001 and 2002 begin to ease in 2003 and beyond, users
will want to derive more value from the effective integration
of existing IT investment. According to Gartner Dataquest
outsourcing demand will continue to spur information technology
growth over the next few years, and pent-up demand for consulting
as well as development and integration of new technologies will
be important growth factors.
According to the U.S. Bureau of Commerce, approximately 10% of
the U.S. gross domestic product, or more than $900 billion in
1999, is spent annually on the movement and storage of raw
materials, parts, finished goods and other activities along the
supply chain. Globalization and the rise of the Internet are
working in conjunction as catalysts for the emergence of supply
chain technologies designed not only to reduce the costs inherent
in the global economy, but to give enterprises unprecedented
visibility into and dynamic control over their supply chains. The
Company's strategy is grounded in the conviction that supply
chain optimization and management, driven by software
applications and integrated systems is a long-term growth
industry still in its early stages of development, in which there
is an attractive opportunity for companies with sufficient scale
and the right product set to emerge as global leaders in this
industry.
AMR Research forecasts the worldwide SCM industry to reach $21
billion by 2005, a five year compound annual growth rate of
approximately 32%. Application software license revenues, which
in 2001 comprised an estimated 41% of total SCM industry sales,
according to AMR, are forecast to continue to grow at a 29%
compound annual growth rate and to reach nearly $8 billion by
2005. Software maintenance, which AMR estimated to generate
nearly $1 billion in industry revenues in 2001, is expected to
grow at a 36% compound annual growth rate and to reach $3 billion
by 2005.
6
The two largest geographic markets for SCM technology and
services are North America and Europe. AMR estimated that in 2001
these two markets accounted for roughly 86% of worldwide sales,
with the North American market expected to grow at a 28% annual
compound growth rate through 2005 and Europe expected to grow at
a 38% annual compound growth rate over the same period. In light
of the continuing impact of the recessionary economies in North
American and Europe, management believes that AMR's current
industry growth forecasts may prove to be aggressive.
Asia/Pacific and Central and South America are forecast to grow
more rapidly over this period, but today these markets account
only for an estimated 13% of industry sales and are forecast to
reach about 17% by 2005.
The industry opportunity is being defined by three worldwide
trends:
Two Major Catalysts: Global Competition and the Internet
Many observers point to two fundamental drivers of long-term
growth in the SCM industry: (i) the increase in globalization and
the competitive pressures that trend is creating for businesses;
and (ii) the rise of the Internet as a medium for commerce at
virtually every level of the economy.
As competitive barriers fall around the world, we believe
that there is a secular trend toward more open global commerce
that has the potential to impact businesses of nearly every size.
This may create opportunities for the Company's products in
large as well as in small enterprises.
Coincidental with the increase in the pressures of global
competition, has been the arrival of the Internet. Electronic
commerce is characterized by more interdependent relationships
among companies, their vendors and their customers. Managing the
supply chain in an e commerce environment lies at the heart of
the Company's suite of products.
An Industry Evolving
Despite billions of dollars of capital investment in new software
systems in the decade of the nineties, the benefits of this
investment have been achieved more slowly than corporate buyers
had expected. As corporate buyers began to return to their
technology needs during 2002, after a slowdown in 2001 and early
2002, their approach is a more modest one, seeking affordable
solutions targeted at specific problems and whose projected
return on investment can be more rigorously assessed.
The Company is focusing the marketing of its product portfolio to
meet such buyer expectations and is seeking to offer specific
supply chain products, at a predictable total cost of ownership,
with predictable time to complete implementation.
7
Beyond the "Four Walls"
Traditionally, companies have viewed their supply chains as a
series of discrete activities that could be managed largely
independently of each other and almost certainly independently of
a company's vendors and customers. This approach is changing.
Corporate buyers are understanding the interdependence of each
stage and of each participant in the supply chain and are seeking
"visibility" into their supply chain.
This transition to a new operating model poses challenges for
corporate managers because few internal IT systems or business
practices are yet fully capable of taking advantage of the new
opportunity to access and manage enterprise information in a
decentralized environment. Increasingly, corporations are taking
advantage of opportunities to add value at many more places along
the supply chain. This is placing a more complex set of
functional needs on legacy supply chain management practices and
technologies. These challenges include:
Implementing and managing more dynamic, customer-driven
fulfillment processes;
Supporting a new array of relationships with partners, vendors,
trading partners and customers;
Enhancing visibility into order, inventory, warehouse and
transportation status;
Improving real-time co-ordination among enterprise facilities;
Extending supply chain visibility beyond the enterprise;
Permitting dynamic scalability to address unpredictable increases
in transaction volumes;
Allowing least-cost routing;
Enabling the application of value-added services along the supply
chain;
Providing means to monitor activity along the supply chain; and
Managing events in the supply chain in the optimum time to take
advantage of revenue opportunities and avoid costs.
A premium is developing on SCM systems and software that are more
integrated, scaleable, offering real-time capabilities and that
can support a more complex and dynamic web of business
relationships with vendors, partners and customers. Management
believes that the Company's software and services, coupled with
its expertise in the areas of order fulfillment, inventory,
warehouse and transportation management offer important value-
added in the evolving SCM marketplace.
8
The Business and Products of the Company
The Company is a provider of products designed to meet the emerging
opportunity described above. These products principally
involve the provision of services and enterprise level software
for order fulfillment comprising order management, warehouse and
inventory management and distribution management. This
market is sometimes referred to as supply chain "execution
management" software. The business benefits from an
established, revenue-producing suite of proven products
which have been sold to a client base consisting principally
of Fortune 500 clients in the US, in the Company's target
vertical markets. These vertical markets are pharmaceuticals;
consumer packaged goods, third party logistics providers; and bulk
food distributors.
The following summary relates to the product lines currently
offered by the Company, principally through its wholly-owned
subsidiary, XeQute:
1. Warehouse Management Systems (WMS) Products -
the eSuite Software Products
The Company's core product offerings are its Java-
architected, enterprise level, supply chain execution
systems which include order management (eOMS) and warehouse
management (eWMS) applications. Vertex's eSuite of products
promotes collaboration and the exchange of "real-time"
critical information among users within their trading
environment, including employees, distributors,
manufacturers, suppliers and customers. Portable by design,
the eSuite of products can operate across multiple operating
and hardware environments, incorporate the ability to
utilize various database options, and can easily be
integrated with existing IT infrastructure and third party
applications.
eWMS is a Java architected warehouse management
system that provides companies with real-time
insight into warehouse operations and inventory
availability. eWMS is a true multi-warehouse/owner
system that can be deployed across industries and
has specific functionality for food and third party
warehouse/logistics environments. eWMS can be
implemented to interface with existing enterprise
applications or as an integrated component of eOMS
to facilitate a complete supply chain execution
solution.
9
eOMS is a web-based order management system that
integrates all users in a real-time environment:
internal employees, external sales force,
distributors, and customers, through any means of
deployment: Internet, Intranet, or Extranet. eOMS
provides companies with maximized selling
opportunities by capturing valuable buying pattern
information and then uses this information to
broadcast suggestive selling and promotional
opportunities as well as many other benefits. The
eOMS market is potentially the single largest of the
Company's products because order management is a
function performed by every business irrespective of
whether they operate a warehousing and distribution
facility. The importance of this market is
highlighted by the fact that over the past eighteen
months two of the larger ERP vendors, PeopleSoft and
JD Edwards, among others have entered this segment
of the market. The Company is intending to devote
marketing resources to exploit this opportunity.
eOMS represents one of the largest, new market
opportunities for the Company. Every business has a
requirement to manage its customers' orders properly.
Ideally, the order management system should
ensure accurate order entry and timely fulfillment while
providing readily available information to
customers on progress in meeting their respective
orders. Very few existing order management systems
provide all of this functionality, or all of this
functionality in an easily accessible form. In contrast,
e-OMS addresses these needs in a single complete
package. First, the system allows customers to enter
their orders directly through a browser-based solution.
This permits customers to not only self enter their
orders, but also to track the progress of, and if
required change, such orders during the fulfillment
process in real time over the internet. Again, being
internet based allows for access to, and collaborative
trading among, all of the participants in the chain of
supply, namely customers, employees and vendors.
The Company has commenced a sales campaign targeted
at its existing customer base initially, with plans to
reach the broader market after implementing the system in
certain existing accounts.
In conjunction with the sale of the WMS product suite,
the Company also provides customers with software
maintenance support, business and warehouse consulting,
and other implementation services, including system
design and analysis, project management, and user and
technical training.
10
Customers which have purchased a warehouse management
system from the Company during the period 2000-2002 have
included major US companies such as: McLane, a division of
Walmart Stores and the largest distribution company in the
world, Iowa Beef, ConAgra,CDC Distribution, ABX Logistic,
Air Express International, Branch Electric, Land O'Lakes
Dairy, Avery Dennison, The General Printing Office
(US Government) and Rand McNally. The first release of the
E Suites product was delivered to a large retailer in
February 2001, who indicated that the software was capable
of processing in excess of 100,000 transactions per hour
per distribution center (of which there were 19). A product
for the bulk food and 3PL vertical markets was released
in 2002.
The eSuite product line was recently rewritten in JAVA.
Management believes that the eSuite product line is
presently one of the few completely integrated internet-based
order fulfillment systems in the world. The competitive
importance of this was recently highlighted by SAP's
announcement that its web strategy would center around a
new JAVA version of its SAP R/3 operating system. The
JAVA language is critically important to the future of
the Company's development in that it is the first
software language to be independent of both operating
platforms and databases; that is to say this software can
run in any IT environment without extensive
modifications.
iSeries WMS
The original product developed by Renaissance was a
warehouse management system, iWMS, developed
exclusively for use in an AS/400 environment. iWMS
provides the stability, security and ease-of-
implementation that AS/400 users have learned to expect
and mandate. iWMS is a well established, highly
functional, warehouse management system, that is
currently installed worldwide in a variety of
industries including, 3PL, pharmaceutical, cosmetic and
fragrance, food, office supplies, furniture, fast
moving consumer goods among others.
2. Light-Directed Picking and Put Away Systems
The terms "light-directed" or "light-prompted" systems refer
to the stock picking (or put away) functions in warehousing
management systems whereby a light automatically shines in
the sector where stock needs to be picked. Such "light-
directed" stock picking systems have a proven track record
for making the order fulfillment process dramatically more
efficient with a very significant reduction in the error
rate in the stock picking function and a measured
improvement in productivity.
The Company's light-directed family of software picking
systems was originally developed by our subsidiary, Data
Control Systems, in 1981. The products offer a design and
implementation of state-of-the-art, IT-based solutions that
dramatically improve productivity for the order fulfillment
and warehouse management functions in manufacturing and
distribution companies.
11
The Company's light-directed picking solutions interface
with a number of ERP systems and can be modified to work
with almost any system. The order control/fulfillment
systems represent an important facet of the complete E-
commerce system. While E-commerce marketing and order
taking engines can generate substantial sales, without an
optimized order fulfillment process, the promise of E-
commerce will not be fully realized by companies. The
Company is recognized as a leader in electronic warehouse
management systems in real-time, and in light-directed
order processing.
The industry has recognised the Company's products and
services and they were awarded the "Modern Materials
Handling" Productivity Achievement Award in 1999 and the
Vendor of the Year for Merck Pharmaceuticals in 1998.
Our product line includes a mobile cart based system that
appeals to a broader customer base. This system, CartRite,
utilizes light panels and advanced wireless communications
in its warehouse management application.
The Company believes that it is the only supplier in its
industry to develop, engineer, assemble, and install its
own systems, in contrast to other companies which provide
some, but not all, of the systems and services that the
Company is able to provide as a one-stop shop. In-house
personnel implement turn-key solutions that have yielded
to clients the immediate benefit of increased operating
efficiencies, an improved competitive edge and have
offered a platform for future growth.
The Company has documented that its light-directed
products achieve dramatic improvements in operating
efficiency for clients. Typically, after introduction of
the Company's light-directed order fulfillment system,
clients eliminate a portion of the staff they previously
required to fill warehouse orders. This is achieved by
automating and optimizing the scheduling, method and the
order of picking items without any paper. The system thus,
among other things, eliminates the multiple steps associated
with paper handling and manual reconciliation.
The software products automate the process from order
receipt to final shipment. The Company has developed
standard communication interfaces with the leading ERP
vendors including SAP, JD Edwards, Oracle, Peoplesoft and
Microsoft Great Plains Resources, and other enterprise
level systems. The Company is an authorized software
provider for all the major shippers in the US which
includes UPS/FedEx/RPS/USPS. The software is capable of
simultaneous production of shipping bar codes when labels
are generated.
Hundreds of the Company's installations of its WareRite
Warehouse Management Systems ("WMS"), PicRite,
TurnRite, and PutRite light-prompt systems are
providing results in a wide range of industries,
including: pharmaceuticals, cosmetics, publishing, mail
order industries, automotive, electronics, direct selling
associations, retail and wholesale distribution. The
above product lines along with the new CartRite system
have the potential to enhance its clients' E-commerce
related processes. Customers include Merck
Pharmaceutical, Pfizer, Wyeth, Estee Lauder, OfficeMax,
Rite Aid, Braun Electronics ( a wholly owned subsidiary
of Gillette) and Dr. Mann Pharma in Germany.
12
3. Integration Applications
This line of business is involved in the design,
development and implementation of software that connects
applications on handheld devices used in the distribution
system to the base ERP system and in particular to the
SAP R/3 operating systems.
This product family includes proprietary, patented
products and services that allow companies to leverage
their existing investment in SAP R/3 by extending
its functionality to the warehouse floor. To assist
in ease-of-implementation, the Company has developed
tools for SAPConsole implementation including the
Universal Starter Transaction Set which allows
transactions to be easily modified by new users
of ABAP, BC2SAP for rapid bar code label design,
Z-Builder which develops transactions in hours.
The Company's UMDC is shrink-wrapped software that
enhances SAP R/3 functionality. In addition, Vertex
has professional services to complete its SAP R/3
practice offering including SAPConsole technical training,
ABAP coding for data collection, bar code design,
implementation, training and on-going support.
Customers include Mercedes-Benz U.S. International,
Colgate, Bristol Myers Squibb, Oceanspray, Bodek & Rhodes,
Rexam, SAATI in Italy, among others.
Competition
The industry today is marked by competition in two industry
segments: SCM planning and SCM execution. Vertex competes
primarily in the execution segment. In this segment, the Company
faces competition from numerous foreign and domestic companies of
various sizes. Competition in these areas is further complicated
by possible shifts in market share due to technological
innovation, changes in product emphasis and applications and new
entrants with greater capabilities or better prospects.
Order Management
The order management market is becoming a center of focus for
every business in the world whether or not they run distribution
centers. As a result this market segment could become the largest
part of the Company's business in the future. The importance of
this emerging opportunity is highlighted by the recent entry of
JD Edwards, PeopleSoft, i2 and Manugistics into this market. The
competition for the Company's eOrder product is believed to be as
follows:
13
PeopleSoft, an ERP vendor with revenues of $2 billion. The
Company believes that PeopleSoft has a Java-based product
offering which is very competitive with that offered by the
Company.
JD Edwards & Co Inc, an ERP vendor with revenues of
approximately $900 million with a presence in the order
management segment.
i2 Technologies, the largest planning supply chain vendor in the
US based on revenues, with sales of approximately $500 million.
Execution Management
In the execution management segment in the US there are
approximately 275 companies offering a WMS product, of which only
a small number have a top tier product (defined as able to handle
warehouse space in excess of 250,000 square feet and at least 100
simultaneous users of wireless devices at any one time) and
revenues in excess of $10 million. The Company believes that it
is the only supplier with a complete JAVA based cross-platform
solution for Supply Chain Management. In this segment of the
industry the Company's major competitors for the warehouse and
inventory management components and the transportation and
logistics components of its e Suite product are:
EXE Technologies, with revenues of approximately $70 million,
competes most directly with the Company in warehouse management
in the Company's main vertical markets.
Manhattan Associates, the largest warehouse management software
vendor in the world with annual revenues of approximately $170
million. They focus principally on the AS/400 market in retail
distribution and fast moving consumer goods.
Catalyst International, with revenues of $33 million, provides
principally UNIX solution solutions in the Company's vertical
markets.
Light-Directed Systems
In the "Pick-to-light" business, the Company believes that there
are some 25 competitors, of which the largest are Real Time
Solutions, Rapistan, Kingsway and Haupt of Austria, all
privately held companies. These companies compete with aggressive
pricing and turn key solutions. However, the Company's
competitive advantage centers around its product's flexibility
and software capabilities.
The Company believes that it has a strong market share in the
pharmaceutical vertical market.
Research and Development
The Company's research and development ("R&D") initiatives focus
on enhancing the product set with additional functionality aimed
at the Company's core vertical markets.
14
For the years ended September 30, 2002, 2001 and 2000, R&D expense
was $4.2 million (representing 11.6% of revenues), $7.0 million
(representing 11.9% of revenues), and $1.2 million (representing 2.5%
of revenues), respectively.
The high level of R&D expenditure in 2001 arose out of the need
to complete the Java-architected, enterprise level SCM suite.
The Company's research and development timetable, over the next
24 months for the eWMS product includes a number of features
and enhancements which are budgeted to begin development in
mid-2003. However the extent of this development is dependent upon
the Company's ability to raise the required funds.
Employees
At September 30, 2002 we had approximately 80 employees. With the sale
or liquidation of our European operations in the fourth quarter,
96% of the remaining employees are in North America. In our North
American operations, approximately 44% of our workforce is in R&D,
14% in Installation and Implementation, 11% in Sales and Marketing
(including sales support) and the balance in Executive/Administrative.
Designing and implementing the Company's software solutions requires
substantial technical capabilities in many disparate disciplines,
from mechanics and computer science to electronics and mathematics.
While the Company believes that the capability and experience of its
technical employees compare favorably with other similar companies,
there is no guarantee that it can retain existing employees or
attract and hire capable technical employees it may need in the
future, or if it is successful, that such personnel can be
secured on terms deemed favorable to the Company.
ITEM 2. PROPERTIES
Vertex and its subsidiaries occupy approximately 5,000 square
feet of office space in a building in Paramus, New Jersey under a
lease expiring in May 2008. In addition, the Company leases
approximately 15,000 square feet of office & warehouse space for
its light directed order fulfillment solutions in South
Plainfield, New Jersey which lease expires in April 2008. The
Company is attempting to consolidate and further reduce the total
amount of space under lease at these locations. The Company
believes that its current office space and facilities are
sufficient to meet its present needs and does not anticipate any
difficulty securing alternative or additional space, as needed, on
terms acceptable to the Company.
ITEM 3. LEGAL PROCEEDINGS
a) On October 31, 2001, an action was commenced in the United
States District Court, Southern District of New York entitled
Edgewater Private Equity Fund II, L.P. et al. v. Renaissance Software,
Inc. et al. The action, brought against Renaissance Software, Inc.,
a subsidiary of Vertex, and Vertex, alleged the default by
Renaissance Software, Inc. in payment of certain promissory notes
in the principal aggregate sum of $1,227,500. Vertex guaranteed
the notes. The noteholders demanded $1,227,500, together with
interest accruing at the rate of 8% per annum from June 30, 2001.
On March 12, 2002, the noteholders were successful in obtaining a
judgment against Renaissance Software, Inc. in the aggregate amount
of $1,271,407 including interest, late charges and attorney fees.
However, given the Company's current cash position, we
have been unable to pay the judgment and have been pursuing non
cash alternatives.
15
b) On November 7, 2000, Pierce Procurement Ltd. ("Pierce")
brought an action against the Company's subsidiary Renaissance
Software, Inc. ("Renaissance"), in the Boone County Circuit Court in
Northwestern Illinois. The suit was removed to the United States
District Court for the Northern District of Illinois, Western Division,
on February 1, 2001. The claim by Pierce against Renaissance is based
upon allegations that Renaissance sold a computer system which did not
meet the particular purposes of Pierce and that Renaissance made certain
misrepresentations to Pierce with respect to the system. Renaissance
denies such claims, and through its insurance carrier is vigorously
defending the action. Renaissance has counterclaimed against Pierce
alleging that Pierce has paid only a portion of the contract fee agreed
to by the parties. Total damages claimed by Pierce are approximately
$1,500,000 plus interest and penalties. Renaissance seeks approximately
$76,500 on its counterclaim. A mediation has been scheduled for
September 2003.
c) Certain legal proceedings, reported in this Item 3 in prior
periods, have been settled subsequent to September 30, 2002. See
Note 16 - Settled Litigation for a description of these settlements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security
holders during the most recent fiscal quarter.
16
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market for Company's Common Equity
Until August 20, 2002, the principal market for the Company's
shares of Common Stock, par value $.005 per share was the NASDAQ
National Market System under the symbol VETX. From August 21,
2002 until February 17, 2003 the Company's Common Stock was
traded on the NASDAQ Bulletin Board. Thereafter it trades on the
Pink Sheets under the symbol "VETXE" (See Note 1 - Recent
Developments to the Consolidated Financial Statements).
The following table sets forth, for the periods shown, the high
and low sale prices concerning such shares of Common Stock:
High Low
2001
First Quarter $18.50 $5.31
Second Quarter 8.78 1.56
Third Quarter 2.95 1.44
Fourth Quarter 1.97 0.88
2002
First Quarter $1.27 0.71
Second Quarter 1.23 0.27
Third Quarter 0.40 0.08
Fourth Quarter 0.14 0.05
The approximate number of holders of record of the Company's
shares of Common Stock as of February 28, 2003 was 433. This
number includes numerous brokerage firms that hold such shares in
street name. The Company estimates that there are more than 3,000
beneficial shareholders as of February 28, 2003. The Company's
shares of Series A Preferred Stock par value $.01 per share are
held by one holder of record. The Company's shares of Series B
Preferred Stock par value $.01 per share are held by one holder
of record. The Company's shares of Series C Preferred Stock par
value $.01 per share are held by six holders of record.
The Company has not paid any cash dividends on its Common Stock
and does not intend to do so in the foreseeable future.
Securities authorized for issuance under equity compensation plans.
17
Number of securities to be
issued upon exercise of Weighted average exercise Number of securities
outstanding options, price of outstanding options, remaining available for
Plan category warrants and rights warrants and rights future issuance
- ---------------- ----------------------------- ----------------------------- -----------------------
(a) (b) (c)
- ---------------- ----------------------------- ----------------------------- -----------------------
Equity compensation
plans approved by
security holders 3,269,000 $3.72 2,394,032
Equity compensation
plans not approved
by security holders 0 0 0
---------- ----------
Total 3,269,000 $3.72 2,394,032
Recent Sales of Unregistered Securities
We have issued unregistered securities to (a) employees and (b)
other individuals and institutional investors. Each such issuance
was made in reliance upon the exemptions from registration
requirements of the Securities Act of 1933, contained in Section
4(2) and/or Regulation D promulgated there under, or Rule 701
promulgated there under on the basis that such transactions did
not involve a public offering. When appropriate, we determined
that the purchasers of securities described below were
sophisticated investors who had the financial ability to assume
the risk of their investment in our securities and acquired such
securities for their own account and not with a view to any
distribution thereof to the public. At the time of issuance, the
certificates evidencing the securities contained legends stating
that the securities are not to be offered, sold or transferred
other than pursuant to an effective registration statement under
the Securities Act of 1933 or an exemption from such registration
requirements. The following is a summary of transactions we made
during the quarter ended September 30, 2002 involving sales and
issuances of securities that were not registered under the
Securities Act of 1933 at the time of such issuance or transfer:
In connection with the Company's 401-K Plan, the Company
issued 410,304 shares of Common Stock in satisfaction of
the Company's obligation for the calendar 2001 matching
contribution. The shares were issued within the meaning
of Rule 501 and pursuant to Rule 506 of Regulation D under
the Securities Act of 1933.
18
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company should be
read in conjunction with the Company's Consolidated Financial
Statements and notes thereto appearing on pages beginning on F-1.
Such financial data for periods prior to September 30, 1999 were
restated, effective October 1, 1999, to reflect the change in
year end from July 31 to September 30. Also, as discussed in Item
7. and Note 2 to the Consolidated Financial Statements, the
Company has completed various acquisitions and disposals in the
past four years so the amounts shown in selected financial data
are not directly comparable.
SUMMARY OF SELECTED FINANCIAL DATA
2002 2001 2000 1999 1998
OPERATIONS FOR THE
YEAR:
Revenues $36,135,217 $59,087,470 $47,769,311 $10,106,332 $6,754,864
Income (loss)before
amortization,
impairment of goodwill
and in-process
research and
development write-off (25,386,813) (21,568,299) (198,157) 333,542 (20,500)
Intangible amortization 413,734 14,571,757 1,063,775 - -
Impairment of goodwill(2) 18,973,832 78,364,560 - - -
In-process research and
development write-off(1) - 3,600,000 7,500,000 - -
Net (loss) income (44,774,379) (122,952,102) (9,412,424) (160,413) 287,011
Basic Net Income (Loss)Per Share (1.26) (3.95) (0.46) (0.02) 0.04
FINANCIAL POSITION
AT END OF YEAR:
Total Assets $2,800,431 $53,439,283 $110,219,476 $30,348,130 $5,399,704
Long-Term Debt - 7,129,260 1,927,943 1,495,337 115,530
Stockholders' Equity (Deficit) (26,835,525) 11,950,527 84,407,725 13,725,628 2,071,507
(1) For fiscal years 2001 and 2000, the in-process research and
development write off is associated with the acquisitions of
Transcape assets from Pitney Bowes in February 2001 and the
enterprise software applications of Renaissance Software, Inc.,
effective September 30, 2000, respectively.
(2) In fiscal years 2002 and 2001, the Company wrote down
intangible assets (primarily goodwill) to their estimated fair
value (See Note 4 to the Consolidated Financial Statements).
19
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Annual Report on Form 10K contains, in addition to
historical information, certain forward-looking statements that
involve significant risks and uncertainties. Such forward-looking
statements are based on management's belief, as well as
assumptions made by and information currently available to,
management pursuant to the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Our actual
results could differ materially from those expressed in or
implied by the forward-looking statements contained herein.
Factors that could cause or contribute to such differences
include, but are not limited to, those discussed herein and in
Item 1: "Business", and elsewhere in this Annual Report on Form
10-K. Vertex undertakes no obligation to release publicly the
result of any revisions to these forward-looking statements that
may be made to reflect events or circumstances after the date of
this Annual Report or to reflect the occurrence of other
unanticipated events.
This discussion and analysis should be read in conjunction with
the Selected Financial Data and the audited consolidated
financial statements and related notes of the Company contained
elsewhere in this report. In this discussion, the years "2002",
"2001" and "2000" refer to fiscal years ended September 30, 2002,
2001, and 2000, respectively.
Overview
Purchase Acquisitions:
As discussed in Note 2 to the Consolidated Financial Statements,
we had completed a number of acquisitions from September 1999
through October 2001, which had substantially expanded our
portfolio of products and services, as well as our geographic
reach throughout North America and into Europe. The magnitude of
these acquisitions had a significant impact on the comparability
of our results of operations from 1999 through 2002. The
following summary of the more significant purchase acquisitions
closed during the last three years is segregated by those first
impacting operations in fiscal 2000 ("Fiscal 2000 Acquisitions"),
fiscal 2001 ("Fiscal 2001 Acquisitions"), and fiscal 2002
("Fiscal 2002 Acquisitions").
Fiscal 2000 Acquisitions:
Effective March 1, 2000, we acquired all of the outstanding
capital stock of Data Control Systems ("DCS"), a provider of
enterprise level "light-directed" warehouse management systems
located in New Jersey.
Effective April 1, 2000, Vertex acquired all of the outstanding
capital stock of Auto-ID, Inc. ("Auto-ID"), a reseller of point
solutions bar coding equipment, primarily in the Southeast.
Effective June 30, 2000, we acquired all of the outstanding
common stock of Societe Italiana Servizi Italservice S.r.l.
("SIS"), a provider of after-market computer maintenance and
software support services, primarily in Italy.
20
Fiscal 2001 Acquisitions:
Effective September 30, 2000, Vertex acquired all of the
outstanding common stock of Renaissance Software Inc. ("RSI"), a
developer of enterprise level supply chain and warehouse
management systems.
In October 2000, we purchased the assets and business of three
former European service and maintenance divisions of Genicom
International (collectively referred to as "ESSC"), which
expanded our ability to provide hardware and software maintenance
to our European customers.
Effective December 31, 2000, Vertex completed a merger with
Applied Tactical Systems, Inc. ("ATS"), a provider of point
solution connectivity software for SAP installations.
Effective February 7, 2001, Vertex purchased from Pitney Bowes
its Transportation Management Software and certain engineering
assets (the Transcape Division, or "Transcape"), which broadened
our portfolio of enterprise level applications.
On February 13, 2001, we acquired all of the capital stock of
Binas Beheer B.V. ("Binas") a Java IT consulting practice.
Fiscal 2002 Acquisitions:
Effective September 30, 2001, we acquired all of the
outstanding stock of DynaSys, a software developer of
enterprise level advance planning and scheduling applications.
In October 2001, Vertex acquired Euronet Consulting S.r.l
("Euronet"), an Italian software applications consulting firm
that expanded our professional services capabilities in Europe.
Vertex has accounted for each of these acquisitions using the
purchase method of accounting in accordance with APB No. 16.
(and SFAS 141 for DynaSys and Euronet) Accordingly, the financial
statements include the results of operations from March 1, 2000
for DCS, from April 1, 2000 for Auto-ID, from July 1, 2000 for
SIS, from October 1, 2000 for RSI, from November 1, 2000 for ESSC,
from January 1, 2001 for ATS, from February 1, 2001 for Binas,
from February 7, 2001 for Transcape and from October 1, 2001
for DynaSys and Euronet (collectively, the "Purchase Acquisitions").
Business Combinations:
In June 2000, we completed mergers with Positive Developments,
Inc. ("PDI"), a provider of point solution applications, and
Communication Services International, Incorporated ("CSI"), a
provider of wireless and cable networking services. These mergers
were accounted for using the pooling of interests method in
accordance with APB No. 16. Accordingly, the accompanying
consolidated financial statements include the results of PDI and
CSI for all periods presented.
21
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements requires
management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and the
related disclosure of contingent assets and liabilities. Management
bases its estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Management continuously
evaluates its estimates and judgments, and actual results may differ
from these estimates under different assumptions or conditions.
Those estimates and judgments that were most critical to the
preparation of the financial statements involved the allowance for
doubtful accounts, inventory reserves, recoverability of intangible
assets and the estimation of the net liabilities associated with
subsidiaries in liquidation.
a) We estimate the collectibility of our trade receivables.
A considerable amount of judgment is required in assessing
the ultimate realization of these receivables including analysis
of historical collection rates and the current credit-worthiness
of significant customers. Significant changes in required reserves
have been recorded in recent periods and may occur in the future
due to the current market and economic conditions.
b) We establish reserves for estimated excess or obsolete inventory
equal to the difference between the cost of inventory and the
estimated fair value based upon assumptions about future demand and
market conditions. In 2002, inventory reserves increased as a result
of the decision to discontinue or significantly reduce certain non-core
product lines. If actual market conditions are less favorable than
those projected by management, additional inventory write-downs may
be required.
c) During 2002 and 2001 we have recorded significant impairment charges
related to the carrying value of goodwill and other intangibles. In
assessing the recoverability of our goodwill and other intangibles,
we have made assumptions regarding estimated future cash flows and
considered various other factors impacting the fair value of these
assets, as more fully described below in the discussions of the results
of operations - provision for impairment of goodwill.
d) As described in the Sales or Divestitures of Non-Core Businesses
section of Note 2 to the Consolidated Financial Statements we have
sought the protection of the respective courts in three European countries,
which have agreed to orderly liquidations of five of our European
subsidiaries. We have used a liquidation accounting model in the
establishment of the net liabilities associated with these entities at
September 30, 2002. This accounting model required the estimation of the
fair value of the assets of these entities. A considerable amount of
judgment was used in determining the amount of cash to be recovered
through the collection of receivables or the sale of inventory and equipment
in a liquidation environment, that will then be available for the respective
creditors. If actual market conditions are less favorable than those
projected by management, the net assets available for creditors may be less
than estimated. However, since the liabilities of these entities remain on
our balance sheet at historical values (and exceed the fair value of their
net assets by approximately $7.3 million), we expect to recognize a gain
upon legal resolution of the liquidations. The amount and timing of such
gain is totally dependent upon the decisions to be issued by the respective
court appointed liquidators.
22
Results Of Operations
Year ended September 30, 2002 ("2002") compared to year ended
September 30, 2001 ("2001").
Revenues:
Revenues decreased by approximately $23 million (or 39%) to
$36.1 million in 2002.
Products and Services
Sales to external customers by the three significant product and
service line groupings for the years ended September 30, 2002 and
2001 (in thousands) are as follows:
September 30
2002 2001
-------- ----------
Point Solutions............ $15,022 $28,849
Enterprise Solutions....... 6,926 9,921
Service and Maintenance.... 14,187 20,317
--------- ----------
$36,135 $59,087
========= ==========
Point solutions products and services revenues decreased
approximately $13.8 million, to $15.0 million in 2002 from
$28.8 million in 2001, primarily as a result of our strategy
of de-emphasizing lower margin product sales (including the sale
or shutdown of various businesses, both in North America and
Europe no longer core to our focus on enterprise level solutions),
together with the impact of the downturn in the economy, especially
post-September 11, 2001 in both North America and Europe. Sales of
our mobile computing products, principally in the U.K.,
decreased approximately $1.8 million, as revenues in 2001
included two large contracts. In addition, our decision to sell
and/or liquidate all of our European operations effective June 30,
2002 (See Note 2 - Disposals) resulted in a decrease of point
solutions revenue of approximately $4.4 million from the same
period last year.
Enterprise solutions revenues decreased to $6.9 million in 2002
from $9.9 million in 2001. Our light directed order
fulfillment systems revenues decreased $5.4 million in 2002.
Sales of these products have been severely impacted by the
general economic slowdown and the hesitancy of customers to
commit to large system purchases. We expect this slowdown to
have a negative impact on the fiscal 2003 light directed
revenues. The revenues generated by our eSuite of Java (TM)
architected products and services and transportation management
systems acquired in 2001 were $0.2 million lower than the
revenues generated last year. License revenues continue to be
below expectations, both as a result of delays in the
development (now substantially complete) and roll out of the eSuite
of products and the downturn in the economy. Recognition of license
revenues had improved in the fourth quarter of 2001 and the first
half of 2002, but were substantially lower in the second half of
2002. Offsetting these decreases, revenues increased by
approximately $2.6 million as a result of the acquisition
of advanced planning and scheduling software in September
2001, which, in turn, was sold in August 2002 (See Note 2 -
Disposals).
23
Service and maintenance revenues have decreased approximately
$6.1 million from 2001. European service and maintenance
revenues decreased $2.5 million in 2002, primarily as a result of
our decision to sell and/or liquidate all of our European
operations effective June 30, 2002 (See Note 2 - Disposals). In
addition, our North American service and maintenance revenues
decreased approximately $3.6 million in 2002, resulting primarily
from a large $2.2 million cable installation project in 2001,
the reduction in the broadband cabling market due in part to the
downturn in the general economy last year and our resulting
decision in July 2002 to close down the wireless and cable
installation division.
Gross Profit:
Gross profit decreased by approximately $9.3 million (or 43%) to
$12.2 million in 2002. As a percent of operating revenues, gross
profit was 33.9% in 2002 as compared to 36.4% in 2001. The gross
profit percentage has been unfavorably impacted by the decreased
revenue from higher margin software and light directed order
fulfillment systems. These decreases, together with our planned
reduction of point solution sales have substantially impacted the
ability of the company to cover non variable costs and therefore
reduced the gross profit percentage in 2002. In addition,
inventory reserves increased approximately $0.3 million to
provide for discontinued products. Offsetting these decreases,
the gross profit percentage was favorably impacted by a higher
percentage of professional services revenues and higher product
margins generated by the entities acquired during 2002.
Operating Expenses:
Selling and administrative expenses decreased $12.0 million (or
35%) to $22.5 million in 2002. At the end of 2001 we initiated
various cost reduction measures which continued throughout 2002,
including a 67% reduction in the number of our North American
employees, facilities consolidations, as well as reductions in
other expenses such as marketing and advertising, non essential
travel and other headcount-related expenses. As a result, we
reduced our selling and administrative expenses by approximately
$7 million in North America. In addition, prior to the sale
and/or liquidation of all of our European operations effective
June 30, 2002, we had also reduced headcount by approximately 25%
and curtailed non-essential travel and marketing expenses in
Europe. These reductions, together with the elimination of all
European selling and administration expenses in the fourth
quarter, resulted in a reduction of approximately $5 million in
2002. Offsetting these decreases, the 2002 acquisitions accounted
for approximately $0.9 million of additional selling and
administrative expenses.
Research and development expenses have decreased approximately
$2.9 million (or 41%) to $4.2 million in 2002 from $7.0 million
in 2001. In 2001, following our acquisition of the core eSuite
functionality in September 2000, we invested substantially in the
completion of the eSuite of Java (TM) architected products in
order to achieve commercial stability. While on-going research
and development continued in 2002, the R&D expenditures related
to these products have decreased approximately $1.7 million from
the prior year. Other factors impacting R&D were reductions of
approximately $1.5 million of expenditures incurred in the
development of warehouse management products and transportation
management systems, with the latter decrease resulting primarily
from the disposal of the transportation management system product
line in April 2002. Offsetting these decreases, the R&D
expenditures on the products acquired with our purchase of
DynaSys increased R&D by approximately $0.5 million in 2002.
24
Toward the end of 2001 and throughout 2002, the Company sought to
consolidate its facilities. As a result of this process, we
either terminated or negotiated a settlement for the remainder of
numerous office leases, resulting in additional operating
expenses of $1.1 million and $0.3 million in 2002 and 2001,
respectively.
The decrease in depreciation and amortization was primarily due
to a decrease in the amortization of intangibles to $0.4 million
in 2002, as compared to $14.6 million in 2001. This was the
direct result of two factors: (i) the write-off of intangible
assets in the fourth quarter of fiscal 2001, based on an
assessment of the fair value of these assets as of September 30,
2001; and (ii) the adoption of SFAS 142 as of October 1, 2001,
which substantially reduced the amount of intangibles that
were subject to amortization (See Note 4). These intangibles
were being amortized over their estimated lives ranging from 2
to 25 years.
The provision for the impairment of goodwill and other
intangibles was $19 million in 2002 and $78.4 million in 2001.
At September 30, 2002, we assessed the carrying value of our
remaining goodwill using the criteria established in SFAS 142.
As a result of the continuing weak market conditions in our
industry, our significant operating losses and stockholders'
deficit, we determined that the remaining goodwill of
approximately $19 million was impaired and it was written off.
At September 30, 2001 we wrote off approximately $78.4 million,
as the result of an assessment of the carrying values of our
intangible assets recorded in connection with all of our
acquisitions. Management undertook this assessment because of
the significant negative economic trends impacting our current
operations, lower expected future growth rates, a decline in
our stock price, and significantly lower valuations for
companies within our industry. At the time of our analysis, the
net book value of our assets exceeded our market capitalization.
Based on our evaluation of these factors, our belief that the
decline in market conditions within our industry was
significant and permanent, the consideration of all other available
evidence, we determined that the fair value of our long-lived
assets was less than their carrying value.
In 2001, as a result of the February 2001 acquisition of
Transcape, $3.6 million of the purchase price was charged
directly to expense as a write-off of in-process research and
development costs, based on a valuation made by an independent
valuation firm.
Interest expense increased by approximately $1.8 million to 2.9
million in 2002. This increase is due to increased working
capital borrowings at the end of fiscal 2001 and early in fiscal
2002, including approximately $9 million of convertible notes
payable, $2.5 million of demand notes payable, and a $2.4
million senior credit facility. As a result of an imbedded
beneficial conversion feature in a convertible note payable, the
Company incurred a non-cash interest charge of approximately
$1.2 million in 2002. These increases were offset by the effects
of debt conversions, paydowns or settlements of debt.
25
The provision for litigation amounted to $2.7 million and $3.1
million in 2002 and 2001, respectively. These amounts relate to
several matters, which arose in 2001 and were settled in 2002,
and are described in Note 16 to the Consolidated Financial
Statements.
In 2002, the Company incurred a net loss on sale or liquidation
of non-core assets. As more fully described in Note 2 to the
Consolidated Financial Statements, this loss is comprised of (1)
a $1.2 million aggregate net gain on the sale of certain non-core
product lines and business units and (2) a $4.4 million loss on
companies placed into liquidation during 2002. The net loss on
companies in liquidation includes a provision to reduce the net
assets to their estimated net realizable values.
The income tax provision is negligible in both years due
primarily to operating losses. The income tax provision is
comprised primarily of foreign taxes provided on the profit of
certain subsidiaries for which no net operating losses are
available or where the utilization of the pre-acquisition net
operating losses are an adjustment of goodwill.
Year ended September 30, 2001 compared to year ended September
30, 2000.
Revenues:
Revenues increased by approximately $11.3 million (or 23.7%) to
$59.1 million in 2001.
Point solutions products and services revenues decreased
approximately $2.9 million, to $28.8 in 2001 from $31.7 million
in 2000. This is due primarily to our strategy of de-emphasizing
lower margin product sales, which reduced revenues by
approximately $6.8 million, including $3.8 million resulting from
the sale of two divisions in the second half of 2000. Sales of
our mobile computing products, principally in the U.K., decreased
approximately $2.1 million; as revenues in 2000 included a large
contract with one customer aggregating $5.1 million. Offsetting
these decreases, point solutions revenues also increased by
approximately $6 million as a result of additional point solution
products and services acquired during 2001 aimed at inventory,
warehouse management, and the SAP market.
Enterprise solutions revenues increased to $9.9 million from $6.7
million in 2000. Our light directed order fulfillment systems
revenues increased to $8.1 million in 2001 from $6.7 million in
2000. The revenues in 2000 were for the seven-month period
following the acquisition of our light-directed technology, while
2001 includes a full year of revenues. Sales of these products
have been severely impacted by the general economic slowdown and
the hesitancy of customers to commit to large systems purchases.
We expect this slowdown to have a negative impact on the fiscal
2002 enterprise solutions revenues, at least through our third
fiscal quarter ending June 30, 2002. The remainder of the
increase in enterprise solutions revenues was generated by our
eSuite of Java architected products and services acquired during
2001 and by the addition of the enterprise transportation
management assets mid year. These revenues fell substantially
below expectations, both as a result of delays in the development
and roll out of the eSuite of products and the downturn in the
economy.
26
Service and maintenance revenues have increased approximately $11
million from 2000. The acquisitions of ESSC in 2001 and SIS in
June 2000 expanded our capability to provide hardware and
software maintenance in Europe and resulted in an additional $8.1
million of revenue in 2001. Our remaining service and maintenance
revenues grew approximately $2.9 million in 2001 resulting
primarily from service revenue on the products acquired in 2001
and a large $2.2 million cable installation project.
Gross Profit:
Gross profit increased by approximately $6.3 million (or 41.4%)
to $21.5 million in 2001. As a percent of operating revenues,
gross profit was 36.4% in 2001 as compared to 31.8% in 2000. The
increase in the gross profit percentage is due, in part, to the
higher margin software and system sales, principally from the
enterprise solutions products and services, which represented 17%
of total revenues in 2001 and 14% in 2000. The gross profit
percentage was also favorably impacted by our de-emphasis of low
margin point solution products mentioned above.
Operating Expenses:
Selling and administrative expenses increased $21.4 million (or
160%) to $34.8 million in 2001. The Fiscal 2001 Acquisitions
accounted for $8.1 million of the increase, and the impact of a
full year of the Fiscal 2000 Acquisitions in 2001 added
approximately $1.5 million. Additionally during 2001, we incurred
approximately $1.3 million on a consolidated corporate marketing,
advertising and communications program; which included the
creation of corporate identity and product collateral literature,
development of advertising materials, as well as advertising
space, and attendance at key industry trade shows. In
anticipation of the roll out of our eSuite of products, together
with a new point solution warehouse management system, we
recruited, hired and trained additional sales personnel in North
America and Europe. Corporate level general and administrative
expenses have increased approximately $6 million reflecting, in
part, a full year of expense related to the corporate
infrastructure that we began to establish during 2000, to
integrate and manage the expansion of our products and services
through acquisitions. This included human resources, data
processing, finance, investor relations and administrative
personnel. In addition, professional fees (including legal,
accounting, recruiting, financial and strategic consulting)
increased approximately $2.3 million.
Research and development expenses have increased approximately
$5.8 million (or 472%) to $7.0 million in 2001 from $1.2 million
in 2000. This increase reflects our acquisition of the eSuite of
Java architected products and, in part, the transportation
management system assets. In addition, following our acquisition
of the core eSuite functionality, we determined that it was not
sufficiently commercialized, consequently, we accelerated our R&D
investment in these key applications in order to achieve
commercial stability.
27
The amortization of intangibles of $14.6 million in 2001, as
compared to $1.1 million in 2000 is a direct result of the
Purchase Acquisitions. These intangibles were being amortized
over their estimated lives ranging from 2 to 25 years. At
September 30, 2001 we wrote off approximately $78.4 million (see
Note 4), as the result of an assessment of the carrying values of
our intangible assets recorded in connection with all of our
acquisitions. Management undertook this assessment because of the
significant negative economic trends impacting our current
operations, lower expected future growth rates, a decline in our
stock price, and significantly lower valuations for companies
within our industry. At the time of our analysis, the net book
value of our assets exceeded our market capitalization. Based on
our evaluation of these factors, our belief that the decline in
market conditions within our industry was significant and
permanent, the consideration of all other available evidence, we
determined that the fair market value of our long-lived assets
was less than their carrying value.
Our intangible assets are associated with our acquisitions of
technologies and services capabilities that we have made as part
of our growth and competitive strategy described above. A number
of these acquisitions were closed during a period of rapid change
and evolution within the technology industry generally and within
the developing supply chain management industry in particular.
Since making some of our acquisitions we have concluded that some
of our original long-term assumptions about how the market we
serve would evolve and what customers would be requiring in
supply chain management technologies have changed. We now expect
future cash flows from these acquired assets to be less than our
initial expectations. We have, therefore, reduced the carrying
value of these assets on our balance sheet, as described in
detail in Note 4, and recorded a $78.4 million write off at
September 30, 2001.
As a result of the February 2001 acquisition of Transcape assets,
$3.6 million of the excess purchase price was charged directly to
expense as a write-off of in-process research and development
costs. The allocation of $3.6 million of the excess purchase
price to in-process research and development costs was based on a
valuation made by an independent valuation firm, as more fully
described in Note 2 to the financial statements.
Interest income decreased approximately $170,000 (or 55%) in
2001. The decrease is due to lower cash balances maintained
during 2001 as compared to 2000. Interest expense increased by
approximately $560,000 to $1.0 million in 2001. This increase is
due to increased working capital borrowings, including $5.8
million of convertible notes payable, and acquisition related
debt. Other expenses increased $3.7 million primarily due to
provisions for litigation in 2001.
The income tax provision decreased $227,000 (or 60%) in 2001, due
primarily to increased losses. The income tax provision is
comprised primarily of foreign taxes provided on the profit of
certain subsidiaries for which no net operating losses are
available or where the utilization of the pre-acquisition net
operating losses are an adjustment of goodwill.
28
Net Income (loss):
The 2001 net loss includes the impact of the amortization of
intangibles, increased operating expenses, the write-off of in-
process research and development costs, and the recognition of
impairment of certain long-lived assets.
Liquidity and Capital Resources
Based upon our substantial working capital deficiency ($27.4
million at September 30, 2002), our current rate of cash consumption,
the uncertainty of liquidity- related initiatives described in detail
below, and the reasonable possibility of on-going negative impacts
on our operations from the overall economic environment for a further
unknown period of time, there is substantial doubt as to our ability
to continue as a going concern.
The successful implementation of our business plan has required,
and will require on a going forward basis, substantial funds to
finance (i) continuing operations, (ii) further development of
our enterprise software technologies, (iii) expected future operating
losses, (iv) settlement of existing liabilities, including past due payroll
obligations to its employees, officers and directors, and (v) possible
selective acquisitions to achieve the scale we believe will be
necessary to remain competitive in the global SCM industry. There can be no
assurance that we will be successful in raising the necessary funds.
Fiscal 2002:
In fiscal 2002, the overall decline in the enterprise applications software and
telecommunications industries, continued to have a substantial negative impact
on our results of operations. These factors, in combination with our continuing
negative operating cash flows, placed significant pressures on our financial
condition and liquidity and negatively impacted our operations. Operating
activities resulted in cash consumption of $8.5 million in 2002. During fiscal
2002 we raised approximately $9.8 million (net of cash transaction costs)
through the issuance of: (1) Series "B" Convertible Preferred Stock to
Pitney Bowes valued at $1 million; (2) $3 million in notes payable
convertible into Series "C" Convertible Preferred Stock to Midmark Capital II,
LP; (3) $3.6 million of demand notes payable from Pitney Bowes and Midmark
Capital II L.P. and (4) $2.4 million in a senior credit facility
collateralized by North American accounts receivable. During the same period,
we sold various businesses and assets (See Note 2) resulting in net cash of $1.2
million and we paid various debt obligations ($3.8 million). At September 30,
2002, the above activities resulted in a net cash balance of $74,000 (a decrease
of $1.3 million) and a negative working capital balance of $27.4 million.
Outlook:
In light of current economic conditions and the general expectation that there
will be no significant upswing in the economy or technology capital expenditures
for the foreseeable future, we do not now anticipate reaching the point at which
we generate cash in excess of our operating expenses until December 2003 at the
earliest, about which there can be no assurance. To the extent we cannot settle
existing obligations in stock or defer our obligations until we generate
sufficient operating cash, we will require significant additional funds
to meet accrued non-operating obligations, working capital to fund
operating losses, short term debt and related interest, capital expenditures,
expenses related to cost-reduction initiatives, and potential liabilities
related to litigation claims and judgments (See Note 16 to Consolidated
Financial Statements).
29
Our sources of ongoing liquidity include the cash flows of our operations,
potential new credit facilities, and potential additional equity
investments. Consequently, Vertex continues to aggressively pursue
additional debt and equity financing, restructure certain existing debt
obligations, reduce its operating expenses, and is structuring its overall
operations and resources around high margin enterprise products and services.
However, in order to remain in business, the Company must raise additional
cash in a timely fashion.
Subsequent to September 30, 2002 the following initiatives have been
completed or are in process to raise the required funds, settle liabilities
and/or reduce expenses:
(i) In December 2002, Vertex, through XeQute, closed a $500,000 Bridge Loan
arranged by Charles Street Securities, Inc. (CSS) from MidMark Capital and
Aryeh Trust. The Bridge Loan is to be repaid with proceeds from a proposed
Private Placement funding (see iii below). The Bridge Loan is for a term of
180 days, which matured on June 9, 2003, at which time it converted to a term
loan payable in 24 monthly installments. The first monthly installment was
due July 1, 2003 and has not been paid. The Bridge Loan is secured by a
first security interest in all of the assets of XeQute and carries an
interest rate of 3% per month.
XeQute received an additional $480,000 from MidMark under a Convertible Loan
Note. The Convertible Loan Note will automatically convert into Non-Voting
Shares of XeQute Solutions PLC when a minimum subscription of $480,000 of the
Private Placement is reached.
In addition, as of June 30, 2003, Vertex and XeQute have borrowed a further
$893,000 from MidMark Capital II, L.P. pursuant to a series of demand notes,
of which $425,000 was restricted for usage on XeQute obligations. These notes
are payable on demand, bear interest at 10% per annum and are secured by the
same collateral in which the Company previously granted a security interest
to MidMark under its convertible notes payable.
Vertex also executed a Grid Note which provides for up to $1 million of
availability from MidMark Capital, L.P. This note will be funded by the
proceeds, if any, from the sale of any shares of Vertex Common Stock held
by MidMark Capital. This note is payable on demand but in any event no
later than December 31, 2003, carries interest at the rate of 10% per
annum and is secured by the same collateral in which the Company previously
granted a security interest to MidMark under its convertible notes payable.
In consideration of MidMark providing this facility, the Company agreed to
issue warrants to purchase a number of unregistered shares equal to 120% of
the number of tradeable shares sold by MidMark to fund such note, at a
purchase price per share equal to 80% of the price per share realized in
the sale of shares to fund the Grid Note. As of June 30, 2003, the
Company had borrowed $77,000 under this arrangement.
(ii) The Company has completed the sale of certain entities and assets (See
Note 2 - Disposals). After being unsuccessful in attempting to sell its five
remaining European operations (Vertex UK-previously PSS, Vertex Service and
Maintenance Italy - previously SIS, Vertex Italy, Euronet and Vertex France -
previously ICS France) and based on the continuing cash drain from these
operations the respective boards of directors determined that in the best
interest of their shareholders that they would seek the protection of the
respective courts in each country, which have agreed to an orderly liquidation
of these companies for the benefit of their respective creditors. Upon legal
resolution of the $7.3 million of net liabilities of these remaining European
entities, we expect to recognize a non- cash gain (and no significant cash
outlay), however the amount and timing of such gain and cash outlay is totally
dependent upon the decisions to be issued by the respective court appointed
liquidators.
30
(iii) We are aggressively pursuing additional capital raising initiatives in
particular through the formation of XeQute Solutions PLC, a wholly owned
subsidiary of Vertex and parent company of XeQute, into which we have an
agreement with CSS to raise, in conjunction with MidMark Capital,
approximately $3.8 million of new equity. This transaction is currently on
hold pending completion and filing of this Annual Report on Form 10-K and
an interim audit of XeQute Solutions, Plc. for the nine months ended June 30,
2003. We have also conducted extensive negotiations with various sources to
invest up to an additional $8 million of new equity or convertible debt into
Vertex, contingent among other things, upon the completion of the new
financing into XeQute.
(iv) We have continued to reduce headcount (to approximately 40 employees in
our continuing North American business at June 30, 2003, of whom 14 are
currently furloughed until additional funds are raised), consolidate
facilities, and generally reduce costs.
(v) Effective July 31, 2003, the Company completed the sale of 10,000,000
shares of its common stock, which had a fair market value at that time of
approximately $500,000, to American Marketing Complex, Inc. (AMC). Payment
for this purchase was in the form of cash equivalent trade credits with a
face value of $4,000,000, which the Company can utilize for the purchase of
merchandise and services. The face value is not necessarily indicative of
the ultimate fair value or settlement value of the cash equivalent trade
credits. Any trade credits not utilized by June 30, 2008 shall expire,
unless the Company exercises an option to extend the agreement for one year.
In addition, the Company agreed to loan AMC $150,000 of which $10,000
was delivered at closing; $40,000 will be delivered by August 15, 2003;
$50,000 will be delivered by Septemer 10, 2003 and $50,000 will
be delivered by October 10, 2003. This loan will be repaid exclusively
from funds received from the sale of the 10,000,000 shares. The Company
is required to register these shares within six months of the closing.
(vi) We are seeking to settle certain of our current liabilities through
non-cash transactions. Vertex is negotiating with vendors to settle balances
at substantial discounts, including through the use of the cash equivalent
trade credits set forth in (v) above. In addition, we are negotiating to
settle certain notes payable and approximately $4 million of litigation
accruals at a discount or with the issuance of shares of either Vertex or
XeQute.
While we are continuing our efforts to reduce costs, gain scale, resolve
lawsuits on favorable terms and settle certain liabilities on a non-cash basis
there is no assurance that we will achieve these objectives. In addition, we
continue to pursue strategic business combinations and opportunities to raise
both debt and equity financing. However, there can be no assurance that
we will be able to raise additional financing in the timeframe necessary to
meet our immediate cash needs, or if such financing is available, whether the
terms or conditions would be acceptable to us.
The financial statements have been prepared on a basis that contemplates
Vertex's continuation as a going concern and the realization of assets and
liquidation of liabilities in the ordinary course of business. The
financial statements do not include any adjustments, with the exception of
the provision to reduce the carrying values of the assets of the subsidiaries in
liquidation to their estimated net realizable value (See Note 2), relating to
the recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that might be necessary should we
be unable to continue as a going concern. If Vertex fails to raise capital
when needed, the lack of capital will have a material adverse effect on
Vertex's business, operating results, and financial condition.
31
New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 142 provides that separable intangible assets that
have finite lives will continue to be amortized over their useful lives
and that goodwill and indefinite-lived intangible assets will no longer be
amortized but will be reviewed for impairment annually, or more frequently if
impairment indicators arise. Under the provisions of SFAS 142, any impairment
loss identified upon adoption of this standard is recognized as a cumulative
effect of a change in accounting principle. Any impairment loss recognized
subsequent to initial adoption of SFAS 142 will be recorded as a charge to
current period earnings. We elected to early adopt the provisions of
SFAS 142, including the provisions for nonamortization of intangible
assets, as of October 1, 2001. As a result of our analysis of the fair
market value of intangible assets at September 30, 2001 and the resulting
charge for impairment recorded at that time, the transitional goodwill
impairment provisions of SFAS 142, did not have a significant impact on our
consolidated financial statements.
In November 2002, the Emerging Issues Task Force (EITF) of the FASB reached a
consensus on Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables." This issue provides guidance on when and how to separate elements
of an arrangement that may involve the delivery or performance of multiple
products, services and rights to use assets into separate units of accounting.
The guidance in the consensus is effective for revenue arrangements entered into
in fiscal periods beginning after June 15, 2003. The Company will adopt Issue
No. 00-21 in the quarter beginning July 1, 2003. The transition provision allows
either prospective application or a cumulative effect adjustment upon adoption.
The Company is currently evaluating the impact of adopting this guidance, but
does not believe it will have a material effect on its results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Market risk represents the risk of loss that may impact the
financial position, results of operations or cash flows of the
Company due to adverse changes in market prices and rates.
The Company is exposed to market risk because of changes in
foreign currency exchange rates as measured against the U.S.
dollar and currencies of the Company's subsidiaries and
operations in Europe. Revenues from these operations are
typically denominated in European currencies thereby potentially
affecting the Company's financial position, results of
operations, and cash flows due to fluctuations in exchange rates.
The Company does not anticipate that near-term changes in
exchange rates will have a material impact on future earnings,
fair values or cash flow of the Company, especially now that all
of the European operations have been either sold or placed into
liquidation. However, there can be no assurance that a sudden and
significant change in the value of European currencies would not
have a material adverse effect on the Company's financial
condition and results of operations.
The Company's short-term bank debt bears interest at variable
rates; therefore, the Company's results of operations would only
be affected by interest rate changes to the short-term bank debt
outstanding. An immediate 10 percent change in interest rates
would not have a material effect on the Company's results of
operations over the next fiscal year.
32
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this "Item 8" is included following
the "Index to Financial Statements and Schedules" appearing at
the end of this Form 10-K.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
(a) In a letter dated April 9, 2002, Ernst & Young LLP ("Ernst
& Young") resigned as auditors of the Company, effective
immediately. Management, under the direction of the Audit
Committee of the Board of Directors, commenced the process of
naming new auditors for the Company.
The reports of Ernst & Young on the Company's consolidated
financial statements for the past two fiscal years did not
contain an adverse opinion or a disclaimer of opinion and were
not qualified or modified as to uncertainty, audit scope, or
accounting principles, except for their report dated January 25,
2002 on the Company's consolidated financial statements as of
September 30, 2001, and 2000 and for each of the three years in
the period ended September 30, 2001, which contained an
explanatory paragraph indicating substantial doubt about the
Company's ability to continue as a going concern.
In connection with the audits of the Company's consolidated
financial statements for each of the two fiscal years ended
September 30, 2001 and 2000, and in the subsequent interim period
through April 9, 2002, there were no disagreements with Ernst &
Young on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope and procedures
which, if not resolved to the satisfaction of Ernst & Young would
have caused Ernst & Young to make reference to the matter in
their report.
In connection with the audit of the Company's 2001 consolidated
financial statements, Ernst & Young advised the Company and the
Audit Committee that material weaknesses existed with regard to
the Company's financial accounting systems, including the
financial reporting and closing process, impacting the Company's
ability to timely prepare accurate financial statements. The
Company authorized Ernst & Young to respond fully to the
inquiries of any successor auditor concerning this matter.
The Company requested Ernst & Young to furnish it with a letter
addressed to the Commission stating whether it agrees with the
above statements. A copy of that letter, dated April 16, 2002
was filed as Exhibit 16 to our Form 8-K filed on April 16, 2002.
b) On May 13, 2002 by unanimous written consent, the Board of
Directors of the Company engaged WithumSmith+Brown P.C. as the
Company's independent auditors for the fiscal year ending
September 30, 2002. The Company's Audit Committee, approved and
recommended to the Board of Directors, approval of the
appointment of WithumSmith+Brown P.C. based on a recommendation
by management and a Proposal to Serve presented to the Company
by WithumSmith+Brown P.C. dated May 7, 2002.
WithumSmith+Brown P.C. is affiliated with HLB International, a world-
wide organization of professional accounting firms and business
advisors, which has member and correspondent firms in 100
countries.
33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Certain information about directors and officers of the Company
is contained in the following table as of September 30, 2002.
Director
Name of Director Age Principal Occupation Since
- ----------------- ---- ---------------------- --------
Hugo H. Biermann 53 Executive Chairman 1999
Vertex Interactive, Inc
Nicholas R. H. Toms 54 Chief Executive Officer 1999
Vertex Interactive, Inc
Otto Leistner 58 Managing & Senior Partner 2000
Leistner Pokoj Schnedler
There is no family relationship between any of the foregoing
directors or between any of such directors and any of the
Company's executive officers. The Company's executive officers
serve at the discretion of the Board of Directors.
Hugo H. Biermann has served as Executive Chairman of the Board of
Directors since July 2001 and served as Joint Chairman and Joint
Chief Executive Officer and a Director of the Company from
September 1999 through June 2001. Mr. Biermann has been a
principal in Edwardstone & Company, Incorporated ("Edwardstone"),
an investment management company, since 1986 as well as serving
as President of Edwardstone since 1989. From 1988 to 1995 Mr.
Biermann served as Director and Vice Chairman of Peak
Technologies Group, Incorporated ("Peak Technologies"), a company
involved in automated data capture technologies.
Nicholas R. H. Toms has served as Chief Executive Officer since
July, 2001 and served as Joint Chairman of the Board of
Directors, Joint Chief Executive Officer and a Director of the
Company from September 1999 through June 2001. Mr. Toms has been
a principal of Edwardstone, an investment management company,
since 1986 and Chairman and Chief Executive Officer of
Edwardstone since 1989. From 1988 to 1997, Mr. Toms served as
Chairman, President and Chief Executive Officer of Peak
Technologies.
Otto Leistner has been a Director since April 2000. He has been a
Partner since 1995 in Leistner Pokoj Schnedler, a midsize
accounting and consulting firm in Frankfurt, Germany with a staff
of approximately 100.
Due to various reasons Stephen Duff, George Powch, Michael
Monahan, Larry Schafran, Wayne Clevenger and Joseph Robinson
found it necessary to resign during fiscal 2002.
34
Operation of Board of Directors and Committees
The Board of Directors met 20 times during the fiscal year ended
September 30, 2002. Standing committees of the Board include an
Audit Committee and a Stock Option/Compensation Committee. The
Company does not have a Nominating Committee. During the time in
which they were members, all directors attended in excess of 75%
of the meetings.
During the year 2002, Stephen Duff(2), George Powch(2), Mike
Monahan(2), Larry Schafran(2), Joe Robinson(3) and Otto Leistner
all served for periods of time as members of the Audit Committee.
As of September 30, 2002, the Audit Committee was solely
comprised of Messr. Leistner, a non-employee director. Pursuant
to the Audit Committee Charter, the Committee's primary duties
and responsibilities are to 1) serve as an independent and
objective party to monitor the Corporation's financial reporting
process and internal control system; 2) review and appraise the
audit efforts of the Corporation's independent accountants; and
3) provide an open avenue of communication among the independent
accountants, financial and senior management and the Board of
Directors. Audit Committee Meetings primarily were combined with
regular Board Meetings and included full Board participation.
There were 4 meetings during the 2002 fiscal year during which
Audit Committee agenda items were addressed. All members attended
in excess of 75% of the meetings which were held while they were
members.
During the year 2002, Wayne Clevenger(3), Stephen Duff(2) and
Otto Leistner all served for periods of time as members of the
Stock Option/Compensation Committee. As of September 30, 2002 the
Stock Option/Compensation Committee was comprised solely of
Messr. Leistner. The Committee's primary functions are to
determine remuneration policies applicable to the Company's
executive officers and to determine the bases of the compensation
of the Chief Executive Officer, including the factors and
criteria on which such compensation is to be based. The Committee
also administers the Company's Stock Option Plan. Stock
Option/Compensation Committee Meetings primarily were combined
with regular Board Meetings and included full Board
participation. All members attended 100% of the meetings which
were held while they were members.
35
Compensation of Directors
With the exception of Messrs. Clevenger (3) and Robinson(3) who
are partners in Midmark Associates, which firm was paid a
management fee by Vertex (this management fee was discontinued in
August 2002), non-employee directors had in the prior two years
received compensation of 15,000 stock options per year for their
services as directors. No options were granted to directors for
the 2002 fiscal year. The Company reimburses directors for their
reasonable out-of-pocket expenses with respect to board meetings
and other Company business. Stephen Duff(2), Otto Leistner and
George Powch(2) each received 30,000 in-plan non-qualified
options on February 6, 2001 at an exercise price of $8.50. Of these
options, 15,000 vested immediately for services provided in the
year 2000 and 15,000 vested on December 31, 2001 for services
provided during 2001. In August, 2001 L. G. Schafran(2) received
15,000 in-plan, non-qualified options at an exercise price of
$1.51 which vested on December 31, 2001 for services provided
during 2001. Options received by Directors for services provided
terminate one year from the date of resignation.
In addition, in January 2000, the Company granted options to
purchase 100,000 shares of common stock at $3.85 (110% of the
fair market value of the stock on the date of grant) to each of
Mr. Clevenger(3), Mr. Robinson(3), Mr. Thomas(1) and Mr. Denis
Newman (a former Director, who resigned from the Board effective
August 9, 2000). These options were granted to compensate these
individuals for consultation, advice, due diligence and other
work performed in addition to the standard scope of
responsibilities of an outside director. Such options were fully
vested on the date of grant and expire five years from that date.
(1) Mr. Thomas resigned from the Board in January, 2001.
(2) Mr. Duff, Mr. Powch, Mr. Monahan, and Mr. Schafran have
resigned from the Board, in November, 2001, December, 2001,
February 2002, and July 2002 respectively.
(3) Mr. Clevenger and Mr. Robinson resigned from the Board in
August 2002.
EXECUTIVE OFFICERS
In addition to Messrs. Biermann and Toms the following persons
were executive officers of Vertex Interactive, Inc. as of
September 30, 2002:
Name Age Position
Raymond J. Broek 51 Treasurer and Vice President-Finance
Mark A. Flint 56 Chief Financial Officer
Jacqui Gerrard 48 Chief Operating Officer-Europe
Donald W. Rowley 51 Executive Vice President-Strategic
Development
Barbara H. Martorano 46 Corporate Secretary
36
Raymond J. Broek has been with Vertex since March 2000 and,
previously had been a consultant to Vertex and other middle
market companies. From 1973 to 1999, Mr. Broek was with Ernst &
Young LLP; the last 12 years as a partner providing accounting
and auditing services. Mr. Broek resigned from his executive
officer position effective November 27, 2002, but continues in the
employ of the Company in a non-officer capacity.
Mark A. Flint joined Vertex in June 2001. From December 2000 to
May 2001, he was Chief Financial Officer of Industria Solutions,
a Silicon Valley B2B supply chain software company. From October,
1998 to December, 2000 he was an independent management
consultant. From September, 1996 to September, 1998 he served as
the CFO of Dart Group, as the COO of Crown Books, and CEO of
Shoppers Food Warehouse. He has held additional positions in
several other distribution, retail and professional service
companies as a Board member, Chairman of the Executive Committee,
CFO, and CIO.
Jacqui Gerrard joined Vertex in March 2000. From March 1999 to
February 2000 Ms. Gerrard served as the Director of Human
Resources for Logical, the systems integration division of
Datatec, a software networking corporation. From February 1998 to
February 1999 she managed the European organization of Peak
Technologies, after first serving as the Human Resource Director
for the European Division from September 1997. Prior to that, Ms.
Gerrard was a Director of Human Resources for ICL, an information
technology systems company. Ms. Gerrard terminated her employment
with the Company effective October 31, 2002 following the disposal
of all of our European operations.
Donald W. Rowley joined the Company in December 2000. Previously,
Mr. Rowley was with Brightstar Information Technology Group from
January 1999, when he was appointed its Chief Financial Officer
and Secretary, and was elected to the Brightstar Board. Prior to
that appointment, he was interim Chief Financial Officer and a
director of PetroChemNet, Inc., a business-to-business internet-
based marketplace serving the petrochemical and petroleum
segments of the energy industry, from 1998 to 1999. Mr. Rowley
resigned from his executive officer position effective March 31,
2003, but continues in the employ of the Company on a part-time
basis in a non-officer capacity.
Barbara H. Martorano joined the Company in June 1990 and has
served in a variety of positions, including Sales Order
Processing Coordinator, Office Administrator, Executive Assistant
to the President, CEO and Chairman of the Board, as well as,
Corporate Secretary as of January 17, 1996.
37
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual
and long-term compensation for services in all capacities to the
Company for the fiscal years ended September 30, 2002, 2001, and
2000 of the five highest compensation persons who were, at
September 30, 2002, executive officers of the Company and earned
$100,000 or more in any of the respective fiscal years:
Long Term
Annual Compensation
Compensation Securities
Name and Principal Bonus & Other Underlying
Position Year Salary Cash Items Options(#)
------------------ ----- -------- -------------- -------------
Hugo H. Biermann 2002 $300,000 - -
Executive Chairman 2001 300,000 - -
of the Board of Directors 2000 300,000 - 475,000
Nicholas R. H. Toms 2002 300,000 - -
Chief Executive Officer 2001 300,000 - -
And Director 2000 300,000 - 475,000
Mark A. Flint 2002 275,000 $100,000(1) -
Chief Financial Officer 2001 40,104 - 400,000
2000 - - -
Jacqui Gerrard 2002 187,200 - -
Chief Operating Officer - 2001 188,500 71,050 50,000
Europe 2000 95,425 39,800 100,000
Donald W. Rowley 2002 225,000 - -
Executive Vice President - 2001 206,731 - 200,000
Strategic Development 2000 - - -
(1)Such amount is accrued however unpaid as of June 30, 2003.
(2)All officers and U.S. based employees of Vertex are
eligible to participate in the 401k Savings and Retirement
plan that is funded by voluntary employee and Company
contributions. See "401(k) Savings and Retirement Plan".
(3)In accordance with the rules of the Securities and
Exchange Commission, other compensation received in the form
of perquisites and other personal benefits has been omitted
because such perquisites and other personal benefits
constituted less than the lesser of $50,000 or 10% of the
total annual salary and bonus for the Named Executive Officer
for such year.
38
Employment Agreements
Effective October 1, 1999, Edwardstone entered into an agreement
with the Company pursuant to which Edwardstone agreed to provide
the services of Messrs. Biermann and Toms to act as the Joint
Chairmen and Joint Chief Executive Officers of the Company. Such
Agreement provided for aggregate annual compensation of $600,000
and entitled them to participate in all employee benefit plans
sponsored by Vertex in which all other executive officers of
Vertex participate. The agreement had an initial five-year term
and continued thereafter on a year-to-year basis on the same
terms and conditions existing at the time of renewal, unless
terminated by either the Company or the employee upon thirty days
written notice prior to the end of either the initial (5 year)
term or any subsequent one-year term, as the case may be. This
agreement was terminated by mutual consent effective September
30, 2002.
On April 17, 2000, the Company entered into an agreement with
employee, Mr. Raymond J. Broek, commencing on March 6, 2000 for a
period of five (5) years. The employment agreement provides for
an annual base salary of at least $150,000 and a bonus of up to
$100,000 per annum based on performance goals established. The
agreement further provides Mr. Broek with options to purchase up
to 125,000 shares of the Company's common stock at an exercise
price of $6.00 per share. Of these options, 25,000 vested
immediately and the balance vest ratably over 5 years. In the
event Mr. Broek is discharged without cause, he will be entitled
to receive the greater of his base salary for the remaining term
of the Agreement or, his base salary for 12 months, in a lump sum
payment.
On May 30, 2001, the Company entered into an agreement with
employee, Mr. Donald W. Rowley, commencing on December 4, 2000.
The employment agreement provides for an annual base salary of
$250,000, and a bonus of up to 100% of base salary based on
performance goals established. The agreement further provides Mr.
Rowley with the option to purchase up to 200,000 shares of the
Company's common stock. These options vest ratably over 5 years.
In the event Mr. Rowley is discharged without cause, he will be
entitled to receive his base salary and bonus for 12 months.
Stock Option Grants in Last Fiscal Year
The following table describes certain information regarding
stock options granted to each of the named executive officers in
the fiscal year ended September 30, 2002, including the potential
realizable value over the ten-year term of the options, based on
assumed rates of stock appreciation of 5% and 10%, compounded
annually. These assumed rates of appreciation comply with the
rules of the Securities and Exchange Commission and do not
represent Vertex's estimate of future stock price. Actual gains,
if any, on stock option exercises will be dependent on the timing
of such exercises and the future performance of Vertex's common
stock.
39
Potential
Percent realizable
of total value at assumed
options annual rates of
Number of granted to stock price
Securities employees appreciation for
Underlying in Exercise options terms
Options fiscal Price Expiration ---------------
Granted year ($/share) Date 5% 10%
---------- ---------- ---------- ---------- ----- ------
None in 2002
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-
End Option Values
The following table describes for the named executive
officers, the exercisable and unexercised options held by them as
of September 30, 2002. No options were exercised by the named
executive officers in fiscal 2002. The "Value of Unexercised In-
the-Money Options at Fiscal Year End" is based on a value of $.07
per share, the closing price of Vertex's common stock on The
Nasdaq Stock Market's National Market, on September 30, 2002,
less the per share exercise price, multiplied by the number of
shares to be issued upon exercise of the options.
Number of Securities Value of unexercisied
Underlying unexercised in-the-money options
Options at fiscal year end at fiscal year end
--------------------------- ------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Hugo Biermann 475,000 - n/a n/a
Nicholas Toms 475,000 - n/a n/a
Mark Flint 160,000 240,000 n/a n/a
Jacqui Gerrard 80,000 70,000 n/a n/a
Donald Rowley 40,000 160,000 n/a n/a
401(k) Savings And Retirement Plan
Vertex maintains a 401(k) savings plan (the "401(k) Plan")
for the benefit of all U.S. based employees age 18 or over who
have worked for at least three months and who are not covered by
a collective bargaining agreement. The 401(k) Plan is qualified
under Section 401(a) of the Code and is intended to qualify under
Section 401(k) of the Code. The assets accumulated by the 401(k)
Plan are held in a trust.
40
Under the current terms of the 401(k) Plan, employees may
elect to defer from Federal income tax up to 17% of their annual
compensation, not to exceed Internal Revenue Code limits and have
it contributed to the 401(k) Plan on their behalf. Beginning
January 1, 2001, the Company contributed 50% of an employee's
salary deferral up to 6% or a 3% match. The Company's contribution
is funded after each calendar year end, with either cash or Vertex
common stock, at the Company's option. The salary deferrals
are fully vested, while the Company's contributions vest 20% upon
the completion of the first year of service and 20% each successive
year thereafter, until completion of the fifth year of service or,
if earlier, upon the death, disability or retirement of the
participant. Benefits under the 401(k)Plan are generally
distributed in a lump sum following the participant's retirement,
death, disability or termination of employment, or in a case of
hardship, prior to the termination of the participant's
employment.
The Company contributions for the years ended September 30 were
$202,000 for 2002, $290,000 for 2001, and $0 for 2000.
Compensation Committee Interlocks and Insider Participation
The following non-employee directors were members of the
Stock Option/Compensation Committee of the Board of Directors
during 2002: Wayne Clevenger (until his resignation in August
2002), George Powch (until his resignation in December 2001) and
Otto Leistner. During 2002 the Company paid $218,000 to MidMark
Associates for consulting services pursuant to a five year
management agreement entered into in September 1999 and
terminated on August 13, 2002. Mr. Clevenger is a managing
director of MidMark Associates. On February 6, 2001 the Board
awarded Messrs. Leistner and Powch each 30,000 options to
purchase the Company's stock at an exercise price of $8.50 per
share. No stock option awards were granted in 2002.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the
"Exchange Act") requires the Company's directors and executive
officers, and holders of more than 10% of the Company's Common
Stock, to file with the Securities and Exchange Commission (the
"SEC") initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the
Company. Such executive officers, directors and 10% stockholders
are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file.
Based on its review of such forms that it received, or
written representations from reporting persons that no Forms 5
were required for such persons, the Company believes that, during
fiscal 2002, all Section 16(a) filing requirements have not
been satisfied on a timely basis for members of the Board of
Directors and Executive Officers.
41
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
General
Notwithstanding any statement to the contrary in any of the
Company's previous or future filings with the Securities and
Exchange Commission, this Report shall not be incorporated by
reference into any such filings.
The Stock Option/Compensation Committee of the Company's
Board of Directors (the "Committee") has furnished the following
report on Executive Compensation in accordance with the rules and
regulations of the Securities and Exchange Commission. This
report outlines the duties of the Committee with respect to
executive compensation, the various components of the Company's
compensation program for executive officers and other key
employees, and the basis on which the 2002 compensation was
determined for the executive officers of the Company, with
particular detail given to the compensation for the Company's
Chief Executive Officer.
Compensation of Executive Officers Generally
The Committee is responsible for establishing compensation
levels for the executive officers of the Company, including the
annual bonus plan for executive officers and for administering
the Company's Stock Option Plan. The Committee was comprised of
three non-employee directors: Messrs. Clevenger (Chair) (until
his resignation in August 2002), Duff (until his resignation in
November 2001) and Leistner. The Committee's overall objective is
to establish a compensation policy that will (i) attract, retain
and reward executives who contribute to achieving the Company's
business objectives; (ii) motivate executives to obtain these
objectives; and (iii) align the interests of executives with
those of the Company's long-term investors. The Company
compensates executive officers with a combination of salary and
incentives designed to focus their efforts on maximizing both the
near-term and long-term financial performance of the Company. In
addition, the Company's compensation program rewards individual
performance that furthers Company goals. The executive
compensation program includes the following: (i) base salary;
(ii) incentive bonuses; (iii) long-term equity incentive awards
in the form of stock option grants; and (iv) other benefits. Each
executive officer's compensation package is designed to provide
an appropriately weighted mix of these elements, which
cumulatively provide a level of compensation roughly equivalent
to that paid by companies of similar size and complexity engaged
in the same or similar business.
Base Salary. Base Salary levels for each of the Company's
executive officers, including the Executive Chairman and the
Chief Executive Officer, are generally set within a range of base
salaries that the Committee believes are paid to similar
executive officers at companies deemed comparable based on the
similarity in revenue level, industry segment and competitive
employment market to the Company. In addition, the Committee
generally takes into account the Company's past financial
performance and future expectations, as well as the performance
of the executives and changes in the executives'
responsibilities. There were no increases in the base salary for
any of the Executive Officers of the Company during fiscal 2002,
reflecting the Company's objectives of cash preservation.
42
Incentive Bonuses. The Committee recommends the payment of
bonuses to provide an incentive to executive officers to be
productive over the course of each fiscal year. These bonuses are
awarded only if the Company achieves or exceeds certain corporate
performance objectives. The incentive bonus to each executive
officer is based on the individual executive's performance as it
relates to the Company's performance. With the exception of the
Chief Financial Officer and the Chief Operating Officer - Europe
(which bonuses were guaranteed bonuses), there were no incentive
bonuses granted to any of the executive officers of the Company
in 2002 or 2001, reflective of the operating losses and the
desire to preserve cash.
Equity Incentives. Stock options are used by the Company for
payment of long-term compensation to provide a stock-based
incentive to improve the Company's financial performance and to
assist in the recruitment, retention and motivation of
professional, managerial and other personnel. Generally, stock
options are granted to executive officers upon commencement of
employment with the Company and from time to time thereafter,
based primarily upon the individual's actual and/or potential
contributions to the Company and the Company's financial
performance. Stock options are designed to align the interests of
the Company's executive officers with those of its shareholders
by encouraging executive officers to enhance the value of the
Company, the price of the Common Stock, and hence, the
shareholder's return. In addition, the vesting of stock options
over a period of time is designed to create an incentive for the
individual to remain with the Company. The Company has granted
options to the executives on an ongoing basis to provide
continuing incentives to the executives to meet future
performance goals and to remain with the Company. During the
fiscal year ended September 30, 2001, options to purchase an
aggregate of 715,000 shares of Common Stock were granted to the
Company's executive officers based on the Committee's assessment
of the individual contributions of the executive officers
receiving options. None of the options granted to the Company's
executive officers were granted to Messrs. Biermann or Toms. No
options were granted in 2002.
Other Benefits. Benefits offered to the Company's executive
officers are provided to serve as a safety net of protection
against the financial catastrophes that can result from illness,
disability, or death. Benefits offered to the Company's executive
officers are substantially the same as those offered to all of
the Company's regular employees. The Company also maintains a tax-
qualified deferred compensation 401(k) Savings and Retirement
Plan covering all of the Company's eligible U.S. based employees.
Compensation of the Chief Executive Officer
The Committee annually reviews the performance and compensation
of the Chief Executive Officer based on the assessment of
his past performance and its expectation of his future
contributions to the Company's performance. Messrs. Biermann
and Toms served as Joint CEOs from September 27, 1999 through
June 2001, at which time Mr. Biermann became Executive Chairman
and Mr. Toms became the Chief Executive Officer. Both
Mr. Biermann and Mr. Toms serve under a five year agreement with
compensation at $300,000 each per annum, which compensation has
remained unchanged since September 1999. The Committee believes
the compensation paid to Messrs. Biermann and Toms was reasonable
given the competitive nature of the market place for executive
talent, given the implementation of cost and expense reductions
to align the company's business with its core competencies and
the lack of base pay increases and bonuses to reflect the results
achieved.
43
Policy with Respect to Qualifying Compensation for Deductibility
Section 162(m) of the Internal Revenue Code imposes a limit
on tax deductions for annual compensation (other than performance-
based compensation) in excess of one million dollars paid by a
corporation to its Chief Executive Officer and the other four
most highly compensated executive officers of a corporation. The
Company has not established a policy with regard to Section
162(m) of the Code, since the Company has not and does not
currently anticipate paying cash compensation in excess of one
million dollars per annum to any employee. None of the
compensation paid by the Company in 2002 was subject to the
limitations on deductibility. The Board of Directors will
continue to assess the impact of Section 162(m) on its
compensation practices and determine what further action, if any,
is appropriate.
Stock Option/Compensation Committee
Otto Leistner
STOCK PERFORMANCE GRAPH
The following line-graph provides a comparison of the
cumulative total shareholder return on our Common Stock for the
period September 30, 1996 through September 30, 2002, against the
cumulative shareholder return during such period achieved by The
Nasdaq Stock Market (U.S. Companies) ("Nasdaq US") and a Peer
Index ("The JP Morgan H&Q Technology Index" through 2001, when it
was discontinued, and the "RDG Software Composite Index"). The
graph assumes that $100 was invested on September 30, 1996 in our
Common Stock and in each of the comparison indices, and assumes
reinvestment of dividends.
JPMorgan
NASDAQ Stock H&Q RDG Software
Measurement Period Vertex Market (U.S. Technology Composite
(Fiscal Year Covered) Interactive Companies) Index Index
- ---------------------- ----------- --------------- ------------ --------------
September 30, 1996 $100.00 $100.00 $100.00 $100.00
September 30, 1997 86.84 137.27 149.10 152.12
September 30, 1998 86.84 139.44 138.53 207.93
September 30, 1999 242.11 227.82 266.83 345.78
September 30, 2000 1,542.15 302.47 434.45 447.55
September 30, 2001 86.74 123.64 144.15 189.77
September 30, 2002 5.89 97.34 - 146.55
The Stock Performance Graph shall not be deemed incorporated
by reference by any general statement incorporating by reference
this proxy statement into any filing under the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as
amended (collectively, the "Acts"), except to the extent that the
Company specifically incorporates this information by reference,
and shall not otherwise be deemed filed under such Acts.
44
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG VERTEX INTERACTIVE, INC.,
THE NASDAQ STOCK MARKET (U.S.) INDEX,
THE JP MORGAN H&Q TECHNOLOGY INDEX
AND THE RDG SOFTWARE COMPOSITE INDEX
[PERFORMANCE GRAPH]
* $100 invested on 9/30/96 in stock or index-
including reinvestment of dividends.
45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the amount and percent of
shares of each class of stock that, as of February 28, 2003 are
deemed under the rules of the Securities and Exchange Commission
(the "Commission") to be "beneficially owned" by each member of
the Board of Directors of the Company, by each Named
Executive Officer of the Company, by all Directors and Executive
Officers of the Company as a group, and by any person or "group"
(as that term is used in the Securities Act of 1934, as amended)
known to the Company as of that date to be a "beneficial owner"
of more than 5% of the outstanding shares of the respective class
of stock.
Shares Beneficially Owned
Number (1) Percent(2)
PREFERRED "A":
5% Beneficial Owners:
Pitney Bowes, Inc. 1,356,852 100%
One Elmcroft Road
Stamford CT 06926
PREFERRED "B":
5% Beneficial Owners:
Pitney Bowes, Inc. 1,000 100%
One Elmcroft Road
Stamford CT 06926
PREFERRED "C"
5% Beneficial Owners:
MidMark Capital II L.P. 805 80.74%
177 Madison Avenue
Morristown, NJ 07960
Paine Webber Custodian 50 5.02%
F/B/O Wayne Clevenger
177 Madison Avenue
Morristown, NJ 07960
Joseph Robinson 50 5.02%
177 Madison Avenue
Morristown, NJ 07960
O'Brien Ltd Partnership 50 5.02%
177 Madison Avenue
Morristown, NJ 07960
Total as a Group 955 95.79%
46
COMMON STOCK:
5% Beneficial Owners:
MidMark Capital L.P.(3) 5,495,470 14.10%
177 Madison Avenue
Morristown, NJ 07960
Non-Employee Directors:
Otto Leistner (4) 572,875 1.54%
Named Executive Officers:
Hugo H. Biermann (5) 863,010 2.29%
Nicholas R. H. Toms (6) 1,314,014 3.49%
Jacqui Gerrard (7) 90,000 *
Donald W. Rowley (8) 80,000 *
Mark A. Flint (9) 160,000 *
All directors and executive officers
as a group (8 persons)(10) 3,188,899 8.25%
* Less than 1%
(1) Represents shares held directly and with sole voting and
investment power, except as noted, or with voting and
investment power shared with a spouse.
(2) For purposes of calculating the percentage beneficially
owned, the number of shares of each class of stock deemed
outstanding include (i) 37,201,978 common shares, 1,356,852
Preferred "A" Shares; 1000 Preferred "B" Shares and 997 Preferred "C"
shares outstanding as of February 28, 2003 and (ii) shares issuable
by us pursuant to options held by the respective person or group which
may be exercised within 60 days following February 28, 2003
("Presently Exercisable Options"). Presently Exercisable
Options are considered to be outstanding and to be
beneficially owned by the person or group holding such
options for the purpose of computing the percentage ownership
of such person or group, but are not treated as outstanding
for the purpose of computing the percentage ownership of any
other person or group.
(3) Includes 300,000 shares issuable pursuant to presently
exercisable options and warrants to purchase 1,472,820 shares.
(4) Includes 50,000 shares issuable pursuant to presently
exercisable options.
(5) Includes 475,000 shares issuable pursuant to presently
exercisable options and 388,010 shares held in the name of
Bunter BVI Limited of which Mr. Biermann may be deemed to be
a beneficiary. Mr. Biermann, however, disclaims such
beneficial ownership.
(6) Includes 475,000 shares issuable pursuant to presently
exercisable options.
(7) Includes 90,000 shares issuable pursuant to presently
exercisable options.
(8) Includes 80,000 shares issuable pursuant to presently
exercisable options.
(9) Includes 160,000 shares issuable pursuant to presently
exercisable options.
(10) Includes 1,439,000 shares issuable pursuant to presently
exercisable options and 388,010 shares held by a
company for which by Mr. Biermann disclaims beneficial
ownership.
47
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Wayne L. Clevenger and Joseph R. Robinson, directors of the
Company until August 13, 2002, are partners in Midmark
Associates, which firm provided consulting services to the
Company. During fiscal 2001 and 2002, the Company paid $250,000
and $218,000 respectively, to Midmark Associates for consulting
services pursuant to a five-year management agreement entered
into in September 1999 that was terminated in August 2002
when Mr. Clevenger and Mr. Robinson resigned as directors. In
addition, during the year ended September 30, 2001, the Company
issued in the aggregate $5,500,000 of convertible notes payable
to Midmark Capital L.P., Midmark Capital II L.P., and certain
individuals related to these two entities (collectively "Midmark
Capital"). During the year ended September 30, 2002, Midmark
Capital elected to convert approximately $782,000 of principal
and $218,000 of accrued interest into 997 shares of Series "C"
Preferred Stock. The remaining convertible notes payable of
$4,718,717 with accrued interest at prime were convertible
into Series "C" Preferred Shares at a conversion price of
$1,000 per share, and the Series "C" Preferred Shares in turn
were convertible into Common Shares at $0.84 per shares. In
addition, during the year ended September 30, 2002, the
Company issued $3,000,000 of notes payable convertible into
3,000 shares of Series "C" Preferred Stock and in turn
convertible into 3,570,026 shares of Common Stock at $0.84 per
share, and borrowed $2,588,900 under a demand note payable.
(See Note 9 to the Consolidated Financial Statements).
On August 9, 2002, the remaining balance of the $4,718,717
convertible notes and $1,185,176 of the $3.0 million convertible
notes were fully settled with the sale of the French based advanced
planning software business to MidMark (See Note 2 to the
Consolidated Financial Statements). The remaining $1,814,324
or 10% convertible notes payable at September 30, 2002 are
collateralized by all tangible and intangible property of the
Company, except that the holders have executed in favor of
certain senior lenders a subordination of their right of payment
under the Notes and the priority of any liens on certain assets,
primarily accounts receivable.
On January 2, 2001, the Company awarded Otto Leistner, one of
its Directors, options exercisable at a price of $5.72 per share
for 20,000 unregistered shares of our common stock for the
accounting services he performed from September 22, 1999 thru
April 17, 2000 prior to his becoming a Director. In August 2001,
the Company issued a $359,375 convertible note payable to PARTAS
AG, which is owned by Mr. Leistner. This note was to
automatically convert into 250,000 shares of Vertex common stock
on the day that the Company obtained the requisite shareholder
approval for the issuance of shares to PARTAS AG. Since
shareholder approval was not obtained by February 22, 2002, the
principal amount plus any accrued interest (at prime rate) became
immediately due and payable. On July 31, 2002 this convertible
note payable was fully settled with the sale of the German point
solutions business to PARTAS AG (See Note 2 to the Consolidated
Financial Statements).
48
L. G. Schafran, a director of the Company, provided
consulting services to the Company prior to his election as a
Director on August 9, 2001. For these services Mr. Schafran
received 30,000 non-qualified, in-plan options at an exercise
price of $1.51, all of which vested on the date of grant, August
14, 2001. Mr. Schafran resigned as a Director of the Company on
July 8, 2002.
ITEM 14. Controls and Procedures
Within the 90-day period prior to the date of this report, a
preliminary evaluation was carried out, under the
supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures pursuant to Rule 13a-
15 of the Securities Exchange Act of 1934. Based upon, the
Company's disclosure as to material weaknesses in internal
controls as reflected in its 8-K filed April 16, 2002, the
disclosure referenced in this Report's Part II, Item 9, the
lateness of this filing, and its preliminary evaluation, the
Chief Executive Officer and Chief Financial Officer
concluded that given additional procedures performed, our
disclosure controls and procedures were effective, in all
material respects, with respect to the recording, processing,
summarizing, and reporting of information required to be
disclosed by us in the reports that we file or submit under
the Exchange Act, but our disclosure controls and procedures
were ineffective, in all material respects, with respect to
completing the recording, processing, summarizing, and
reporting of information, within the time periods specified
in the SEC's rules and forms, of information required to be
disclosed by us in the reports that we file or submit under
the Exchange Act given the resources available to the Company.
As more fully described in Item 7 - Liquidity and Capital
Resources and in Footnote 1 to the Consolidated Financial
Statements, there is substantial doubt as to the Company's
ability to continue as a going concern. The Company is
seeking additional funding, the amount and timing of which
cannot be assured. However, as soon as additional financial
resources can be made available to acquire additional human
resources, the Company, its Chief Executive Officer, and its
Chief Financial Officer will conduct a full evaluation of
its controls and procedures and design such controls and
procedures to allow the Company to comply with Rule 13a-15
of the Securities Exchange Act of 1934.
49
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND
REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. and 2. Financial Statements:
1. Financial Statements and Supplementary Data:
Index to Financial Statements
Reports of Independent Auditors
Balance Sheets as of September 30, 2002 and 2001
Statements of Operations for the years ended September 30,
2002, 2001 and 2000.
Statements of Cash Flows for the years ended September 30,
2002, 2001 and 2000.
Statements of Changes in Stockholders' Equity for the
years ended September 30, 2002, 2001 and 2000.
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
Schedules for the three years ended September 30, 2002, 2001, and
2000.
Schedule II - Valuation Qualifying Accounts
Schedules other than those listed above have been omitted
because they are not applicable or the required
information is shown in the financial statements or notes
thereto.
3. Exhibits:
The following is a list of exhibits incorporated by reference
from the Company's Registration Statement on Form S-18 filed
under the Securities Act of 1933, as amended and effective June
2, 1986 (File No. 33-897-NY), those filed pursuant to
Registration Statement on Form 8-A under the Securities Exchange
Act of 1934, as amended, and those material contracts of the
Company previously filed pursuant to the Securities Act of 1934
as amended, and those filed herewith.
50
Exhibit Description
Number
2.1 Form of Common Stock Certificate (incorporated by
reference to the Registration Statement on Form S-18
filed under the Securities Act of 1933, as amended and
effective June 2, 1986 (File No. 33-897-NY).
3.1 Certificate of Amendment to the Certificate of
Incorporation of Vertex Interactive, Inc. filed with
the Secretary of State, State of New Jersey on February
7, 2001, on October 18, 2001 and November 2, 2001
(incorporated by reference to the Form 10-Q filed
May 20, 2002).
3.2 Amended By-laws, amended as of August 9, 2001
(incorporated by reference to the Form 10-K filed January
25, 2002).
10.5 Incentive Stock Option Plan dated October 10, 1985, and
amended February 14, 2000 (incorporated by reference to
the Form 10-K filed on December 18, 2000).
10.54 Management agreement between the Company and
Edwardstone & Company, Inc. dated September 27, 1999
(incorporated by reference to the Form 10-K filed on
January 13, 2000).
10.55 Share Purchase Agreement, by and among Vertex
Industries, Inc. St. Georges Trustees Limited, as
trustee on behalf of the John Kenny Settlement and the
Godfrey Smith Settlement, John Kenny and Bryan J.
Maguire and Godfrey Smith dated June 21, 1999, as
amended September 27, 1999, (incorporated by reference
to the Form 8-K filed October 7, 1999).
10.56 Share Purchase and Transfer Agreement, 1999, between
Gregor von Opel and Vertex Industries, Inc. dated as of
June 21, 1999 and as amended September 27, 1999,
(incorporated by reference to the Form 8-K filed
October 7, 1999).
10.57 Stock Purchase Agreement by and among Vertex
Interactive, Data Control Systems and The Stockholders
of Data Control Systems, Inc. dated March 31, 2000
(incorporated by reference to the Form 8-K filed April
12, 2000).
10.58 Agreement and Plan of Merger, dated September 18, 2000,
by and among Vertex Interactive, Rensoft Acquisition
Corp. and Renaissance Software, Inc. (incorporated by
reference to the Form 8-K filed October 2, 2000).
10.59 Form of Note Purchase Agreement dated June 19, 2001
between Vertex Interactive, Inc. and MidMark Capital
II, Lp with respect to the Convertible Notes Payable
(incorporated by reference to the Form 10-Q filed
August 14, 2001).
51
10.60 Form of Subscription Agreement dated April l3, 2001
with respect to the private placement of common shares
(incorporated by reference to the Form 10-Q filed
August 14, 2001).
10.61 Agreement and Plan of Merger, dated December 29, 2000,
between Vertex Interactive and Applied Tactical
Systems, Inc. (incorporated by reference to the Form 8-K
filed March 2, 2001 and Form 8-K a filed March 14,
2001.)
10.62 Asset Purchase Agreement and Ancillary Agreements
between Vertex Interactive, Inc. and Finmek Holding N.
V.-Genicom S.p.A., Genicom Ltd., Genicom S.A. dated
October 6, 2000 (incorporated by reference to the Form
10-K filed on January 25, 2002).
10.63 Transaction Agreement among Vertex Interactive, Inc.,
Pitney Bowes Inc. and Renaissance Software, Inc. dated
February 7, 2001 (incorporated by reference to the Form
10-K filed January 25, 2002).
10.64 Note Purchase Agreement dated July 31, 2001 by and
among Vertex Interactive and Partas AG (incorporated by
reference to the Form 10-K filed on January 25, 2002).
10.65 Employment Agreement dated April 17, 2000 between
Vertex Interactive, Inc. and Raymond J. Broek
(incorporated by reference to the Form 10-K filed on
January 25, 2002).
10.66 Employment Agreement dated May 30, 2001 between Vertex
Interactive, Inc. and Donald W. Rowley (incorporated
by reference to the Form 10-K filed on January 25, 2002).
10.67 Stock Purchase Agreement by and between Pitney Bowes
Inc. and Vertex Interactive, Inc. dated October 18,
2001 for the purchase of Series "B" Preferred Stock
(incorporated by reference to the Form 10-Q filed
February 20,2002).
10.68 Securities Purchase Agreement by and among Laurus
Master Fund, Ltd. and Vertex Interactive, Inc. dated
November 20, 2001 for the purchase of 7% Convertible
Notes Payable (incorporated by reference to the Form 10-
Q filed February 20,2002).
10.69 Note Purchase Agreement by and among MidMark Capital
II, L.P. and Vertex Interactive, Inc. dated as of
November 1, 2001 for the purchase of 10% Convertible
Notes Payable (incorporated by reference to the Form 10-
Q filed February 20,2002).
10.70 Accounts Receivable Purchase Agreement dated February
27, 2002 between Vertex Interactive, Inc., its North
American subsidiaries and Laurus Master Fund, Ltd.
(incorporated by reference to the Form 10-Q filed May
20,2002).
52
10.71 Form of Conversion Agreement between Vertex
Interactive, Inc. and MidMark dated March 7, 2002 and
the Amended and Restated Convertible Promissory Note
dated March 7, 2002(incorporated by reference to the
Form 10-Q filed May 20,2002).
10.72 Asset Purchase Agreement between Vertex, Renaissance
and Pitney Bowes dated April 19, 2002 (incorporated by
reference to the Form 10-Q filed May 20,2002).
10.73 ICS Sale Agreement between Vertex Interactive, Partas
Aktiengesellschaft and ICS AG dated July 12, 2002
(filed herewith).
10.74 Stock and Debt Purchase Agreement between MidMark
Capital II, L.P., MidMark Capital, L.P., DynaSys, S.A.
and Vertex Interactive, Inc. dated August 9, 2002
(filed herewith).
21.0 Subsidiaries of Vertex Interactive, Inc.(filed herewith).
23.1 Consent of WithumSmith+Brown P.C. (filed herewith).
23.2 Consent of Ernst & Young LLP (filed herewith).
99.1 Certification of Chief Executive Officer and Chief Financial
Officer required under Section 906 of the Sarbanes-Oxley
Act of 2002. This exhibit is furnished, not filed, in
accordance with SEC Release Number 33-8212.
(b) Reports on Form 8-K
1) Form 8-K filed on August 21, 2002 relating to the
Company's notification by NASDAQ that the NASDAQ
Listing Qualifications Panel (the "Panel") has
determined to delist the Company's securities from
the NASDAQ Stock Market.
2) Form 8-K filed on October 2, 2002 regarding the
CEO and CFO certifications of the Form 10-Q filed
October 2, 2002.
3) Form 8-K filed on December 5, 2002 regarding the
resolution
and dismissal of claims relating to its merger with
Applied Tactical Systems ("ATS").
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Company has duly caused this
report to be signed on its behalf by the undersigned, thereunto
duly authorized.
VERTEX INTERACTIVE, INC.
Date: July 31, 2003 /s/ Nicholas R. Toms
Nicholas R. Toms
Chief Executive Officer
Date: July 31, 2003 /s/ Mark A. Flint
Mark A. Flint
Chief Financial Officer
Pursuant to the requirements by the Securities Exchange Act of
1934, this report has been signed by the following persons on
behalf of the Company and in the capacities and on the dates
indicated:
July 31, 2003 /s/ Hugo H. Biermann
Hugo H. Biermann
Executive Chairman and
Director
July 31, 2003 /s/ Nicholas R. Toms
Nicholas R. Toms
Chief Executive Officer and
Director
July 31, 2003 /s/ Otto Leistner
Otto Leistner
Director
54
CERTIFICATIONS
I, Nicholas R. Toms, certify that:
1. I have reviewed this annual report on Form 10-K of
Vertex Interactive, Inc.;
2. Based on my knowledge, this annual report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made,
in light of the circumstances under which such statements
were made, not misleading with respect to the period covered
by this annual report;
3. Based on my knowledge, the financial statements, and
other financial information included in this annual report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures
to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this annual report
(the "Evaluation Date"); and
c) presented in this annual report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of
registrant's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have identified
for the registrant's auditors any material weaknesses
in internal controls;
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
55
6. The registrant's other certifying officers and I have
indicated in this annual report whether there were
significant changes in internal controls or in other
factors that could significantly affect internal
controls subsequent to the date of our most recent
evaluation, including any corrective actions with
regard to significant deficiencies and material
weaknesses.
July 31, 2003
/s/Nicholas R. Toms
Nicholas R. Toms
Chief Executive Officer
56
CERTIFICATIONS
I, Mark A. Flint, certify that:
1. I have reviewed this annual report on Form 10-K of
Vertex Interactive, Inc.;
2. Based on my knowledge, this annual report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made,
in light of the circumstances under which such statements
were made, not misleading with respect to the period covered
by this annual report;
3. Based on my knowledge, the financial statements, and
other financial information included in this annual report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures
to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this annual report
(the "Evaluation Date"); and
c) presented in this annual report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of
registrant's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have identified
for the registrant's auditors any material weaknesses
in internal controls;
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
57
6. The registrant's other certifying officers and I have
indicated in this annual report whether there were
significant changes in internal controls or in other
factors that could significantly affect internal
controls subsequent to the date of our most recent
evaluation, including any corrective actions with
regard to significant deficiencies and material
weaknesses.
July 31, 2003
/S/Mark A. Flint
Mark A. Flint
Chief Financial Officer
58
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS:
Reports of Independent Auditors F-2, F-3
Consolidated Balance Sheets as of September 30, 2002 and 2001 F-4, F-5
Consolidated Statements of Operations for the years ended
September 30, 2002, 2001, and 2000 F-6
Consolidated Statements of Cash Flows for the years ended
September 30, 2002, 2001, and 2000 F-7
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the years ended September 30,
2002, 2001, and 2000 F-8, F-9
Notes to Consolidated Financial Statements F-10
SUPPLEMENTAL SCHEDULE
Schedule II - Valuation and Qualifying Accounts
for the years ended September 30,
2002, 2001, and 2000 F-51
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Vertex Interactive, Inc.:
We have audited the accompanying consolidated balance sheet of Vertex
Interactive, Inc. and Subsidiaries as of September 30, 2002, and the related
consolidated statements of operations, stockholders' equity (deficit) and
cash flows for the year then ended. Our audit also included the financial
statement schedule listed in the index at Item 15(a). These financial
statements and the schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Vertex
Interactive, Inc. and Subsidiaries as of September 30, 2002, and the
consolidated results of their operations and their cash flows for the year
ended September 30, 2002 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial
statement schedule taken as a whole, presents fairly in all material respects
the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred significant operating losses
and, at September 30, 2002 has a working capital deficiency of $27.4 million
and a Stockholders' Deficit of $26.8 million. These factors raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
As discussed in Notes 3 and 4 to the financial statements, the Company changed
its method of accounting for goodwill and other intangible assets in accordance
with Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" effective October 1, 2001.
/s/ WithumSmith+Brown P.C.
Livingston, New Jersey
April 30, 2003 (July 31, 2003 as to Notes 1 and 19)
F-2
Report of Independent Auditors
The Board of Directors and Shareholders of Vertex Interactive, Inc.
We have audited the accompanying consolidated balance sheet of Vertex
Interactive, Inc. and subsidiaries as of September 30, 2001 and the related
consolidated statements of operations, cash flows and changes in stockholders'
equity for the years ended September 30, 2001 and 2000. Our audits also included
the financial statement schedule for the years ended September 30, 2001 and 2000
listed in the Index at Item 15(a)2. These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Vertex
Interactive, Inc. and subsidiaries at September 30, 2001, and the consolidated
results of their operations and their cash flows for the years ended September
30, 2001 and 2000 in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule for the years ended September 30, 2001 and 2000, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
As more fully discussed in Note 1 to the consolidated financial statements, the
Company's recurring losses from operations, negative working capital, rate of
cash consumption and lack of sufficient current financing raise substantial
doubt about its ability to continue as a going concern. Management's plans as to
these matters are also described in Note 1. The 2001 consolidated financial
statements and financial statement schedule do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
MetroPark, New Jersey
January 25, 2002
F-3
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, September 30,
2002 2001
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 74,016 $ 1,411,222
Accounts receivable, less allowance for doubtful accounts
of $929,030 and $380,568 at September 30, 2002 and 2001 936,246 11,224,533
Inventories, net 941,357 5,065,214
Prepaid expenses and other current assets 263,260 1,521,730
------------ -------------
Total current assets 2,214,879 19,222,699
PROPERTY, EQUIPMENT, AND CAPITAL LEASES
Property and equipment 1,387,620 6,283,848
Capital leases - 350,168
------------ -------------
Total property, equipment and capital leases 1,387,620 6,634,016
Less: Accumulated depreciation and amortization (1,200,546) (2,270,097)
------------ -------------
Net property, equipment and capital leases 187,074 4,363,919
OTHER ASSETS:
Goodwill - 24,627,785
Other intangible assets, net of amortization of
$1,007,088 at September 30, 2001 - 3,721,802
Capitalized software, net of amortization of $115,756
and $24,426 at September 30, 2002 and 2001 231,513 420,554
Other assets 166,965 1,082,524
------------ -------------
Total other assets 398,478 29,852,665
------------ -------------
Total assets $ 2,800,431 $ 53,439,283
============ =============
See notes to consolidated financial statements.
F-4
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
September 30, September 30,
2002 2001
------------- -------------
CURRENT LIABILITIES:
Current portion of obligations under capital leases $ - $ 163,425
Bank credit lines - 1,824,528
Senior credit facility 145,736 -
Notes payable 1,602,500 2,677,517
Notes payable - related parties 2,588,900 -
Convertible notes payable - related parties 1,814,324 359,375
Mortgage notes payable current portion - 75,793
Accounts payable 4,429,065 8,432,386
Liabilities associated with subsidiaries in liquidation 7,263,694 -
Payroll and related benefits accrual 2,074,902 4,916,639
Litigation related accruals 4,122,123 3,856,948
Other accrued expenses and liabilities 3,933,725 5,700,965
Advances from customers 343,547 612,077
Deferred revenue 1,317,440 5,739,843
------------ ------------
Total current liabilities 29,635,956 34,359,496
LONG-TERM LIABILITIES:
Obligations under capital leases - 106,201
Mortgage notes payable - 1,392,858
Convertible notes payable - related parties - 5,500,000
Other long term liabilities - 130,201
------------ ------------
Total long-term liabilities - 7,129,260
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Series A preferred stock, par value $.01 per share; 2,000,000
shares authorized, 1,356,852 issued and outstanding
($10,000,000 aggregate liquidation preference) 13,569 13,569
Series B preferred stock, par value $0.01 per share;
1,000 shares authorized, 1,000 issued and outstanding
($1,000,000 aggregate liquidation preference) 10 -
Series C preferred stock, par value $0.01 per share;
10,000 shares authorized, 997 issued and outstanding
($997,000 aggregate liquidation preference) 10 -
Common stock, par value $.005 per share; 75,000,000 shares
authorized; 37,201,978 and 34,909,506 shares issued at
September 30, 2002 and 2001, respectively 186,011 174,548
Additional paid-in capital 154,979,295 149,321,766
Deferred compensation - (180,557)
Accumulated deficit (180,681,702) (135,907,323)
Accumulated other comprehensive loss (1,265,478) (1,426,307)
------------- -------------
(26,768,285) 11,995,696
Less: Treasury stock, 87,712 and 40,055 shares (at cost) (67,240) (45,169)
------------- -------------
Total stockholders' equity (deficit) (26,835,525) 11,950,527
------------- -------------
Total liabilities and stockholders' equity (deficit) $ 2,800,431 $ 53,439,283
============= =============
See notes to consolidated financial statements.
F-5
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30,
---------------------------------------
2002 2001 2000
------------ ------------ -----------
REVENUES $36,135,217 $59,087,470 $47,769,311
COST OF SALES 23,894,594 37,586,253 32,562,140
------------ ------------ -----------
GROSS PROFIT 12,240,623 21,501,217 15,207,171
------------ ------------ -----------
OPERATING EXPENSES:
Selling and administrative 22,503,288 34,510,749 13,407,440
Research and development 4,179,553 7,039,014 1,230,511
Depreciation and amortization
of intangibles 1,237,162 15,791,510 1,594,152
Provision for termination of leases 1,102,984 300,000
In-process R&D write-off and
merger related expenses - 3,600,000 7,737,000
Impairment of goodwill and
other intangible assets 18,973,832 78,364,560 -
----------- ------------ ------------
Total operating expenses 47,996,819 139,605,833 23,969,103
----------- ------------ ------------
OPERATING LOSS (35,756,196) (118,104,616) (8,761,932)
OTHER INCOME AND (EXPENSES):
Interest income 93,967 141,358 311,103
Interest expense (2,875,396) (1,035,140) (470,867)
Provision for litigation (2,653,891) (3,100,000) -
Loss on sale or liquidation of
non-core assets (3,080,656) - -
Other (367,364) (703,228) (113,470)
----------- ------------ ------------
Net other income (expense) (8,883,340) (4,697,010) (273,234)
----------- ------------ ------------
LOSS BEFORE INCOME TAXES (44,639,536) (122,801,626) (9,035,166)
Income Tax Provision 134,843 150,476 377,258
----------- ------------ ------------
NET LOSS ($44,774,379)($122,952,102) ($9,412,424)
============ ============= ===========
Net loss per share of
Common Stock:
Basic and diluted ($1.26) ($3.95) ($.46)
Weighted Average Number of
Shares Outstanding:
Basic and diluted 35,649,274 31,128,185 20,598,502
See notes to consolidated financial statements.
F-6
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30,
----------------------------------------
2002 2001 2000
------------ ------------ ------------
Cash Flows from Operating Activities:
- ------------------------------------
Net Loss ($44,774,379)($122,952,102) ($9,412,424)
Adjustments to reconcile net loss to
net cash used for operating activities:
Depreciation and amortization 1,237,162 15,791,510 1,594,152
Loss on sale or liquidation of non-core
businesses and assets 3,080,656 6,951 201,458
Imputed interest 100,000
Impairment of goodwill and other
intangible assets 18,973,832 78,364,560 -
Stock and stock options issued in
consideration for services and other
obligations - 2,325,850 404,896
Non cash interest expense 1,168,885
Amortization of deferred
compensation costs 180,557 324,655 -
In-process R&D write-off - 3,600,000 7,500,000
Changes in assets and liabilities, net of
effects of acquisitions and disposals:
Accounts receivable, net 4,948,464 781,789 (764,924)
Inventories, net 933,072 530,699 1,018,739
Prepaid expenses and other current assets 261,629 (750,052) (1,333,781)
Other assets 1,010,556 252,945 (673,760)
Accounts payable 184,707 2,548,730 2,849,172
Accrued expenses and other liabilities 5,580,371 3,577,123 (1,174,310)
Advances from customers ( 39,400) 184,663 (3,239,030)
Deferred revenue (1,075,747) (406,502) (734,287)
------------ ---------- -----------
Net cash used for
operating activities (8,329,635) (15,819,181) (3,664,099)
------------ ----------- -----------
Cash Flows from Investing Activities:
- ---------------------------------------
Additions to property and equipment (172,458) (1,070,668) (1,102,932)
Proceeds from sale of assets, net of cash sold 1,184,231 18,378 930,020
Acquisition of businesses, net of cash acquired - (4,626,222) (13,712,087)
------------ ----------- -----------
Net cash provided by (used for) investing
activities 1,011,773 (5,678,512) (13,884,999)
------------ ----------- -----------
Cash Flows from Financing Activities:
- -------------------------------------
Loans payable bank, net (683,386) (183,158) (460,629)
Proceeds from senior credit facility and
notes payable 8,774,900 5,859,375 -
Payment of senior credit facility and
notes payable (2,933,645) (272,500) (958,201)
Payment of mortgages (49,564) (69,205) (108,659)
Payment of capitalized lease obligations (127,656) (625,422) (151,056)
Proceeds from long term borrowing - 437,816 572,600
Net proceeds from issuance of stock 1,030,168 8,773,373 24,012,569
Proceeds from exercise of stock options - 910,484 882,940
Purchase of treasury stock (22,071) - -
----------- ---------- ----------
Net cash provided by
financing activities 5,988,746 14,830,763 23,789,564
----------- ----------- -----------
Effect of exchange rate changes on cash (8,090) 185,378 (335,084)
----------- ----------- -----------
Net (Decrease) Increase in Cash (1,337,206) (6,481,552) 5,905,382
Cash and Cash Equivalents at Beginning of Period 1,411,222 7,892,774 1,987,392
----------- ----------- -----------
Cash and Cash Equivalents at End of Period $74,016 $1,411,222 $7,892,774
=========== =========== ===========
Cash paid for:
Interest $ 930,000 $ 671,000 $ 411,000
Income taxes $ 237,000 $ 134,000 $ 98,000
See notes to consolidated financial statements.
F-7
VERTEX INTERACTIVE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock Common Stock Additional
------------------ ---------------- Paid-In Deferred
Shares Amount Shares Amount Capital Compensation
------ ------ ------ ------ ---------- ------------
Balance September 30, 1999 - - 18,526,746 $92,633 $17,223,403 $(21,310)
Exercise of stock options 583,899 2,920 880,020
Issuance of stock in connection with
new investors , net of expenses 3,293,750 16,469 20,199,600
Stock options issued to non-employees 5,061,615
Issuance of stock and stock options
in connection with acquisitions 3,671,144 18,356 54,738,510
Issuance of stock in connection with
license acquisition 80,386 402 999,598
Amortization of deferred compensation 21,310
Stock grants to employees 112,022 560 (560)
Deferred compensation 461,012 (461,012)
Other Comprehensive income (loss),
net of tax:
Net loss
Change in unrealized gain/(loss)
on investment
Change in unrealized foreign
exchange translation
gains/losses
Comprehensive income (loss)
------- ------- ---------- -------- ----------- --------
Balance September 30, 2000 - $ - 26,267,947 131,340 99,563,198 (461,012)
Exercise of stock options 437,481 2,187 908,297
Issuance of stock in connection with
new investors, net of expenses 4,186,754 20,933 7,830,033
Stock options issued to
non-employees 1,465,756
Issuance of stock in connection
with retirement of debt and other
obligations 576,501 2,883 2,496,009
Issuance of stock and stock options
in connection with acquisitions 1,356,852 13,569 3,440,823 17,205 37,014,273
Deferred compensation 44,200 (44,200)
Amortization of deferred
compensation 324,655
Other Comprehensive income (loss),
net of tax:
Net loss
Change in unrealized foreign
exchange translation
gains/losses
Comprehensive income (loss)
---------- ------- ---------- -------- ----------- ----------
Balance September 30, 2001 1,356,852 13,569 34,909,506 174,548 149,321,766 (180,557)
---------- ------- ---------- -------- ----------- ----------
Issuance of common stock 34,404 172 68,844
Issuance of Series B
preferred stock, net of expenses 1,000 10 960,990
Issuance of stock in connection
with acquisitions 1,676,168 8,381 930,667
Issuance of stock and stock
options in connection with
retirement of debt and other
obligations 581,900 2,910 2,031,153
Purchase of Treasury
Stock (47,657 shares)
Conversion of notes payable
into Series C Preferred Stock 997 10 996,990
Amortization of deferred
compensation 180,557
Cancellation of common stock (1,676,168) (8,381) (930,667)
Exercise of stock options 1,676,168 8,381 930,667
Settlement of acquisition
related escrow (500,000)
Non cash interest expense 1,168,885
Other Comprehensive income
(loss), net of tax:
Net loss
Change in unrealized foreign
exchange translation
gains/losses
Comprehensive income (loss)
--------- -------- ----------- -------- ------------ ---------
Balance September 30, 2002 1,358,849 $ 13,589 37,201,978 $186,011 $154,979,295 $ -
========= ======== =========== ======== ============ =========
F-8
VERTEX INTERACTIVE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(continued)
Accumulated
Other
Accumulated Comprehensive Comprehensive Treasury
Deficit Loss Income/(Loss) Stock Total
----------- ------------- ------------- -------- -------
Balance September 30, 1999 $(3,542,797) $18,868 $(45,169) $13,725,628
Exercise of stock options 882,940
Issuance of stock in connection with
new investors , net of expenses 20,216,069
Stock options issued to non-employees 5,061,615
Issuance of stock and stock options
in connection with acquisitions 54,756,866
Issuance of stock in connection with
license acquisition 1,000,000
Amortization of deferred compensation 21,310
Stock grants to employees -
Deferred compensation -
Other Comprehensive income (loss),
net of tax:
Net loss (9,412,424) $ (9,412,424) (9,412,424)
Change in unrealized gain/(loss)
on investment (18,868) (18,868) (18,868)
Change in unrealized foreign
exchange translation
gains/losses (1,825,411) (1,825,411) (1,825,411)
------------
Comprehensive income (loss) $ (11,256,703)
------------- ============= ----------- -------- ------------
Balance September 30, 2000 (12,995,221) (1,825,411) (45,169) 84,407,725
------------- ----------- -------- ------------
Exercise of stock options 910,484
Issuance of stock in connection with
new investors, net of expenses 7,850,966
Stock options issued to
non-employees 1,465,756
Issuance of stock in connection
with retirement of debt and other
obligations 2,498,892
Issuance of stock and stock options
in connection with acquisitions 37,045,047
Deferred compensation -
Amortization of deferred
compensation 324,655
Other Comprehensive income (loss),
net of tax:
Net loss (122,952,102) $(122,952,102) (122,952,102)
Change in unrealized foreign
exchange translation
gains/losses 399,104 399,104 399,104
--------------
Comprehensive income (loss) $(122,552,998)
------------ ============== --------- ------- ------------
Balance September 30, 2001 (135,907,323) (1,426,307) (45,169) 11,950,527
------------ ---------- -------- ------------
Issuance of common stock 69,016
Issuance of Series B
preferred stock, net of expenses 961,000
Issuance of stock in connection
with acquisitions 939,048
Issuance of stock and stock options
in connection with
retirement of debt and other
obligations 2,034,063
Purchase of Treasury Stock
(47,657 shares) (22,071) (22,071)
Conversion of notes payable
into Series C Preferred Stock 997,000
Amortization of deferred
compensation 180,557
Cancellation of common stock (939,048)
Exercise of stock options 939,048
Settlement of acquisition
related escrow (500,000)
Non cash interest expense 1,168,885
Other Comprehensive income (loss),
net of tax:
Net loss (44,774,379) $(44,774,379) (44,774,379)
Change in unrealized foreign
exchange translation
gains/losses 160,829 160,829 160,829
------------
Comprehensive income (loss) $ (44,613,550)
------------- ============= ---------- -------- -------------
Balance September 30, 2002 $(180,681,702) $(1,265,478) $(67,240) $(26,835,525)
============= ========== ======== =============
See notes to consolidated financial statements.
F-9
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. RECENT DEVELOPMENTS AND NATURE OF PRESENTATION
Background
Vertex Interactive, Inc. ("Vertex" or "we" or the" Company") is a global
provider of supply chain management ("SCM") technologies, including enterprise
software systems and applications, advance planning and scheduling capabilities,
software integration, solutions that enable our customers to manage their order,
inventory, warehouse and transportation needs, consultative services, and
software and hardware service and maintenance. We serve our clients through
three general product and service lines: (1) enterprise solutions; (2) point
solutions; and, (3) service and maintenance for our products and services,
including service and maintenance of software and hardware we resell for third
parties. Our enterprise solutions include a suite of Java-architected software
applications, applications devoted to the AS/400 customer base, as well as a
portfolio of "light-directed" systems for inventory, warehouse and distribution
center management. Our point solutions provide an array of products and services
designed to solve more specific customer needs from managing a mobile field
workforce, mobile data collection, distributed bar code printing capabilities,
compliance labeling applications, automated card devices, software development
tools and proprietary software serving SAP R/3 users. We provide a full range of
software and hardware services and maintenance on a 24-hour, 7-days a week, 365-
days a year basis, including the provision of wireless and wired planning and
implementation services for our customers' facilities. As a result of various
acquisitions beginning in September 1999, as described in Note 2, Vertex
had substantially increased its portfolio of products and services that it could
provide to customers through its operations in North America and Europe.
In 2002, the Company announced its intention to focus primarily on
enterprise solutions. As of September 30, 2002, the Company has sold or is in
the process of closing the majority of its point solutions and services
operations (See Note 2), including all of its European operations.
Recent Developments
On August 20, 2002, the Company was notified that the NASDAQ Listing
Qualifications Panel had determined that the Company had failed to comply with
the $1.00 minimum closing bid price and the minimum stockholders' equity or the
market value of publicly held shares requirements for continued listing and
determined to delist the Company's securities from the NASDAQ National Stock
Market effective with the open of business on August 21, 2002 and listed on
the NASDAQ Bulletin Board. Effective February 17, 2003, the Company's
securities currently trade on the Pink Sheets under the symbol "VETXE".
On August 30, 2002, Vertex formed XeQute Solutions, Inc. ("XeQute"), a Delaware
corporation and a wholly-owned subsidiary. XeQute purchased most of the
operating assets and assumed certain liabilities of both Vertex and its
principal North American subsidiaries and became the principal operating entity
of the group effective October 1, 2002 (See Note 19). These assets comprise
substantially all of the enterprise software businesses of Vertex.
F-10
Going Concern
Based upon our substantial working capital deficiency ($27.4 million at
September 30, 2002), our current rate of cash consumption, the uncertainty
of liquidity-related initiatives described in detail below, and the reasonable
possibility of on-going negative impacts on our operations from the overall
economic environment for a further unknown period of time, there is substantial
doubt as to our ability to continue as a going concern.
The successful implementation of our business plan has required, and will
require on a going forward basis, substantial funds to finance (i) continuing
operations, (ii) further development of our enterprise software technologies,
(iii) expected future operating losses, (iv) settlement of existing liabilities
including past due payroll obligations to its employees, officers and directors,
and (v) possible selective acquisitions to achieve the scale we believe will
be necessary to remain competitive in the global SCM industry. There can be no
assurance that we will be successful in raising the necessary funds.
Fiscal 2002:
In fiscal 2002, the overall decline in the enterprise applications software and
telecommunications industries, continued to have a substantial negative impact
on our results of operations. These factors, in combination with our continuing
negative operating cash flows, placed significant pressures on our financial
condition and liquidity and negatively impacted our operations. Operating
activities resulted in cash consumption of $8.5 million in 2002. During fiscal
2002 we raised approximately $9.8 million (net of cash transaction costs)
through the issuance of: (1) Series "B" Convertible Preferred Stock to
Pitney Bowes valued at $1 million; (2) $3 million in notes payable
convertible into Series "C" Convertible Preferred Stock to Midmark Capital II,
LP; (3) $3.6 million of demand notes payable from Pitney Bowes and Midmark
Capital II L.P. and (4) $2.4 million in a senior credit facility
collateralized by North American accounts receivable. During the same period,
we sold various businesses and assets (See Note 2) resulting in net cash of $1.2
million and we paid various debt obligations ($3.8 million). At September 30,
2002, the above activities resulted in a net cash balance of $74,000 (a decrease
of $1.3 million) and a negative working capital balance of $27.4 million.
Outlook:
In light of current economic conditions and the general expectation that there
will be no significant upswing in the economy or technology capital expenditures
for the foreseeable future, we do not now anticipate reaching the point at which
we generate cash in excess of our operating expenses until December 2003 at the
earliest, about which there can be no assurance. To the extent we cannot settle
existing obligations in stock or defer our obligations until we generate
sufficient operating cash, we will require significant additional funds
to meet accrued non-operating obligations, working capital to fund
operating losses, short term debt and related interest, capital expenditures,
expenses related to cost-reduction initiatives, and potential liabilities
related to litigation claims and judgments (See Note 16 to Consolidated
Financial Statements).
Our sources of ongoing liquidity include the cash flows of our operations,
potential new credit facilities, and potential additional equity
investments. Consequently, Vertex continues to aggressively pursue
additional debt and equity financing, restructure certain existing debt
obligations, reduce its operating expenses, and is structuring its overall
operations and resources around high margin enterprise products and services.
However, in order to remain in business, the Company must raise additional
cash in a timely fashion.
F-11
Subsequent to September 30, 2002 the following initiatives have been
completed or are in process to raise the required funds, settle liabilities
and/or reduce expenses:
(i) In December 2002, Vertex, through XeQute, closed a $500,000 Bridge Loan
arranged by Charles Street Securities, Inc. (CSS) from MidMark Capital and
Aryeh Trust. The Bridge Loan is to be repaid with proceeds from a proposed
Private Placement funding (see iii below). The Bridge Loan was for a term of
180 days, which matured on June 9, 2003, at which time it converted to a term
loan payable in 24 monthly installments. The first monthly installment was due
July 1, 2003 and has not been paid. The Bridge Loan is secured by a first
security interest in all of the assets of XeQute and carries an interest rate
of 3% per month.
XeQute received an additional $480,000 from MidMark under a Convertible Loan
Note. The Convertible Loan Note will automatically convert into Non-Voting
Shares of XeQute Solutions PLC when a minimum subscription of $480,000 of the
Private Placement is reached.
In addition, as of June 30, 2003, Vertex and XeQute have borrowed a further
$893,000 from MidMark Capital II, L.P. pursuant to a series of demand notes,
of which $425,000 was restricted for usage on XeQute obligations. These
notes are payable on demand, bear interest at 10% per annum and are secured
by the same collateral in which the Company previously granted a security
interest to MidMark under its convertible notes payable.
Vertex also executed a Grid Note which provides for up to $1 million of
availability from MidMark Capital, L.P. This note will be funded by the
proceeds, if any, from the sale of any shares of Vertex Common Stock held
by MidMark Capital. This note is payable on demand but in any event no
later than December 31, 2003, carries interest at the rate of 10% per
annum and is secured by the same collateral in which the Company previously
granted a security interest to MidMark under its convertible notes payable.
In consideration of MidMark providing this facility, the Company agreed to
issue warrants to purchase a number of unregistered shares equal to 120% of
the number of tradeable shares sold by MidMark to fund such note, at a
purchase price per share equal to 80% of the price per share realized in
the sale of shares to fund the Grid Note. As of June 30, 2003, the
Company had borrowed $77,000 under this arrangement.
(ii) The Company has completed the sale of certain entities and assets (See
Note 2 - Disposals). After being unsuccessful in attempting to sell its five
remaining European operations (Vertex UK-previously PSS, Vertex Service
and Maintenance Italy - previously SIS, Vertex Italy, Euronet and Vertex
France-previously ICS France) and based on the continuing cash drain
from these operations the respective boards of directors determined
that in the best interest of their shareholders that they would seek the
protection of the respective courts in each country, which have agreed to an
orderly liquidation of these companies for the benefit of their respective
creditors. Upon legal resolution of the $7.3 million of net liabilities
of these remaining European entities, we expect to recognize a non- cash gain
(and no significant cash outlay), however the amount and timing of such gain
and cash outlay is totally dependent upon the decisions to be issued by the
respective court appointed liquidators.
F-12
(iii) We are aggressively pursuing additional capital raising initiatives in
particular through the formation of XeQute Solutions PLC, a wholly owned
subsidiary of Vertex and parent company of XeQute, into which we have an
agreement with CSS to raise, in conjunction with MidMark Capital,
approximately $3.8 million of new equity. This transaction is currently on
hold pending completion and filing of this Annual Report on Form 10-K and
an interim audit of XeQute Solutions, Plc. for the nine months ended June 30,
2003. We have also conducted extensive negotiations with various sources
to invest up to an additional $8 million of new equity or convertible debt
into Vertex, contingent among other things, upon the completion of the new
financing into XeQute.
(iv) We have continued to reduce headcount (to approximately 40 employees in
our continuing North American business at June 30, 2003, of whom 14 are
currently furloughed until additional funds are raised), consolidate
facilities, and generally reduce costs.
(v) Effective July 31, 2003, the Company completed the sale of 10,000,000
shares of its common stock, which had a fair market value at that time of
approximately $500,000, to American Marketing Complex, Inc. (AMC). Payment
for this purchase was in the form of cash equivalent trade credits with a
face value of $4,000,000, which the Company can utilize for the purchase of
merchandise and services. The face value is not necessarily indicative of
the ultimate fair value or settlement value of the cash equivalent trade
credits. Any trade credits not utilized by June 30, 2008 shall expire,
unless the Company exercises an option to extend the agreement for one year.
In addition, the Company agreed to loan AMC $150,000 of which $10,000
was delivered at closing; $40,000 will be delivered by August 15, 2003;
$50,000 will be delivered by Septemer 10, 2003 and $50,000 will
be delivered by October 10, 2003. This loan will be repaid exclusively
from funds received from the sale of the 10,000,000 shares. The Company
is required to register these shares within six months of the closing.
(vi) We are seeking to settle certain of our current liabilities through
non-cash transactions. Vertex is negotiating with vendors to settle balances
at substantial discounts, including through the use of the cash equivalent
trade credits set forth in (v) above. In addition, we are negotiating to
settle certain notes payable and approximately $4 million of litigation
accruals at a discount or with the issuance of shares of either Vertex or
XeQute.
While we are continuing our efforts to reduce costs, gain scale, resolve
lawsuits on favorable terms and settle certain liabilities on a non-cash basis
there is no assurance that we will achieve these objectives. In addition, we
continue to pursue strategic business combinations and opportunities
to raise both debt and equity financing. However, there can be no
assurance that we will be able to raise additional financing in the timeframe
necessary to meet our immediate cash needs, or if such financing is
available, whether the terms or conditions would be acceptable to us.
The financial statements have been prepared on a basis that contemplates
Vertex's continuation as a going concern and the realization of assets and
liquidation of liabilities in the ordinary course of business. The
financial statements do not include any adjustments, with the exception of
the provision to reduce the carrying values of the assets of the subsidiaries in
liquidation to their estimated net realizable value (See Note 2), relating to
the recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that might be necessary should we
be unable to continue as a going concern. If Vertex fails to raise capital
when needed, the lack of capital will have a material adverse effect on
Vertex's business, operating results, and financial condition.
F-13
2. ACQUISITIONS AND DISPOSALS
Acquisitions
Pooling of Interests Method
In June 2000, the Company completed a merger with Positive Developments, Inc.
("PDI"), a designer of software solutions for supply chain applications, by
exchanging 400,000 shares of its common stock (40,000 of which were held in
escrow, until released in July 2001) for all of the common stock of PDI.
Also in June 2000, the Company completed a merger with Communication Services
International, Incorporated ("CSI"), a designer and installer of wireless
communications and cabling networks, by exchanging 1,317,647 shares of its
common stock (50,000 of which were held in escrow, pending resolution of any
claims) for all of the common stock of CSI. During the quarter ended June 30,
2001, the Company filed a claim against the sellers for shares held in escrow.
The claim was settled in the fourth quarter, resulting in 30,055 shares being
returned to the Company treasury.
Prior to these mergers, PDI's fiscal year ended on December 31, and CSI's fiscal
year ended on February 28. In recording the business combinations, PDI's and
CSI's prior period financial statements have been restated to a year ended
September 30, to conform to Vertex's fiscal year end. These mergers constituted
tax-free reorganizations and have been accounted for as pooling of interests
under Accounting Principles Board Opinion No. 16 "Business Combinations". The
Company's financial statements were previously restated to include the results
of PDI and CSI for all periods presented.
There were no transactions between Vertex and PDI or CSI prior to the respective
combinations.
The revenues and net income (loss) for Vertex, the pooled entities and the
combined amounts presented in the consolidated financial statements for the
periods prior to consummation of the mergers, follow:
Nine Months
Ended
June 30, 2000
--------------
Revenues
Vertex $28,214,342
Pooled Entities 4,620,103
-----------
Combined $32,834,445
===========
Net Income (loss)
Vertex $ (993,661)
Pooled Entities 162,943
-----------
Combined $ (830,718)
===========
F-14
Purchase Method
On September 27, 1999, the Company acquired all of the stock of Portable
Software Solutions Limited ("PSS"), Portable Software Solutions (Maintenance)
Limited ("Maintenance") and Trend Investments Limited ("Trend", and together
with PSS and Maintenance, the "PSS Group"). The PSS Group was a provider of
handheld terminal solutions to mobile workers in the U.K., primarily in the door
to-door insurance and dairy industries. The total purchase price was
approximately $10.1 million, including approximately $5.9 million in cash, two
notes payable of approximately $800,000 each and 1,591,984 common shares. The
shareholders of the PSS Group were entitled to additional incentive payments
based upon target average annual pre tax profits of the PSS Group for the two
years ending December 31, 1999 and 2000. No incentive payments were earned based
on the PSS Group profits.
On September 22, 1999, the Company acquired all of the outstanding capital stock
of ICS International AG ("ICS"), a provider in Germany of integrated high-end
wireless data capture solutions to industrial users and one of the few multi-
national European providers of such solutions. The total consideration paid to
ICS was $5,161,700 of which $3,570,000 was paid in cash at the closing and the
balance was in the form of three notes payable of $531,000 each. In addition,
the Company purchased ICS's headquarters building located in Neu Anspach near
Frankfurt, Germany for $1,593,000 of which $372,000 was paid in cash and the
remainder was financed through mortgages, the principal amounts of which were
$1,221,000.
Effective March 1, 2000, the Company acquired all of the outstanding capital
stock of Data Control Systems ("DCS"), a provider of "light-directed" warehouse
management systems located in New Jersey. The Company paid the shareholders
$14,250,000 in cash. The purchase price was also subject to a working capital
adjustment, which amounted to an additional $120,000 paid to the shareholders.
Effective April 1, 2000, the Company acquired all of the outstanding common
stock of Auto-ID, Inc. ("Auto-ID"), a reseller of bar coding equipment. As
consideration, the Company issued 100,000 shares of its common stock, which at
the date of the transaction had a fair market value of $6 per share.
Effective June 30, 2000, the Company acquired all of the outstanding common
stock of Societe Italiana Servizi Italservice S.r.l. ("SIS"), a provider of
after-market computer maintenance and software support services. Total
consideration paid was $1,750,000 and was subject to an additional incentive
payment based upon targeted profits for the fiscal year ended December 31, 2000,
up to a maximum of $270,000. No incentive payments were earned based on the SIS
profits.
Effective September 30, 2000, the Company acquired all of the outstanding common
stock of Renaissance Software Inc. ("RSI"), a developer of supply chain and
warehouse management systems. As consideration, Vertex issued 3,571,144 shares
of common stock (263,000 of which are held in escrow), which at the date of the
transaction had a fair market value of $13.42 per share. In addition, Vertex
reserved 535,644 shares for issuance upon exercise of RSI stock options. The
vested portion of these options (included in the total consideration paid for
RSI) was estimated to have a total fair market value of $6,217,000. The Company
engaged an independent valuation firm to assist in the identification and
determination of the fair market value of the acquired RSI intangible assets. A
portion of the RSI purchase price was identified, using proven valuation
procedures and techniques, as in-process Research and Development (R&D)
projects. The revenue projections used to value the in-process R&D were based on
estimates of relevant market sizes and growth factors, expected trends in
technology and the nature and expected timing of new product introductions by us
and our competitors. At the date of the acquisition, the products under
development had not reached technological feasibility and had no alternative
future use. Accordingly, $7,500,000 was expensed as in-process R&D in fiscal
2000. The value assigned to in-process R&D was comprised of various research and
development projects. These projects included the introduction of new
technologies as well as revisions or enhancements to certain existing
technologies, and were expected to begin generating net cash inflows in fiscal
2001. There was risk associated with the completion of the projects, and there
was no assurance that each would attain either technological feasibility or
commercial success.
F-15
In October 2000 the Company purchased the assets and business of three former
European service and maintenance divisions of Genicom International
(collectively referred to as "ESSC") for approximately $2 million in cash at
closing and a deferred cash payment of $500,000 due on September 1, 2001. The
Company paid $125,000 in December 2001, however the $375,000 balance has not
been paid and is included in Notes Payable. At September 30, 2002, 5,357,143
shares of Vertex common stock collateralize the remaining $375,000 obligation.
In December 2000, the Company completed a merger with Applied Tactical Systems,
Inc. ("ATS"), a provider of connectivity software for SAP installations
worldwide, by exchanging 3,000,000 shares of its common stock (210,000 of which
are held in escrow, to be released upon the first issuance of the combined
companies audited financial statements) for all of the common stock of ATS. Such
shares had a fair market value of approximately $8.30 per share at the date of
the transaction. In addition, Vertex reserved 153,600 shares for issuance upon
exercise of ATS stock options. The vested portion of these options (included in
the total consideration paid for ATS) was estimated to have a fair market value
of approximately $620,000. (See Note 16 - Settled Litigation)
In February 2001, the Company purchased from Pitney Bowes its Transportation
Management Software and certain engineering assets (the Transcape Division, or
"Transcape"). Consideration for Transcape was 1,356,852 shares of the Company's
Series A preferred stock, which on the date of acquisition, was estimated to
have a fair market value of approximately $10.4 million. A portion of the
Transcape purchase price was identified, using proven valuation procedures and
techniques, as in-process Research and Development (R&D) projects. The revenue
projections used to value the in-process R&D were based on estimates of relevant
market sizes and growth factors, expected trends in technology and the nature
and expected timing of new product introductions by us and our competitors. At
the date of the acquisition, the product under development had not reached
technological feasibility and had no alternative future use. Accordingly,
$3,600,000 was expensed as in-process R&D in fiscal 2001. The value assigned to
in-process R&D was comprised of one research and development project that would
introduce new web-enabling technologies, and was expected to begin generating
net cash inflows in fiscal 2002. There was risk associated with the completion
of the project, and there was no assurance that it would attain either
technological feasibility or commercial success.
Also in February 2001, the Company acquired all of the capital stock of Binas
Beheer B.V. ("Binas"). The total purchase price was $570,000, paid for with
approximately $300,000 in cash and by the issuance to the Binas shareholders of
42,686 shares of our common stock, which at the date of the transaction had a
fair market value of $6.34 per share.
In September 2001, the Company acquired all of the outstanding stock of DynaSys,
a software developer of advance supply chain planning and scheduling
applications. Total consideration paid was $565,000, which included 134,979
shares of Vertex common stock, which had an estimated fair market value of
$217,000 on the date of acquisition.
In October 2001, the Company acquired Euronet Consulting S.r.l. ("Euronet"),
an Italian software applications consulting firm. The value of the
transaction was approximately $940,000. The Company acquired all of the
outstanding shares of Euronet for 684,620 shares of Vertex common stock,
which at the date of acquisition had a fair market value of approximately
$625,000, and additional shares of common stock issued later in the year:
approximately 232,000 shares with an estimated fair market value of $.44
per share in February 2002 and approximately 760,000 shares with a fair
market value of $.27 per share in April 2002.
F-16
The accompanying consolidated financial statements assume the PSS and ICS
acquisitions closed effective September 30, 1999, the DCS acquisition closed
effective March 1, 2000, the Auto-ID acquisition closed on April 1, 2000, the
SIS acquisition closed effective June 30, 2000, the RSI acquisition closed
effective September 30, 2000, the ESSC acquisition closed effective October 31,
2000, the ATS acquisition closed effective December 30, 2000, the Transcape
acquisition closed effective February 7, 2001, the Binas acquisition closed
effective February 1, 2001, the DynaSys acquisition closed effective September
30, 2001 and the Euronet acquisition closed effective October 1, 2001. The
Company has accounted for these acquisitions using the purchase method of
accounting in accordance with APB No. 16 (and SFAS 141 for DynaSys and Euronet)
and accordingly, the financial statements include the results of operations from
October 1, 1999 for PSS and ICS, March 1, 2000 for DCS, April 1, 2000 for Auto-
ID, July 1, 2000 for SIS, October 1, 2000 for RSI, November 1, 2000 for ESSC,
January 1, 2001 for ATS, February 8, 2001 for Transcape, February 1, 2001 for
Binas, and October 1, 2001 for DynaSys and Euronet. An allocation of the
purchase price for DCS, Auto-ID, SIS, RSI, ESSC, ATS, Transcape, Binas, DynaSys
and Euronet has been made to the assets and liabilities acquired as of March 1,
April 1, June 30, September 30, October 31, December 31, 2000, February 7, 2001,
September 30, 2001, and October 1, 2001 respectively, based on their estimated
fair market values.
During the quarter ended June 30, 2001, the Company completed an analysis of the
fair market value of the net assets acquired in two purchase method acquisitions
completed in fiscal 2000. As a result, the Company increased the goodwill
associated with the purchases of Renaissance Software Inc. by approximately $1.8
million and Societe Italiana Servizi Italservice (SIS) by approximately
$700,000, respectively. These adjustments are not reflected in the schedule
below.
The table below represents the allocation of the purchase price for acquisitions
completed in each of the respective years:
September 30,
---------------------------------
2002 2001
------------ ----------
C>
Accounts Receivable $ 294,148 $1,928,403
Inventories - 1,135,853
Other assets 61,771 1,381,507
Intangible assets (including in-process R&D of
$3,600,000 in 2001) 1,078,007 41,474,337
Short-term debt - (468,308)
Deferred revenue and customer advances - (1,911,491)
Other liabilities (494,878) (3,123,080)
------------- -----------
Total consideration paid, less cash acquired 939,048 40,417,221
Less stock issued to sellers 939,048 36,923,444
------------- -----------
Net cash paid $ 0 $3,493,777
============= ===========
F-17
The following table presents unaudited pro forma results of operations of the
Company as if the above described purchase method acquisitions had occurred at
October 1, 2000:
Year Ended September 30,
------------------------
2001
------------------------
Revenues $66,175,127
Net loss (124,375,957)
Net loss per share (3.90)
The unaudited pro forma results of operations are not necessarily indicative of
what the actual results of operations of the Company would have been had the
acquisitions occurred at the beginning of fiscal 2001, nor do they purport to be
indicative of the future results of operations of the Company.
The pro forma amounts reflect the following:
- - The estimated amortization of the excess of the purchase price over the
fair value of net assets acquired for the year ended September 30, 2001 for
acquisitions closed prior to September 30, 2001 and accounted for in
accordance with APB 16, which amounted to approximately $15.5 million.
- - The approximate number of shares issued to complete the acquisitions.
The estimated purchase price for each acquisition may be subject to certain
purchase price adjustments. During the quarter ended June 30, 2001, the Company
filed a claim against the sellers for all of the 263,000 shares held in escrow
for one of the acquisitions completed in fiscal 2000. The claim has not yet been
settled and thus the full amount of shares held in escrow remains outstanding
and no accounting adjustments have been made.
Abandoned Merger
During the quarter ended March 31, 2002, the Company terminated a proposed
transaction with Plus Integration Supply Chain Solutions, BV, ("Plus") a
private supply chain management software and solutions provider headquartered
in Haarlem, the Netherlands, and charged to other expense approximately
$960,000 of previously deferred acquisition costs (primarily legal, accounting
and other professional service fees) incurred with respect to the proposed
transaction.
Sales or Divestitures of Non-Core Businesses
The Company developed and initiated a plan in the quarter ended June 30, 2002
that would result in the sale or divestiture of assets or closings of businesses
that are not part of the Company's current strategic plan or have not achieved
an acceptable level of operating results or cash flows. In connection with this
plan, the Company has completed the sale of certain businesses and assets (see
Disposals). After being unsuccessful in attempting to sell its five remaining
European operations (Vertex UK-previously PSS, Vertex Service and Maintenance
Italy - previously SIS, Vertex Italy, Euronet and Vertex France - previously ICS
France) and based on the continuing cash drain from these operations, the
respective boards of directors determined that in the best interest of their
shareholders that they would seek the protection of the respective courts in
each country, which have agreed to an orderly liquidation of these companies for
the benefit of their respective creditors. Accordingly, the net assets and
liabilities of these businesses are classified as Liabilities Associated with
Subsidiaries in Liquidation in the accompanying September 30, 2002 balance
sheet. While the Company expects the liquidation process to take from 9 to 18
months, significant variations may occur based on the complexity of the entity
and requirements of the respective country In addition, following the
termination of an agreement in principle to sell our North American wireless
and cable installation division, we closed down this operation in July 2002.
The revenues for all of these non-core businesses (sold and liquidated) were
approximately $24 million in 2002.
F-18
A net loss of approximately $4.4 million was included in "Loss on Sale or
Liquidation of Non-core Assets" in 2002. Such amount included a provision to
reduce the carrying values of the net assets, including any remaining goodwill,
to their estimated net realizable values and to record estimated transaction and
closing costs of this plan. Retained liabilities are generally carried at their
contractual or historical amounts. The ultimate amounts required to settle these
retained liabilities will differ from estimates, based on contractual
negotiations, and the outcome of certain legal actions and liquidation
proceedings.
The following is a summary of net assets and retained liabilities as of
September 30, 2002:
Cash $ 307,398
Receivables, net 1,124,228
Inventories, net 515,258
Accounts payable (2,604,276)
Accrued liabilities (4,376,327)
Deferred revenue (1,006,001)
Loans payable - banks (908,810)
Other liabilities (315,164)
-----------
Net liabilities associated with
subsidiaries in liquidation $(7,263,694)
===========
The results of these businesses' operations for the year ended September 30,
2002 are not segregated from other businesses in the accompanying statements of
operations as they are not considered distinct segments or discontinued
operations.
DISPOSALS
During the years ended September 30, 2002, 2001 and 2000, the Company completed
the sale of the following product lines and business units:
2002:
1) In April 2002 the Company sold the source code, documentation and all
related rights to the TMS product line to Pitney Bowes in exchange for
$1.65 million, which included the cancellation of the $1.0 million Pitney
Bowes promissory note and related accrued interest (See Note 10). In
connection with this sale, Vertex eliminated 34 positions.
2) In May 2002 the Company sold a portion of its mobile computing
solutions business in Ireland in exchange for approximately $0.2 million of
cash and the assumption of approximately $0.2 million of liabilities.
3) In June 2002 the Company sold the source code, documentation and all
related rights to the NetWeave software product line to a company
established by former employees of the Company. The proceeds included
approximately $0.5 million in cash and the assumption of approximately $0.4
million of deferred revenue liabilities.
4) In July 2002, the Company sold the German point solutions business to
Partas AG, which is owned by one of the Company's Directors, and a related
entity, in consideration for approximately $0.4 million, including the
cancellation of the Partas note payable (See Note 9) and related accrued
interest.
F-19
5) In August 2002, the Company sold DynaSys S.A., its French based
advanced planning software business to MidMark Capital in consideration for
$6.0 million, including the cancellation of $5.9 million of convertible
notes payable and $0.1 million of related accrued interest (See Note 9). As
part of this transaction, Vertex retained the right to repurchase, on
February 9, 2003, 20% of the shares of DynaSys held by MidMark at the
original purchase price of $1.2 million paid by MidMark. The purchase
price for such shares could be paid for in newly issued 10% senior secured
notes or cash, at Vertex's option. This right of repurchase was subject to
among other things, an initial public offering of DynaSys common stock in
the six months following the closing and that the total market
capitalization of DynaSys shall be not less than $9 million at the time of
repurchase. Such offering did not occur and the right to repurchase has
expired.
6) During July and August, 2002, the Company also completed the sale of
three additional components of its European business: (a) the UK hardware
maintenance business; (b) the Benelux point solutions and hardware
maintenance businesses; and (c) the French hardware maintenance business
for a total consideration of approximately $0.3 million.
The aggregate net gain of approximately $1.2 million on these transactions
is included in the Loss on Sale or Liquidation of Non-core Assets component
of other income (expense).
2000:
On June 30, 2000, the Company sold all of its tangible and intangible
assets related to its weighing product line. As consideration, the Company
received $255,000 in cash, and the right to earn a percentage of the
buyer's gross sales of the weighing product line over the next three years.
Included in the sale were inventory, furniture and equipment, a customer
base, trade names, and patents. The book value of the assets sold was
approximately $230,000, and accordingly, the Company recorded a gain on the
sale of $25,000. The percentage of the buyer's sales that can be earned by
the Company will range from 0% to 18% based on the buyer's annual sales
volumes of weighing products. For the year ended September 30, 2000, the
revenue from weighing products represented less than 2% of consolidated
revenues.
In September 2000, the Company sold the Printscan (PSD) subsidiary of ICS
in Germany. The Company received approximately $600,000 in cash for the
stock of PSD. In connection with the sale, the Company wrote off related
unamortized goodwill of approximately $634,000. As a result of this
transaction, the Company recognized a net loss of approximately $195,000,
which is included in other income (expense). For the year ended September
30, 2000, the revenue from PSD represented less than 6 % of consolidated
revenues.
F-20
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The more significant estimates are those used by management to
measure liabilities associated with subsidiaries in liquidation, litigation
accruals and valuation of intangible assets. Actual results could differ from
those estimates.
Revenue Recognition
Equipment Sales:
Revenue related to sales of equipment is recognized when the products are
delivered, title has passed, the collection of the related receivable is deemed
probable by management and no obligations remain.
Software License Sales:
Revenue related to software license sales is recorded at the time of shipment
provided that (i.) no significant vendor obligations remain outstanding at the
time of sale; (ii.) the collection of the related receivable is deemed probable
by management; and (iii.) vendor specific objective evidence (V.S.O.E.) of fair
value exists for all significant elements, including postcontract customer
support (PCS) in multiple element arrangements.
Where the services relate to arrangements requiring significant production,
modification or customization of software, and the service element does not meet
the criteria for separate accounting, the entire arrangement, including the
software element, is accounted for in conformity with either the percentage-of-
completion or completed contract accounting method. Percentage-of-completion
generally uses input measures, primarily labor costs, where such measures
indicate progress to date and provide a basis to estimate completion.
Professional Services:
The Company provides consulting and other services on a per-diem billing basis
and recognizes such revenues as the services are performed.
Support and Service:
The Company accounts for revenue related to service contracts and postcontract
customer support over the life of the arrangements, usually twelve months,
pursuant to the service and/or licensing agreement between the customers and the
Company.
Deferred Revenue
Deferred revenue represents the unearned portion of revenue related to PCS and
other service arrangements not yet completed and revenue related to multiple
element arrangements that could not be unbundled pursuant to SOP 97-2 or, in the
case of projects accounted for using percentage of completion or completed
contract accounting in accordance with SOP 81-1.
F-21
Inventories
Inventories are valued at the lower of cost (first-in, first-out basis) or
market.
Property and Equipment
All items of property and equipment, including amounts recorded under capital
leases, are stated at cost. It is the general policy of the Company to
depreciate property and equipment under the straight-line method over their
estimated useful lives. Leasehold improvements are amortized over the lesser of
the useful life of the improvements or the remaining term of the lease.
The estimated useful lives of depreciable assets are as follows
Category Years
---------- ------
Buildings 20-25
Office furniture and equipment 3-10
Computer equipment 3-7
Other 3-10
Intangible Assets
Intangible assets consist primarily of the excess of cost over the value of
identifiable net assets of businesses acquired and until September 30, 2001 were
amortized on a straight-line basis over their estimated useful lives which
ranged from 5 to 25 years. Effective October 1, 2001, the Company follows
Statement of Financial Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets". This statement provides that goodwill and intangible assets with
indefinite lives are no longer amortized, but are subject to impairment
evaluations using a fair value test. The Company follows the accounting
guidance in SFAS No. 121 for its other intangible assets that are subject
to amortization. The Company's policy is to evaluate its intangible assets
based on an evaluation of such factors as the occurrence of a significant
adverse event or change in the environment in which the business operates or if
the fair value, based on expected future net cash flows (undiscounted and
without interest) or other fair value criteria, would become less than the
carrying amount of the asset. An impairment loss would be recorded in
the period such determination is made based on the fair value of the related
businesses. As a result of its evaluations, the Company wrote off approximately
$19 million and $78 million of intangible assets in 2002 and 2001, respectively
(See Note 4).
Net Income (Loss) Per Share of Common Stock
Basic net income (loss) per common share is calculated by dividing net income
(loss), by the weighted average common shares outstanding during the period.
Diluted net income per common share is computed similar to that of basic net
income per common share, except that the denominator is increased to include the
number of additional common shares that would have been outstanding if all
potentially dilutive common shares, principally stock options and convertible
securities, were issued during the reporting period. For periods in which a net
loss occurs, such additional shares would not be included, as their effect would
be anti-dilutive.
Cash Equivalents
The Company considers all investments with an original maturity period within
three months to be cash equivalents.
F-22
Long-Lived Assets
The Company reviews its long-lived assets and certain related intangibles for
impairment whenever changes in circumstances indicate that the carrying amount
of an asset may not be fully recoverable.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined to include all changes in equity except
those resulting from investments by shareholders and distribution to
shareholders and is reported in the Statement of Changes in Stockholders'
Equity (Deficit). Included in the Company's comprehensive income (loss) are
net income (loss), unrealized gains (losses) on investments and foreign
exchange translation adjustments.
Stock Based Compensation
The Financial Accounting Standards Board (FASB) issued SFAS No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123). SFAS 123 requires that an entity
account for employee stock compensation under a fair value based method.
However, SFAS 123 also allows an entity to continue to measure compensation cost
for employee stock-based compensation arrangements using the intrinsic value
based method of accounting prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees" (Opinion 25). Entities electing to remain with the
accounting under Opinion 25 are required to make pro forma disclosures of net
income and earnings per share as if the fair value based method of accounting
under SFAS 123 has been applied. The Company has elected to continue to account
for employee stock-based compensation under Opinion 25 and has made the required
disclosures under SFAS 123 (see Note 13).
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS 123 and related Emerging Issues Task
Force interpretations, which generally require that such equity instruments are
recorded at their fair value on the measurement date.
Concentration of Credit Risk
The Company's financial instruments that are exposed to concentration of credit
risks consist primarily of cash and cash equivalents and accounts receivable.
The Company maintains its cash and cash equivalents in bank accounts that, at
times, exceed federally insured limits. The Company has not experienced any
losses in such accounts. The Company believes it is not exposed to significant
credit risk on cash and cash equivalents. Concentration of credit risks with
respect to accounts receivable are limited because of the credit worthiness of
the Company's major customers.
Fair Value of Financial Instruments
The Company's financial instruments, including cash and cash equivalents
and accounts receivable, are carried at cost, less an allowance for doubtful
accounts The carrying values of these assets approximate their fair values.
Due to the current financial condition of the Company, management believes that
the fair values of its accounts payable, short term debt and liabilities
associated with companies in liquidation are less than the carrying values
(cost). However such amounts cannot be reasonably estimated at this time.
Investment Securities
The Company classified its investment securities as available for sale. Such
securities were measured at fair value in the financial statements based on
quoted market prices with unrealized gains and losses included in stockholders'
equity.
F-23
Foreign Currency Translation
Assets and liabilities of the Company's foreign affiliates are translated at
current exchange rates, while revenue and expenses are translated at average
rates prevailing during the respective period. Translation adjustments are
reported as a component of comprehensive income (loss) in stockholders'
equity (deficit).
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was
approximately $400,000 and $1,868,000 in fiscal 2002 and 2001, respectively.
Advertising expense in fiscal 2000 was not material.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 142 provides that separable intangible assets that
have finite lives will continue to be amortized over their useful lives
and that goodwill and indefinite-lived intangible assets will no longer be
amortized but will be reviewed for impairment annually, or more frequently if
impairment indicators arise. Under the provisions of SFAS 142, any impairment
loss identified upon adoption of this standard is recognized as a cumulative
effect of a change in accounting principle. Any impairment loss recognized
subsequent to initial adoption of SFAS 142 will be recorded as a charge to
current period earnings. We elected to early adopt the provisions of
SFAS 142, including the provisions for nonamortization of intangible
assets, as of October 1, 2001. As a result of our analysis of the fair
market value of intangible assets at September 30, 2001 and the resulting
charge for impairment recorded at that time, the transitional goodwill
impairment provisions of SFAS 142, did not have a significant impact on our
consolidated financial statements.
In November 2002, the Emerging Issues Task Force (EITF) of the FASB reached a
consensus on Issue No. 00-21, "Accounting for Revenue Arrangements with
Multiple Deliverables." This issue provides guidance on when and how to
separate elements of an arrangement that may involve the delivery or
performance of multiple products, services and rights to use assets into
separate units of accounting. The guidance in the consensus is effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. The Company will adopt Issue No. 00-21 in the quarter beginning July 1,
2003. The transition provision allows either prospective application or a
cumulative effect adjustment upon adoption. The Company is currently
evaluating the impact of adopting this guidance, but does not believe it
will have a material effect on its results of operations.
F-24
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
Subject to Amortization
Additions/
Estimated September 30, Amortization September 30,
Life 2001 Expense Disposals 2002
--------- ----------- ------------ --------- ------------
Gross Cost
Covenant Not To Compete 2 yrs $ 300,000 - ($300,000)(1) $ -
Technology 5 yrs 2,800,000 - (2,800,000)(2) -
Capitalized Software 3 yrs 444,980 - (97,711)(3) 347,269
Software License 5 yrs 1,028,890 - (1,028,890)(3) -
------------- ------------ ----------
4,573,870 - (4,226,601) 347,269
Accumulated Amortization
Covenant Not To Compete 237,500 $ 62,500 (300,000)(1) -
Technology 466,664 349,998 (816,662)(2) -
Capitalized Software 24,426 132,040 (40,710)(3) 115,756
Software License 222,924 154,332 (377,256)(3) -
--------- ---------- ----------- ---------
951,514 698,870 (1,534,628) 115,756
Net Book Value
Covenant Not To Compete 62,500 (62,500) - -
Technology 2,333,336 (349,998) (1,983,338)(2) -
Capitalized Software 420,554 (132,040) (57,001)(3) 231,513
Software License 805,966 (154,332) (651,634)(3) -
--------- --------- ------------ -------
$ 3,622,356 ($ 698,870) ($2,691,973) $ 231,513
=========== =========== ============= ========
(1) The Covenant Not To Compete became fully amortized in February of 2002.
(2) The Technology intangible asset was sold in April 2002.
(3) The software license and certain capitalized software was sold in June
2002.
F-25
Not Subject to Amortization
September 30, Additions/ September 30,
2001 Foreign Exchange Reductions 2002
-------------- ----------------- ------------- ---------------
Cost
Goodwill $ 27,487,656 $1,571,266(5) ($29,058,922)(4)(6)(7) -
Acquired Workforce 600,000 - (600,000)(4) -
------------- ------------- ------------- -------------
28,087,656 1,571,266 (29,658,922) -
Accumulated Amortization
Goodwill 2,859,871 (2,859,871)(4)(7) -
Acquired Workforce 80,000 (80,000)(4) -
------------- ------------- -------------
2,939,871 (2,939,871) -
Carrying Value
Goodwill 24,627,785 1,571,266(5) (26,199,051)(4)(6)(7) -
Acquired Workforce 520,000 - (520,000)(4) -
------------ ---------- ------------- -------------
$ 25,147,785 $1,571,266 ($24,719,051) $ -
============ ========== ============= =============
(4) Goodwill of approximately $3.0 million and Acquired Workforce related
to the Transcape acquisition were written off in connection with its sale in
April 2002 (See Note 2).
(5) The additions to goodwill during the year ended September 30, 2002 relate
primarily to the acquisition of Euronet (See Note 2), as well as foreign
exchange translation adjustments on European goodwill.
(6) Goodwill reductions of approximately $4.2 million relate to European assets
sold or written off in connection with subsidiaries placed into liquidation (See
Note 2).
(7) Goodwill of approximately $19 million was written off as a result of the
Company's annual SFAS No. 142 impairment analysis performed at September 30,
2002.
F-26
The following table reflects the pro forma results of operations of the
Company, giving effect to the provisions of SFAS 142 for the years ended
September 30, 2002, 2001 and 2000:
Years ended September 30,
--------------------------------------------------------------------------------
2002 2001 2000
--------------------------- ---------------------- ----------------------
Amount Per Share Amount Per Share Amount Per Share
------ --------- ------ --------- ------ ---------
Net loss, as reported $(44,774,379) $ (1.26) $(122,952,102) $(3.95) $(9,412,424) $(.46)
Add back amortization -- -- 12,375,086 .40 976,275 .05
Additional impairment
of goodwill charge -- -- ( 12,055,512) (.39) -- --
-------------- ---------- -------------- -------- -------------- ------
$(44,774,379) $ (1.26) $(122,632,528) $(3.94) $(8,436,149) $(.41)
============== ========== ============== ======== ============== ======
Total aggregate amortization expense for each of the fiscal years ending 2003,
2004 and 2005 are estimated to be $100,000, $100,000 and $30,000, respectively.
No amortization is currently anticipated beyond 2005.
F-27
IMPAIRMENT CHARGES RELATED TO INTANGIBLE ASSETS
2002:
As discussed in Note 3, the Company adopted SFAS 142 on October 1, 2001. The
Company had just completed its assessment of the carrying values of its
intangible assets at September 30, 2001 (see below) and recorded a $78.4 million
write-down. Therefore there was no indication of further impairments on the
Company's goodwill intangible at the time of adoption. However the Company is
required to periodically assess the value of goodwill under the provisions of
SFAS 142 at least annually.
During 2002, the sharp downturn in capital spending in the Company's major
markets continued to negatively impact our core businesses, resulting in
substantially lower than expected revenues, additional operating losses and a
concomitant shortfall in working capital. Significantly lower valuations for
companies within our industry were commonplace and our stock price declined
precipitously. At September 30, 2002, our market capitalization had dropped to
approximately $2 million, while our net book value (pre goodwill write off) was
negative $7 million.
Based upon these indications, the belief that the decline in market conditions
within our industry was significant and permanent, and the consideration of all
other available evidence, the Company determined that an impairment of goodwill
existed at September 30, 2002 and we recorded a $19 million write-down of the
remaining goodwill.
2001:
As of September 30, 2001, the Company performed an assessment of the carrying
values of its intangible assets recorded in connection with all of its
acquisitions. This assessment was initiated because of the significant negative
economic trends impacting our current operations, lower expected future growth
rates, a decline in our stock price, and significantly lower valuations for
companies within our industry. Additionally, at the time of our analysis, the
net book value of the Company's assets significantly exceeded its market
capitalization. Market capitalization is the product of (i) the number of shares
of common stock issued and outstanding and (ii) the closing market price of the
common stock. At September 30, 2001, with approximately 35 million common shares
issued and outstanding and a closing common stock price of $1.03 per share, our
market capitalization approximated $36 million, as compared to our book value of
approximately $92 million (prior to a write down). Based upon these indications,
the belief that the decline in market conditions within our industry was
significant and permanent, the consideration of all other available evidence,
and, in particular, the methodology described below, the Company determined that
the Fair Market Value of these assets was less than their carrying value.
The Company's intangible assets are associated with specific identifiable
acquisitions and their respective product lines. However, we now expect future
cash flows from these acquisitions and products to be significantly less than
our initial expectations. The fair value assessment of intangible assets was
determined by discounting the Company's estimates of the expected future cash
flows related to these assets when the non discounted cash flows indicated that
the long-lived assets would not be recoverable. The rate used to discount our
cash flow expectations was based on our risk adjusted estimated cost of capital.
After considering all of the above, we recorded a $78.4 million write-down of
the intangible assets, which was equal to the amount in excess of the estimated
fair market value of the respective assets as of September 30, 2001.
Also at September 30, 2001, the Company performed an assessment of the carrying
values of its capitalized software costs. This assessment was initiated in light
of new product developments and changes in marketing strategies that included
the discontinuation of certain products. Total capitalized software written off
in fiscal 2001 was approximately $621,000.
F-28
5. INVENTORIES
Inventories consist of the following:
September 30,
2002 2001
--------- -----------
Raw materials $713,295 $1,796,980
Work in process 66,414 345,364
Finished goods and parts 161,648 2,922,870
-------- ----------
$941,357 $5,065,214
======== ==========
At September 30, 2002 inventories of the European operations in liquidation
amounted to approximately $515,000 and are presented on the balance sheet in
Liabilities Associated with Subsidiaries in Liquidation.
6. PROPERTY, EQUIPMENT AND CAPITAL LEASES
September 30,
2002 2001
--------- ----------
Property and Equipment:
Land $ - $313,611
Buildings - 1,762,668
Leasehold improvements - 336,953
Other equipment 123,484 641,634
Office furniture and equipment 728,568 1,797,785
Computer equipment 535,568 1,431,197
--------- ---------
Total 1,387,620 6,283,848
Accumulated depreciation and amortization (1,200,546) (2,056,632)
----------- ----------
Net property and equipment 187,074 4,227,216
Capital Leases:
Office equipment - 191,884
Computer equipment - 35,037
Automobiles - 123,247
---------- ----------
Total - 350,168
Accumulated amortization - (213,465)
---------- ----------
Net capital leases - 136,703
---------- ----------
Net property and equipment and capital leases $ 187,074 $4,363,919
=========== ===========
Depreciation expense for 2002, 2001 and 2000 was $820,000, $1,220,000, and
$530,000, respectively.
F-29
7. BANK LINES OF CREDIT
The Company had several foreign lines of credit, which allowed it to borrow in
the applicable local currency. These lines of credit were concentrated in
Germany, Italy and the United Kingdom. The Company's lines of credit generally
were collateralized by the accounts receivable of the respective subsidiary. As
of September 30, 2001 the Company had outstanding balances of approximately
$1,800,000 on these foreign lines of credit. Amounts outstanding at September
30, 2002 are classified in "Liabilities Associated with Subsidiaries in
Liquidation". None of these lines of credit are currently available as the
subsidiaries have either been sold or placed in liquidation (See Note 2).
8. SENIOR CREDIT FACILITY
In November 2001, the Company closed on a $2.0 million, 7% convertible
note payable with Laurus Master Fund, Ltd (Laurus), collateralized by certain
North American accounts receivable, with a maturity date of November 30,
2003. The Note was convertible into Vertex common shares, which the
Company was required to register, at the lower of (i) $0.85 per share
(2,352,941 shares) or (ii) 88% of the eight lowest closing prices during the
thirty days prior to the conversion date. These conversion rates were
subject to certain antidilution provisions.
In February 2002, the Company and Laurus amended and restated the convertible
note payable and entered into a Senior Credit Facility with a maximum
borrowing availability of $2,405,000. The borrowings under this facility
($145,736 at September 30, 2002) are collateralized by all of the North
American accounts receivable of the Company. In addition, such
borrowings are collateralized by all of the tangible and intangible
assets of the Company and its North American subsidiaries, subordinated to
the security interests under certain Notes Payable of Midmark Capital and
affiliates. Interest accrues on the outstanding balance at 1.67% per month and
the Company pays a management fee equal to 1.5% of all purchased invoices under
the Accounts Receivable Purchase Agreement.
In the event the aggregate borrowings exceed the maximum borrowings
available under the agreement, such overadvance shall be due and payable on
demand and shall be evidenced by a Convertible Note Payable to Laurus.
Interest will accrue at an annual rate of 7%. Laurus shall have the right
to convert the principal amount and interest due under this note into shares
of the Company's common stock. Subject to anti-dilution
adjustments, the conversion price per share shall be the lower of (i) 92% of
the closing price for the common stock on the day the overadvance is created
or (ii) 88% of the average of the three lowest closing prices for the common
stock for the thirty trading days prior to the conversion date.
In connection with the original agreement, the Company also issued options
to purchase 180,000 of the Company's Common Stock at $1.284 per share to the
lender valued at $162,000 (See Note 13). Due to an imbedded beneficial
conversion feature, the Company incurred a non-cash interest charge of
approximately $1.2 million in November 2001, which included the value of the
options. The cash transaction costs ($219,000) associated with the closing of
these transactions, were included in Other Assets as deferred financing costs,
and were to be amortized to interest expense over the three year life of the
facility. However as a result of the agreement to terminate the facility (see
Note 19), the remaining balance of the deferred financing costs was charged to
expense in the fourth quarter.
F-30
9. NOTES AND CONVERTIBLE NOTES PAYABLE - RELATED PARTIES
Midmark Capital L.P. is a shareholder of the Company ( See Note 13 ) and certain
Midmark Capital L.P. Managing Directors have served as directors of the Company.
On June 19, 2001 and subsequently amended in November 2001 and again in
January 2002, the Company issued in the aggregate $5,500,000 of convertible
notes payable to Midmark Capital L.P., Midmark Capital II L.P., and certain
individuals related to these two entities (collectively "Midmark Capital").
These notes were to automatically convert into shares of Vertex common stock
on the day that the Company obtains the requisite shareholder approval
for the issuance of shares to Midmark Capital. In the event that shareholder
approval was not obtained by September 30, 2003, the principal amount plus any
accrued interest (at prime rate) would become immediately due and payable. The
notes were to convert, subject to future events, into (i) Vertex common stock
at a future market price no higher than $1.31 per share or (ii) 5,500 shares
of Series "C" Preferred Stock, which were convertible into 6,545,000
common shares at $0.84 per share. The Company was required to register the
underlying common shares. In the event of a shareholder rejection, or
prepayment prior to shareholder approval, the interest rate on the notes
would have increased retroactively to 14%.
In March 2002, the Company agreed to amend the $5.5 million of convertible
notes payable issued in June 2001. The amendment removed both the
requirement for shareholder approval and the automatic conversion feature, and
set the maturity date for September 30, 2003. Concurrent with the amendment of
these notes, Midmark Capital elected to convert approximately $782,000 of
principal and $218,000 of accrued interest into 997 shares of Series "C"
preferred stock. The amended convertible notes payable of $4,718,717 accrued
interest at prime and were convertible into Series" "C" preferred shares at
a conversion price of $1,000 per share. The Series "C" preferred shares in
turn are convertible into Common Shares at $0.84 per share.
In November 2001, the Company issued $3,000,000 of 10% convertible
notes payable, with a maturity date of September 30, 2003, to Midmark Capital
II, LP ("Midmark II") that can convert into 3,000 shares of Vertex Series "C"
Preferred Stock at the option of Midmark II on the day that the Company
obtains the requisite shareholder approval for the issuance of Series "C"
Preferred Stock to Midmark II. Midmark II can convert the Series "C" Preferred
Shares into 3,570,026 shares of Vertex common stock at $0.84 per share. The
Company is required to register the underlying common shares. In the
event of a shareholder rejection, or prepayment prior to shareholder
approval, the interest rate on the notes would increase retroactively to 14%.
On August 9, 2002, the remaining balance of the $4,718,717 convertible notes and
$1,185,176 of the $3.0 million convertible notes were fully settled with the
sale of the French based advanced planning software business to MidMark (See
Note 2). The remaining $1,814,324 of 10% convertible notes payable at September
30, 2002 are collateralized by all tangible and intangible property of the
Company, except that the holders have executed in favor of certain senior
lenders a subordination of their right of payment under the Notes and the
priority of any liens on certain assets, primarily accounts receivable.
In July 2001, the Company issued a $359,375 convertible note payable to
PARTAS AG, which is owned by one of its Directors. This note was to
automatically convert into 250,000 shares of Vertex common stock on the
day that the Company obtained the requisite shareholder approval for the
issuance of shares to PARTAS AG. Since shareholder approval was not
obtained by February 22, 2002, the principal amount plus any accrued interest
(at prime rate) became immediately due and payable. On July 31, 2002 this
convertible note payable was fully settled with the sale of the German point
solutions business to PARTAS AG (See Note 2).
F-31
During 2002, the Company has borrowed $2,588,900 from Midmark Capital II L.P.
These notes are payable on demand, bear interest at 10% per annum and are
secured by the same collateral in which the Company previously granted a
security interest to Midmark under the long-term convertible notes payable
above.
The conversion rates of all the above Midmark notes are subject to certain
antidilution provisions.
10. NOTES PAYABLE
The Company had approximately $1.5 million in promissory notes payable,
bearing interest at 8%, related to the September 2000 acquisition of
Renaissance Software, Inc., which were originally due on June 30, 2001. On
August 9, 2001, the Company renegotiated the terms of these notes and in
return for 147,000 shares of stock (valued at approximately $162,000), the
notes were payable in two installments: $250,000 due on August 15, 2001, and
the remaining balance, plus accrued interest from June 30, 2001, due on
September 30, 2001. The Company paid the August 15, 2001 installment and
has not paid the remaining past due $1.23 million obligation (See Note 16 -
Pending Litigation).
In October 2000 the Company purchased the assets and business of three former
European service and maintenance divisions of Genicom International
(collectively referred to as "ESSC") for approximately $2 million in cash at
closing and a deferred cash payment of $500,000 due on September 1, 2001. The
Company paid $125,000 in December 2001 and has not paid the remaining $375,000
balance. At September 30, 2002, 5,357,143 shares of Vertex common stock
collateralize the unpaid balance.
The Company had a note payable with a remaining balance of approximately
$540,000 bearing interest at 8% for the September 1999 acquisition of ICS
International AG (ICS) in Germany. This note and a non-interest bearing loan
of approximately $350,000 were past due. In July 2002, the interest bearing
and non-interest bearing notes were fully settled with the sale of the German
point solutions business (See Note 2).
In September 2001, in connection with its acquisition of DynaSys, the Company
assumed certain notes payable to banks and other entities. These notes
payable had an aggregate balance of $0 and $435,000 at September 30,
2002 and 2001, respectively. Approximately $90,000 of these notes were settled
through the issuance of 68,933 shares of Vertex common stock in December 2001.
On February 1, 2002, the Company closed on a $1.0 million promissory
note with Pitney Bowes Inc., payable on demand after February 15, 2002,
with interest at 12%. This note was collateralized by all tangible and
intangible property of the Company, except that the holders had executed (i)
in favor of certain senior lenders a subordination of their right of payment
under the note and the priority of any liens on certain assets, primarily
accounts receivable and (ii) an Intercreditor Agreement with Midmark Capital,
which was entered into in connection with this promissory note. In April 2002,
this note was fully settled with the sale of source code, documentation and
all related rights to the TMS product line to Pitney Bowes (See Note 2).
F-32
11. LONG-TERM DEBT
Long-term debt consists of the following:
September 30,
2002 2001
------------- -------------
Capital lease obligations:
Obligations under capital leases, due in varying $ - $269,626
quarterly/monthly principal installments and at
varying interest rates not exceeding 11 1/2%
Less-Current portion - 163,425
------------- ------------
Long Term capitalized leases $ - $106,201
============= ============
Mortgage notes payable:
Mortgage notes payable bearing interest at rates $ - $1,468,651
from 6% to 8%, collateralized by buildings,
due in monthly installments through 2030
Less-Current portion - 75,793
------------- ------------
Long Term mortgage notes payable $ - $1,392,858
============= ============
As a result of the sale of certain non-core businesses during 2002, the related
capital lease obligations and mortgage notes payable have been assumed by the
purchasers.
Other Long Term Liabilities
Other long-term liabilities included approximately $130,000 at September 30,
2001 of Irish government non-interest bearing loans that were repayable at rates
linked to future revenues earned. Under the terms of the agreement, the loans
were to be repaid at a rate of 4.2% of project sales made in the United States
by PSS in the period from July 1998 to June 2001 and was due for repayment
commencing in July 1999 and ending in July 2002. If the repayments calculated as
a percentage of sales were not sufficient to repay the loans in full, the Irish
government may write-off the balance. PSS has not made any sales in the United
States to date and thus no repayments have been made against these borrowings
through September 30, 2002 nor has the Irish government agreed to write off the
balance. Since the Irish subsidiary has been placed in liquidation (See Note 2),
the remaining balance is included in "Liabilities Associated with Subsidiaries
in Liquidation" on the September 30, 2002 balance sheet.
F-33
12. OTHER ACCRUED EXPENSES AND LIABILITIES
The components of other accrued expenses and liabilities consist of the
following:
September 30,
2002 2001
---------- ----------
Professional fees $1,198,343 $1,658,102
Remaining obligations on terminated 1,402,984 300,000
leases
Sales and other taxes, excluding income 55,005 1,349,855
and payroll
Income taxes 228,171 390,400
Project costs 75,608 405,239
Accrued interest 474,468 322,388
Other 499,146 1,274,981
---------- ----------
$3,933,725 $5,700,965
========== ==========
13. STOCKHOLDERS' EQUITY (DEFICIT)
On September 16, 1999, the Company entered into a Subscription agreement with
Edwardstone & Company, Incorporated, ("Edwardstone") and Midmark Capital, L.P.
("Midmark", and together with Edwardstone, the "Buyers"). Edwardstone and
Midmark purchased 5,449,642 shares and 5,000,000 shares, respectively, of the
Company's common stock. The total consideration paid by Edwardstone and Midmark
for such shares was $10,000,000. As a result of such transactions, the Buyers
beneficially owned approximately 60% of the Company's common shares outstanding
at the time of the transaction. As a condition to the Buyers' purchase of the
shares, the Buyers and the Company entered into a Stockholders Agreement, dated
September 16, 1999 (the "Stockholders Agreement") containing certain terms and
conditions concerning the acquisition and disposition of such shares of the
Company and the corporate governance of the Company.
The shares of the Company's Common Stock issued in connection with the
consummation of the transactions set forth above and the purchase of the PSS
Group carried certain registration rights. A Registration Statement on Form S-3
was filed with the Securities and Exchange Commission to register such shares
and was effective on May 24, 2000.
During March and April, 2000, the Company closed on the sale of 3,293,750
unregistered common shares through private placement offerings, resulting in net
proceeds (after deducting issuance costs of $2,337,000) of approximately
$24,013,000. The Company registered all of the common shares issued in these
private placement offerings in February 2001. In addition, the company granted
options to financial advisors to purchase an aggregate of 1,100,000 common
shares at prices ranging from $4.00 to $8.00 per share contingent upon raising
at least $25 million, which became fully earned and exercisable in April 2000 on
completion of the private placement offerings discussed above. The fair market
value of these options was approximately $3,797,000 and was determined in
accordance with SFAS 123 using the Black-Scholes formula. This amount was
recorded as additional paid in capital, as well as a direct charge against
equity as a cost of the private placement offerings.
Pursuant to employment and consulting agreements, one of the pooled entities
granted 112,022 restricted shares that were earned from fiscal 1998 through the
date of the share issuance in January 2000; this resulted in compensation
expense of $21,310 in 2000.
F-34
On August 31, 2000, the Company purchased all rights to the NetWeave software
product from Netweave Corporation. Consideration for the software was 80,386
shares of Vertex stock, which at the time of the transaction had an aggregate
fair market value of approximately $1 million, and the cancellation of
approximately $71,000 of debt. The total cost of this software was included in
other assets and was being amortized over the five year estimated life of the
product until the Netweave product line was sold in June 2002 (See Note 2).
Prior to the acquisition, the Company sold the Netweave software under a
licensing agreement with NetWeave Corporation. For the years ended September 30,
2001 and 2000, the NetWeave software product generated revenues of approximately
$776,000, and $926,000 respectively.
During December 2000, the Company closed on the sale of 1,124,461 unregistered
common shares, together with 337,341 options to purchase common stock at $7.50,
through a private placement offering, resulting in net proceeds (after deducting
cash issuance costs of $562,000) of approximately $5,053,000. All of the common
shares issued in this private placement offering were registered in an S-3 filed
in February 2001.
In January 2001, the Company issued 398,000 shares of common stock, which had a
fair market value of $2,274,000, in settlement of $1,500,000 notes payable and
other obligations to the sellers of the Portable Software Solutions (PSS) Group,
which was purchased by Vertex in September 1999.
In April 2001, the Company closed on the sale of 3,062,293 unregistered common
shares (including 278,930 penalty shares for not registering the shares in 45
days), through a private placement offering, resulting in net proceeds (after
deducting cash issuance costs of $281,000) of approximately $3,720,000. All of
the common shares issued in this private placement offering carry registration
rights requiring the Company to register such shares.
In addition, the Company granted options to financial advisors to purchase an
aggregate of 289,678 common shares at prices ranging from $1.44 to $5.00 per
share, which were fully earned and exercisable on completion of the December
2000 and April 2001 private placement offerings discussed above. The fair market
value of these options was approximately $922,000 and was determined in
accordance with SFAS 123 using the Black-Scholes formula. This amount was
recorded as additional paid in capital, as well as a direct charge against
equity as a cost of the private placement offerings.
In January 2002, the Company issued 102,663 shares valued at $122,000 to
an employee to settle an obligation for deferred compensation.
Also in January 2002, the Company granted options to purchase an aggregate
1,800,000 common shares at $.80 per share in connection with the settlement
of certain litigation. Such options had a fair value of approximately $1.44
million. The Company also placed an equivalent number of common shares
into escrow to be available upon exercise of these options. Of the 1,800,000
shares issued into escrow, 1,500,000 were unregistered shares. The
settlement agreement also required the Company to register these shares
by April 30, 2002, or an additional monthly cash payment would be
required until the shares are registered. The Company has not registered
these shares and has not made additional monthly cash payments and, as part of
the settlement agreement, three consent judgments have been entered against
Vertex (See Note 16 - Settled Litigation).
In April 2002, the Company sold 34,404 shares to its Chief Executive Officer at
a price of $2.18 per share.
During the year ended September 30, 2002, the Company issued 1,676,168
unregistered shares of common stock to the selling shareholders of Euronet in
consideration for the purchase of Euronet (See Note 2). Subsequent to the
issuance of these shares, stock options for 1,676,168 shares of common stock
were granted and exercised in return for the previously issued shares, which
were then cancelled.
F-35
In July 2002, the Company issued 410,304 shares to the Vertex Interactive
Savings and Retirement Plan in satisfaction of its calendar 2001 matching
contribution obligation of approximately $380,000. In addition, to enable the
Plan to fund certain withdrawal requests, the Company purchased 47,657 shares
from the Plan at a cost of $22,071 and put them into treasury.
In November 2001, the Company granted options to Laurus, the senior credit
facility lender, to purchase an aggregate of 180,000 common shares at $1.284
per share. The fair market value of these options was approximately $162,000,
and was determined in accordance with the Black-Scholes formula. This amount
was recorded as paid in capital, as well as interest expense with the
beneficial conversion feature(See Note 8).
Preferred Stock
Series "A"
In connection with the Transcape acquisition in February 2001 (See Note 2), the
Company issued 1,356,852 shares of Series "A" Preferred Stock. The Series "A"
Preferred Stock is convertible, at the option of the holder, into common stock
on a one for one basis. All of the common shares issuable on conversion of the
Series "A" Preferred Stock must be registered by the Company.
Series "B"
In October 2001, the Company raised $1,000,000 in cash through the issuance
and sale of 1,000 shares of Series "B" Convertible Preferred Stock to Pitney
Bowes, with each share of Series "B" Preferred being convertible into 1,190
shares of common stock at a price of $0.84 per share. The Company must
register all of the common shares issuable on conversion of the Series "B"
Preferred Stock. In connection with this transaction Pitney Bowes had
nominated Michael Monahan to Vertex's Board of Directors. He served as a
Director from November 15, 2001 until his resignation on February 21, 2002.
Series "C"
In March 2002, the Company issued 997 shares of Series "C" Convertible
Preferred Stock to Midmark Capital upon conversion of approximately $997,000 of
convertible notes payable and accrued interest (See Note 9). Each share of
Series "C" Preferred is convertible into 1,190 shares of common stock at a
price of $0.84 per share. The Company must register all of the common shares
issuable on conversion of the Series "C" Preferred Stock.
All of the preferred stockholders are entitled to vote their shares as
though such conversion had taken place. In addition, preferred stockholders
are not entitled to preferred dividends, but are entitled to their pro rata
share of dividends, if any, declared on common stock under the assumption that
a conversion to common stock had occurred.
Pursuant to certain acquisition agreements and private placement offerings,
the Company committed to register the common shares issued or issuable
pursuant to options issued within specified periods of time. The Company has
been unable to register the shares on a timely basis for certain of the
transactions. The Company's present intent is to file a registration statement
on Form S-1 as soon as possible. At September 30, 2002, the Company's
obligation was to register all of the common shares issuable on conversion of
preferred shares, approximately 8.5 million common shares and approximately 2.5
million shares underlying options(See Note 16 - Litigation).
F-36
Stock Option Plan
The Company has an Incentive Stock Option Plan (the "Plan") that provides for
the granting of options to employees, directors, and consultants to purchase
shares of the Company's common stock. During fiscal 2001, the Company's Board of
Directors approved an increase in the number of shares available for issuance
from 4,000,000 to 8,000,000. The Company is required to register the additional
4,000,000 shares issuable pursuant to options exercised. It is the Company's
present intent to file a registration statement on Form S-8 as soon as possible.
Options granted under the Plan generally vest over five years and expire after
ten years. The exercise price per share may not be less than the fair market
value of the stock on the date the option is granted. Options granted to persons
owning more than 10% of the voting shares of the Company may not have a term of
more than five years and may not be granted at less than 110% of fair market
value.
The following table summarizes the common stock options granted, cancelled or
exercised under the Plan:
2002 2001 2000
------------------ ------------------- ------------------
Common Weighted Common Weighted Common Weighted
Stock Average Stock Average Stock Average
Options Exercise Options Exercise Options Exercise
Price Price Price
------- -------- ------- -------- ------- --------
Outstanding at
beginning of year 4,691,100 $4.81 3,257,600 $5.95 1,016,600 $1.75
Granted 2,141,168 .66 2,094,000 3.28 2,635,000 7.11
Exercised (1,676,168) (.60) (238,600) (1.14) (295,800) (2.34)
Cancelled (1,887,100) (5.73) (421,900) (8.07) (98,200) (4.57)
----------- --------- ----------
Outstanding at
end of year 3,269,000 $3.72 4,691,100 $4.81 3,257,600 $5.95
========== ========= =========
Exercisable at
end of year 1,645,200 $3.59 1,038,800 $4.57 472,600 $1.62
========== ========= =========
Weighted average
fair value of
options granted
during the year $0.58 $2.14 $4.28
F-37
The following table summarizes information on stock options outstanding under
the Plan at September 30, 2002:
Options Outstanding Options Exercisable
--------------------------------- ----------------------
Options Weighted
Range of Outstanding Weighted Average Options Weighted
Exercise Prices at Average Remaining Exercisable Average
Range of Exercise September Exercise Contractural at September Exercise
Prices 30, 2002 Price Life 30, 2002 Price
- ------------------ --------- -------- ---------- ----------- -------
$.50 to $1.50 1,053,000 $ .97 $ 8.47 595,000 $0.89
1.51 to 2.25 348,500 1.74 6.75 216,500 1.77
2.26 to 3.40 707,500 2.42 8.61 141,500 2.42
3.41 to 5.00 490,000 3.94 6.93 365,200 3.92
5.01 to 7.65 125,000 6.00 7.55 65,000 6.00
7.66 to 11.50 195,000 8.65 8.13 122,000 8.59
11.51 to 13.13 350,000 12.72 7.54 140,000 12.72
------- --------
3,269,000 1,645,200 3.59
========= =========
Other Stock Options
In addition to the stock options granted under the "Plan" discussed above, the
Company periodically grants stock options to non-employees in consideration for
services rendered, as well as for services to be rendered. Options issued for
services rendered were accounted for under SFAS #123 and EITF Issue 96-18, using
the Black-Scholes formula to determine their fair market value. In fiscal 2001,
options for 467,561 shares were granted to non-employees, which resulted in
additional paid in capital of approximately $665,000 and non-cash expenses of
approximately $474,000 and non cash acquisition costs of $191,000. In fiscal
2000, options for 367,691 shares were granted to non-employees, which resulted
in additional paid in capital of approximately $1,275,000 and non-cash expenses
of approximately $393,000 and prepaid expenses of $882,000. In certain
instances, options issued for services to be rendered are contingent upon
specific performance by the grantee, and will be valued when performance is
completed.
In connection with the purchase of Renaissance Software Inc., the Company
assumed 535,644 outstanding stock options of Renaissance employees. The fair
market value of the vested portion of these options amounted to $6,217,472 and
was included as part of the consideration paid for Renaissance. The unvested
portion of these options was $461,000 and was included as deferred compensation
in Shareholders' Equity and was amortized as compensation expense over the
employees remaining vesting period.
In connection with the purchase of Applied Tactical Systems, Inc. in December
2000, the Company assumed 153,600 outstanding stock options of Applied Tactical
Systems employees. The fair market value of the vested portion of these options
amounted to $620,000 and was included as part of the consideration paid for
Applied Tactical Systems, Inc. The unvested portion of these options was $44,000
and was included as deferred compensation in Shareholders' Equity and was
amortized as compensation expense over the employees remaining vesting period.
F-38
During fiscal 2001, the Company granted non-qualified options aggregating
595,200 to various employees in connection with their employment by the Company.
In January 2000, the Company also granted non-qualified options aggregating
1,200,000 to directors and officers of the Company at an exercise price of $3.85
(110% of the fair value on the date of grant).
The following table summarizes common stock options granted, cancelled and
exercised in addition to those in the Plan:
2002 2001 2000
------------------- --------------------- --------------------
Weighted Weighted Weighted
Common Average Common Average Common Average
Stock Exercise Stock Exercise Stock Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- ---------
Outstanding at
beginning of year 4,572,392 $4.31 3,390,236 $3.88 475,000 $ .61
Granted 1,680,000 .85 1,764,877 5.50 3,203,335 4.07
Exercised - - (198,881) (3.22) (288,099) (.66)
Cancelled (148,719) (3.63) (383,840) (6.55) - -
---------- --------- ------------ --------- --------- ---------
Outstanding at
end of year 6,103,673 $3.37 4,572,392 $4.31 3,390,236 $3.88
========== ============ ==========
Options exercisable 5,937,673 $3.21 4,203,892 $4.10 2,915,578 $3.92
========== ============ ==========
Pro-forma SFAS 123 Disclosure
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). In accordance with the provisions, the Company accounts for its stock
option plans under Accounting Principles Board Opinion 25 and, accordingly, does
not recognize compensation cost. If the Company had elected to recognize
compensation cost based on the fair value of the options granted at the grant
date as proscribed by SFAS 123, net loss and net loss per share would have been
increased to the pro forma amounts indicated in the table below:
2002 2001 2000
------------- -------------- --------------
Net loss-as reported $(44,774,379) $(122,952,102) $(9,412,424)
Net loss--pro-forma (44,850,980) (125,682,128) (11,861,944)
Loss per share--as reported (1.26) (3.95) (.46)
Loss per share--pro-forma (1.26) (4.04) (.58)
The fair value of each option grant is estimated on the date of grant using the
Black Scholes option-pricing model with the following assumptions:
2002 2001 2000
------------- ---------- ---------
Expected dividend yield 0.00 % 0.00 % 0.00 %
Expected stock price volatility 134.88 106.35 88.70
Risk-free interest rate 4.00 4.50 6.98
Expected life of options 3 years 3 years 3 years
F-39
The effects of applying SFAS 123 and the results obtained through the use of the
Black-Scholes option-pricing model are not necessarily indicative of future
values.
14. PENSION PLANS
The Company and certain of its subsidiaries maintain 401(k) plans, which are
defined contribution plans (the "Plans") covering substantially all employees in
the United States. During fiscal 2001, all subsidiary plans were merged into the
Company plan. Eligible employees can contribute up to 17% of their compensation
not to exceed Internal Revenue Code limits. In fiscal 2001, the Company amended
its plan to provide matching contributions of 50% of the employees' contribution
up to 3% of gross pay. The Company's contribution will be funded after each
calendar year end in either cash or in Vertex stock, at the Company's option.
Prior to fiscal 2001, the Plans provided for matching contributions based on
management's discretion. Company contributions for the years ended September 30,
2002, 2001 and 2000 were approximately $202,000, $290,000 and $0.
15. INCOME TAXES
The Company accounts for income taxes under FASB Statement No. 109, "Accounting
for Income Taxes (FASB 109)." Deferred income tax assets and liabilities are
determined based upon differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
The components of the income tax provision included in the statements of
operations for the years ended September 30, 2002, 2001 and 2000 consist of the
following;
2002 2001 2000
-------------- -------------- -------------
Current:
Federal $ - $ - $
-
Foreign 134,473 131,007 227,686
State 370 19,469 149,572
------------- ------------- -------------
Total Current 134,843 150,476 377,258
------------- ------------- -------------
Deferred:
Federal - - -
Foreign - - -
State - - -
------------ ------------- -------------
Total Deferred - - -
------------ ------------- -------------
Total income tax provision $ 134,843 $150,476 $377,258
============ ============= =============
F-40
The net deferred tax assets in the accompanying balance sheets consist of the
following:
September 30,
---------------------------------------------
2002 2001
---------------------- --------------------
Deferred tax assets:
Allowance for doubtful accounts $ 406,315 $ 151,544
Inventory 271,620 4,003
Net operating loss carryforwards 19,514,641 11,778,076
Capital loss carryforwards 1,850,296 -
Accruals 1,791,904 1,530,203
Other 115,755
--------------------- ------------------
Total deferred tax assets 23,834,776 13,579,581
--------------------- -----------------
Deferred tax liabilities:
Depreciation (18,633) (18,891)
Capitalized software (91,413) (168,351)
Deferred revenue (23,664) (50,755)
--------------------- ------------------
Total deferred tax liabilities (133,710) (238,017)
--------------------- ------------------
Valuation allowance (23,701,066) (13,341,564)
--------------------- ------------------
Net deferred tax assets $ - $ -
===================== ==================
Deferred tax assets arise from the tax benefit of net operating and capital loss
carryforwards which are expected to be utilized to offset taxable income and
from timing differences between the recognition in financial statements and tax
returns of certain inventory costs, bad debt allowances on receivables,
depreciation on fixed assets and amortization of certain intangible assets.
A valuation allowance on the net deferred tax assets has been provided based on
the Company's assessment of its ability to realize such assets in the future.
For the year ended September 30, 2002 the valuation allowance for net deferred
tax assets increased by $10,359,502, as a result of net changes in temporary
differences.
The Company believes that as of September 30, 1999, an ownership change under
Section 382 of the Internal Revenue Code occurred. The effect of the ownership
change would be the imposition of annual limitations on the use of the NOL
carryforwards attributable to the periods before the change.
F-41
At September 30, 2002, the net operating loss carryforwards available to offset
future taxable income consist of approximately $45.2 million in Federal net
operating losses, which will expire in various amounts through 2022, and
state net operating losses of approximately $46.8 million which will expire in
various amounts through 2009. These net operating losses also may be limited
due to ownership changes, the effect of which has not yet been determined by
the Company. Total net operating losses available in foreign jurisdictions
are approximately $3.8 million, none of which relate to periods prior to the
acquisition of certain subsidiaries by Vertex. When the Company utilizes
pre-acquisition net operating losses, the benefit will be reflected as a
reduction of goodwill related to the respective subsidiary. No pre-acquisition
net operating losses were utilized during fiscal 2002 and 2001, and
approximately $200,000 of pre-acquisition net operating losses were utilized
during fiscal 2000, with the resulting reduction of tax liability being credited
directly to goodwill. Based on the fact that the remaining European subsidiaries
are in liquidation, the Company does not anticipate utilizing the European net
operating losses. The capital loss carryforward at September 30, 2002 of $4.6
million has no expiration date, but utilization is limited to the extent of
capital gains generated by the Company.
A reconciliation of income tax at the statutory rate to the Company's effective
rate is as follows:
2002 2001 2000
------- -------- -------
Statutory rate 34.0 % 34.0 % 34.0 %
Effect of:
Valuation allowances (23.2) (8.4) (4.2)
Permanent differences (10.8) (26.8) (32.0)
State income taxes, net (0.3) 1.1 (2.0)
------- -------- -------
Effective income tax rate (0.3%) (0.1%) (4.2%)
For 2002, 2001 and 2000, the primary permanent differences relate to the
impairment and amortization of goodwill, and an in-process R&D write-off, which
are not deductible for tax purposes.
There are no undistributed earnings of the Company's foreign subsidiaries at
September 30, 2002. In the event of a distribution of foreign earnings in the
form of dividends or otherwise, the Company would be subject to both U.S. income
taxes (subject to an adjustment for foreign tax credits) and withholding taxes
payable to the various foreign countries.
16. COMMITMENTS AND CONTINGENT LIABILITIES
Leases
The Company and its subsidiaries lease office facilities and certain office
equipment under operating leases that expire at various dates through 2007.
Rent expense for the years ended September 30, 2002, 2001, and 2000 was
approximately $2,300,000, $2,645,000 and $780,000 respectively.
F-42
During 2002, the Company has sold and closed down various businesses (See Note
2). In connection with these dispositions of non-core businesses, the Company
abandoned certain facilities and terminated leases at a cost of approximately
$1.1 million. As a result of these sales and the accrual of the remaining
terminated lease obligations, the minimum lease payments under non-cancellable
operating leases, as of September 30, 2002, are $175,000 through May 2003.
Pending Litigation
We are party to certain judicial actions, the outcomes of which may, together,
or individually, have a negative impact on our financial condition and liquidity
if we do not prevail. Management does not believe that these matters will
have a material negative impact. The items of pending litigation are summarized
as follows:
a) On October 31, 2001, an action was commenced in the United
States District Court, Southern District of New York entitled
Edgewater Private Equity Fund II, L.P. et al. v. Renaissance Software,
Inc. et al. The action, brought against Renaissance Software, Inc.,
a subsidiary of Vertex, and Vertex, alleged the default by
Renaissance Software, Inc. in payment of certain promissory notes
in the principal aggregate sum of $1,227,500. Vertex guaranteed
the notes. The noteholders demanded $1,227,500, together with
interest accruing at the rate of 8% per annum from June 30, 2001.
On March 12, 2002, the noteholders were successful in obtaining a
judgment against Renaissance Software, Inc. in the aggregate amount
of $1,271,407 including interest, late charges and attorneys' fees.
However given the Company's current cash position, we have
been unable to pay the judgment and have been pursuing non cash
alternatives.
b) On November 7, 2000, Pierce Procurement Ltd. ("Pierce") brought an action
against the Company's subsidiary Renaissance Software, Inc. ("Renaissance"),
in the Boone County Circuit Court in Northwestern Illinois. The suit was removed
to the United States District Court for the Northern District of Illinois,
Western Division, on February 1, 2001. The claim by Pierce against Renaissance
is based upon allegations that Renaissance sold a computer system which did not
meet the particular purposes of Pierce and that Renaissance made certain
misrepresentations to Pierce with respect to the system. Renaissance denies
such claims, and through its insurance carrier is vigorously defending the
action. Renaissance has counterclaimed against Pierce alleging that Pierce has
paid only a portion of the contract fee agreed to by the parties. Total damages
claimed by Pierce are approximately $1,500,000 plus interest and penalties.
Renaissance seeks approximately $76,500 on its counterclaim. A mediation has
been scheduled for September 2003.
c) We are also party to a number of claims by vendors, landlords and other
service providers seeking payment of balances owed. Since such amounts are
already recorded in accounts payable or accrued liabilities, these claims are
not expected to have a material affect on the stockholders' equity (deficit) of
the Company.
Settled Litigation
a) On September 28, 2001 Vertex filed a Demand for Arbitration with the
American Arbitration Association ("AAA") against Russell McCabe, Daniel McCabe
and David Motovidlak (the "ATS Shareholders"), the former shareholders of
Applied Tactical Systems, Inc., an entity which merged with Vertex pursuant to a
Merger Agreement dated December 29, 2000, seeking damages resulting from the
McCabe's interference with Vertex's employees and customers. The ATS
Shareholders also filed a Demand for Arbitration seeking $25,000,000 in damages
based on, among other things, Vertex's alleged failure to register the ATS
Shareholders' stock in Vertex by a certain date.
F-43
In a related action, on December 10, 2001 the ATS Shareholders filed a complaint
in the United States District Court for the District of New Jersey against Ernst
& Young LLP (our former auditors), and certain Vertex shareholders, officers and
directors individually. Vertex itself was not a defendant in this action. The
ATS Shareholders were seeking damages in the amount of $40,000,000 plus punitive
and statutory treble damages based upon, among other things, allegations that
Vertex failed to register stock of the ATS Shareholders by a certain date.
On November 15, 2002, we resolved and dismissed claims relating to both of these
matters. The United States District Court for the District of New Jersey
entered a Stipulation and Order of Settlement and Dismissal as to Certain
Parties, agreed to by Vertex, other named parties, and three former ATS
shareholders in the case styled Russell McCabe, et al. v. Ernst & Young, LLP, et
al., Case No. 01-5747 (WHW). Pursuant to the Stipulation and Order, Vertex and
the three former ATS shareholders also agreed to dismiss their respective AAA
arbitration claims. The settlement was funded by Vertex's insurance carrier,
with no additional payments by Vertex or by any settling defendants. The
parties dismissed all claims between them and exchanged mutual general releases.
b) On May 7, 2002 an action was commenced in the Supreme Court of the State of
New York, County of New York by Harris Hoover & Lewis, Inc., ("Harris
Hoover")in which Harris Hoover alleged that the Company breeched a financial
advisory contract. The claim sought damages in the amount of $250,000. The
Company had filed a counter claim alleging breech of contract, breech of
fiduciary duty and intentional misrepresentation and sought damages in an amount
not less than $2,050,000 plus punitive damages. This matter was dismissed by
the New York Supreme Court on November 26, 2002. The parties dismissed all
claims between them and exchanged mutual general releases. No payments were
made by either party to the other.
c) As part of the settlement entered into between the Company and three former
principals of a company acquired by Vertex in 2000, consent judgments in the
amount of approximately $1.0 million each were entered against Vertex on July
19, 2002. The incremental liability has been included in other expense(provision
for litigation) for the year ended September 30, 2002. The Company is currently
negotiating with the former owners to accept forms of payment other than cash
and there can be no assurance that a non-cash settlement will be concluded. In
July 2002, the former owners obtained a court levy upon several of the Company's
bank accounts, placing a hold on approximately $70,000 of the Company's funds.
The Company, together with its secured lenders, objected to the turnover of
these funds, however a turnover order was granted by the court in October 2002.
d) On November 20, 2001, an action was commenced in the Superior Court of
California, County of Los Angeles, SouthWest District by former shareholders
of another company we acquired in 2000. In June 2002, this matter was settled
on mutually agreeable terms with minimal cash outlay and no impact on results of
operations.
Employment Agreements and Other Commitments
The Company has employment agreements with certain key employees, the terms of
which expire at various times through 2004. Such agreements provide for minimum
salary levels as well as for incentive bonuses.
On September 27, 1999 the Company entered into a five-year investment banking
agreement with another shareholder, MidMark Associates, Inc., for $250,000 per
annum. Effective August 13, 2002, concurrent with the resignation of the two
Midmark directors from the Vertex Board of Directors, this agreement was
terminated.
F-44
Effective October 1, 1999, Edwardstone entered into an agreement with the
Company pursuant to which Edwardstone agreed to provide the services of Messrs.
Biermann and Toms to act as the Executive Chairman and Chief Executive Officer
of the Company. Such Agreement provides for aggregate annual compensation of
$600,000 and entitles them to participate in all employee benefit plans
sponsored by Vertex in which all other executive officers of Vertex participate.
The agreement has an initial five-year term and continues thereafter on a year-
to-year basis on the same terms and conditions existing at the time of renewal,
unless terminated by either the Company or the employee upon thirty days written
notice prior to the end of either the initial (5 year) term or any subsequent
one-year term, as the case may be. This agreement was terminated by mutual
consent effective September 30, 2002.
On April 24, 2001 the Company entered into an investment banking agreement with
Harris, Hoover and Lewis, LLC to provide financial advisory and consulting
services with respect to the acquisition of Plus Integration. This agreement
provided for a transaction fee of 2% of the value of the deal, together with
related options, with a minimum transaction fee of $500,000. This agreement was
terminated on November 25, 2002 in connection with the general release of all
claims in the litigation settlement discussed above.
On September 23, 2002, the Company entered into a business advisory and
consulting services agreement with Jeffrey Firestone to assist the Company in
raising funds. An initial retainer of $5,000 was paid and when Mr. Firestone
raises $1,000,000 on behalf of Vertex, he will be entitled to a monthly retainer
of $5,000 for an additional five months. If Firestone is successful within a
three year period in raising funds for Vertex, he is entitled to a cash fee
equal to 10% of the proceeds and five year warrants equal to 10% of the equity
raised at an exercise price equal to the transaction price. Firestone is also
entitled to a 3% commission if he introduces Vertex to an entity that in turn
raises money for Vertex on a commission basis.
On September 30, 2002, Vertex entered into an agreement with Tarshish Capital
Markets ("TCM"), an Israel based corporation to provide financial advisory and
fund raising services. An initial non-refundable retainer fee was accrued at
September 30, 2002 and was paid in October 2002 in the form of 800,000 shares of
Vertex registered common stock, which had a value of $56,000. The agreement
provides for TCM to use its best efforts to raise in excess of $5 million in a
private stock offering. If TCM is successful within a three year period, it is
entitled to a cash fee equal to 10% of the amount invested in Vertex and five
year warrants equal to 10% of the equity raised at an exercise price equal to
the price used in the respective offering.
F-45
17. SEGMENT INFORMATION AND INTERNATIONAL OPERATIONS
The Company operates in one business segment, which is the design, development,
marketing and support of supply chain management solutions.
Geographic Area Data
The following geographic information presents total revenues, gross profit and
identifiable assets for the years ended September 30, 2002, 2001, and 2000 (in
thousands):
2002 2001 2000
------- ------- -------
Revenues
North America $15,495 $30,378 $18,514
Europe(1) 20,640 28,709 29,255
------- ------- -------
$36,135 $59,087 $47,769
======= ======= =======
Gross Profit
North America $ 6,813 $12,705 $7,430
Europe(1) 5,428 8,796 7,777
-------- ------- -------
$ 12,241 $21,501 $15,207
======== ======= =======
Identifiable assets
North America $18,436 $60,174 $102,390
Europe(1) - 13,233 31,097
Eliminations (15,636) (19,968) (23,268)
--------- -------- ---------
$ 2,800 $53,439 $110,219
========= ======== =========
(1) The Company operated throughout Europe, but principally in the United
Kingdom, Germany and Italy. All European operations were either sold or placed
into liquidation (See Note 2) as of September 30, 2002.
Products and Services
Sales to external customers by the three significant product and service line
groupings for the years ended September 30, 2002, 2001 and 2000 (in thousands)
are as follows:
2002 2001 2000
--------- --------- --------
Point Solutions $15,022 $28,849 $31,744
Enterprise Solutions 6,926 9,921 6,737
Service and Maintenance 14,187 20,317 9,288
--------- --------- --------
$36,135 $59,087 $47,769
========= ========= ========
F-46
Major Customers
The Company had no customers that accounted for more than 10% of revenue for the
fiscal years ended September 30, 2002 and 2001. For the fiscal year ended
September 30, 2000, one customer accounted for 11% of revenues.
18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
the years ended September 30, 2002 and 2001.
Dec. 31 Mar. 31 Jun. 30 Sept. 30
------------- -------------- -------------- -------------
2002
Revenues $ 13,036,644 $ 11,466,099 $ 9,959,263 $ 1,673,211
Gross profit 4,298,777 4,161,127 3,307,117 473,602
Net income (loss)
excluding impairment of
intangibles write-off(A) (6,091,210) (10,276,235) (12,468,033) 3,034,931
Net loss (6,091,210) (10,276,235) (12,468,033) (15,938,901)
Weighted average shares
outstanding 34,844,686 35,086,676 35,754,249 36,542,025
Net loss per share $ (0.17) $ (0.29) $ (0.35) $ (0.44)
2001
Revenues $14,747,017 $15,341,053 $14,128,256 $14,871,144
Gross profit 3,755,637 5,944,242 5,758,492 6,042,846
Net loss excluding in-process
R&D and impairment
of intangibles write-off(B) (8,046,728) (9,653,780) (10,466,754) (12,820,280)
Net loss (8,046,728) (13,253,780) (10,466,754) (91,184,840)
Weighted average shares
outstanding 26,626,072 31,132,917 33,523,078 33,951,085
Net loss per share $ (0.30) $ (0.43) $ (0.31) $ (2.69)
(A) In the fourth quarter of fiscal 2002, the Company recorded an impairment of
intangibles write off of approximately $19 million (See Note 4) and a
net gain on sale of non-core assets of approximately $6 million.
(B) In the second quarter of fiscal 2001, the Company recorded an in-process
research & development write off of $3.6 million related to the acquisition
of Transcape assets (See Note 2), and in the fourth quarter, the Company
recorded an impairment of intangibles write off of approximately $78 million
(See Note 4).
F-47
19. SUBSEQUENT EVENTS
a) In October, 2002 Vertex executed a Grid Note, which provides for up to $1
million of availability from MidMark Capital, L.P. This note will be funded by
the proceeds, if any, from the sale of any shares of Vertex Common Stock held
by MidMark Capital. This note is payable on demand but in any event no later
than December 31, 2003, carries interest at the rate of 10% per annum and is
secured by the same collateral in which the Company previously granted a
security interest to MidMark under its convertible notes payable. In
consideration of MidMark providing this facility, the Company agreed to issue
warrants to purchase a number of unregistered shares equal to 120% of the number
of tradeable shares sold by MidMark to fund such note, at a purchase price per
share equal to 80% of the price per share realized in the sale of shares to fund
the Grid Note. As of June 30, 2003, the Company had borrowed $77,000 under
this arrangement, resulting from MidMark's disposal of 1,224,350 Vertex common
shares. As a result, Vertex has granted MidMark warrants to purchase 1,472,820
shares of Vertex common stock at $.052 per share.
In June 2003, to facilitate the sale of shares by Midmark Capital to enable
Midmark Capital to increase its funding under the Grid Note agreement, the
Company contracted with United Institutional Investments Inc. ("United") to
provide financial consulting services. Under this agreement, United has agreed
to assist in the liquidation of up to 3,800,000 common shares currently owned
by Midmark Capital. United's fees will be equal to 10% of the net proceeds
generated by the sale of such shares.
b) In December 2002, the Company repaid the remaining balance due under the
Laurus Senior Credit Facility and terminated the agreement.
c) XeQute Solutions, Inc. ("XeQute") was formed on August 30, 2002 as a
Delaware corporation and wholly-owned subsidiary of Vertex and began
operations effective October 1, 2002.
XeQute Solutions, PLC ("PLC"), a United Kingdom company and wholly-owned
subsidiary of Vertex was formed on November 15, 2002 and incorporated on
November 27, 2002. XeQute became a wholly owned subsidiary of PLC on December
12, 2002.
XeQute (i)purchased certain assets and assumed certain liabilities of Vertex
and (ii) purchased substantially all of the assets and assumed certain of the
liabilities of Vertex's wholly-owned subsidiaries Renaissance Software,
Inc.("Renaissance") and Data Control Systems, Inc. ("DCS") on December 12,
2002, but effective October 1, 2002.
d) In October 2002 PLC (in formation) and Charles Street Securities
("CSS") entered into agreements whereby CSS would a) arrange for
interim financing for PLC in the amount of $500,000 and b) CSS would
act as financial advisor and non-exclusive placement agent to PLC in
connection with the raising of additional capital through a private
placement sale of PLC Ordinary Shares. In connection with CSS's role
as financial advisor and placement agent, CSS received a) 50,000 PLC
warrants (determined as a percentage of the amount of funding raised in
the private placement), each warrant exercisable for a period of five
years into one PLC Convertible Ordinary Non-Voting Ordinary Share of 10
pence each, at an exercise price of 10 pence per share and CSS shall
receive b) a fee of approximately $75,000 in connection with the
preparation of the private placement document and all attendant
financial advisory work, c) a sales commission of 10% of funds
raised by CSS through the private placement, d) a marketing expense
F-48
reimbursement not to exceed approximately $180,000 plus e) up to 521,740
PLC warrants (determined as a percentage of the amount of funding raised
in the private placement), each warrant exercisable for a period of five
years into one PLC Convertible Ordinary Non-Voting Ordinary Share of 10
pence each, at an exercise price of 0.46 British pounds per Ordinary
Share (with a pro rata reduction if less than approximately $1,800,000
is raised by CSS pursuant to the private placement) and reimbursement
of all reasonable out of pocket expenses. In the event that PLC obtains
additional financing from any investor who has invested in the PLC
pursuant to the private placement within two years of the completion
of the private placement, PLC has agreed to pay to CSS a sales
commission in the amount of 10% of the additional funds invested.
PLC has granted CSS the right to appoint two directors to the Board
of Directors of PLC upon successful completion of the private placement,
at which time CSS shall continue to act as financial advisor to PLC,
for which CSS shall receive a quarterly financial advisory fee of
approximately $3,800 until such time PLC is sold or becomes publicly
listed.
The private placement transaction is currently on hold pending
completion and filing of this Annual Report on Form 10K and an
interim audit of PLC for the nine months ended June 30, 2003.
e) In December 2002, Vertex, through PLC, closed a $500,000 Bridge Loan
arranged by CSS from MidMark Capital and Aryeh Trust. The Bridge Loan
is to be repaid with proceeds from the proposed private placement
funding. The Bridge Loan was for a term of 180 days, which matured on
June 9, 2003, at which time it converted to a term loan payable in 24
monthly installments. The first monthly installment was due July 1, 2003
and has not been paid. The Bridge Loan is secured by a first security
interest in all of the assets of XeQute and carries an interest rate of
3% per month. The lenders were each granted 60,000 warrants in PLC at
10 pence per share as part of the consideration for this loan.
The Company will incur a non-cash interest charge related to these
warrants.
Upon the receipt of the private placement's minimum subscription amount
by PLC, MidMark has agreed to relinquish its security interest in the
assets of XeQute, in exchange for receiving from Vertex warrants to
purchase 250,000 Ordinary Shares of PLC which are presently owned by Vertex.
MidMark has agreed that it will vote any shares which it may acquire
through the exercise of the warrant in accordance with the directions
of Vertex. However, it will retain its security interest in the shares
of PLC owned by Vertex and in all of the assets of Vertex.
f) In December 2002, XeQute received an additional $480,000 from MidMark
under a Convertible Loan Note. The Convertible Loan Note will automatically
convert into Non-Voting Shares of PLC at $0.672 per share when a minimum
subscription of $480,000 of the Private Placement is reached.
g) Since October 1, 2002 and as of June 30, 2003, Vertex and XeQute have
borrowed a further $893,000 from MidMark Capital II, L.P. pursuant to a
series of demand notes, of which $425,000 was restricted for usage on XeQute
obligations. These notes are payable on demand, bear interest at 10% per
annum and are secured by the same collateral in which the Company previously
granted a security interest to MidMark under its convertible notes payable.
F-49
h) In March 2003, the Company's subsidiary XeQute, entered into an
"Authorized Marketing Program Partnership Agreement" with Core eBusiness
Solutions LLC ("Core"), a company that employs certain former employees
of the Company. This agreement provided Core with the exclusive rights
to market and sell certain of XeQute's warehouse management software in
the United States and Canada.
However, in June 2003, XeQute and Core mutually agreed to rescind
this agreement and renegotiate a non-exclusive marketing agreement, which
has not yet been finalized.
i) As a result of its severe cash constraints (See Note 1 - Going Concern
section), the Company had fallen as much as two to three months behind in
meeting its payroll obligations to its employees subsequent to September 30,
2002. The Company has been meeting its current payroll obligations, and has
attempted to pay overdue employee payroll obligations as cash resources
become available. However, in a letter dated April 3, 2003 the New Jersey
Department of Labor (N.J.D.O.L.) has assessed the Company a penalty of
$154,000 for failure to pay payroll on a timely basis. The Company is
vigorously appealing this assessment as being counterproductive to
actually paying the employees. Company management met with the N.J.D.O.L.
on June 23, 2003 and presented a plan to bring payroll current over a four
month period (beginning in September 2003 and ending December 2003).
The N.J.D.O.L. is presently considering the Company's plan, together with
its request for a reduction in the penalty assessed by N.J.D.O.L.
In addition, a number of former employees of a California based
division of Vertex had filed claims with the California Department of
Labor for non payment of wages for the second half of July 2002; the
final payroll prior to the closing of the division. The Company had
disputed the claims, primarily on the basis of the lack of documentation
for hours worked during the period. However in July 2003, these claims
were heard by the California DOL and the amounts claimed, together with
interest and penalties aggregating approximately $100,000, were granted
to these former employees.
j) In May 2003 the Company issued 1,000,000 common shares , which had a
fair market value of approximately $20,000, to an investment advisor to
assist in the Company's fund raising efforts.
k) Effective July 31, 2003, the Company completed the sale of 10,000,000
shares of its common stock, which had a fair market value at that time of
approximately $500,000, to American Marketing Complex, Inc. (AMC). Payment
for this purchase was in the form of cash equivalent trade credits with a
face value of $4,000,000, which the Company can utilize for the purchase of
merchandise and services. The face value is not necessarily indicative of
the ultimate fair value or settlement value of the cash equivalent trade
credits. Any trade credits not utilized by June 30, 2008 shall expire,
unless the Company exercises an option to extend the agreement for one year.
In addition, the Company agreed to loan AMC $150,000 of which $10,000
was delivered at closing; $40,000 will be delivered by August 15, 2003;
$50,000 will be delivered by Septemer 10, 2003 and $50,000 will
be delivered by October 10, 2003. This loan will be repaid exclusively
from funds received from the sale of the 10,000,000 shares. The Company
is required to register these shares within six months of the closing.
F-50
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
SCHEDULE II -VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
Balance at Additions Deductions Balance
Beginning Charged to From at End of
of Year Expense Reserves Year
---------- ---------- ----------- ----------
Year Ended September 30, 2002:
Deducted from accounts receivable
for doubtful accounts $ 380,568 $ 617,465 $ 69,003 $ 929,030
Deducted from inventory as
valuation allowance $ 10,000 $ 261,267 $ 0 $ 271,267
Year Ended September 30, 2001:
Deducted from accounts receivable
for doubtful accounts $ 180,630 $439,764 $239,826 $380,568
Deducted from inventory as
valuation allowance $ 10,000 $ 0 $ 0 $10,000
Year Ended September 30, 2000:
Deducted from accounts receivable
for doubtful accounts $ 125,166 $69,470 $14,006 $180,630
Deducted from inventory as
valuation allowance $ 225,290 $34,664 $249,954 $10,000
F-51