UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
Form 10-Q
______________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended December 31, 2003
0-15066
Commission file Number
______________
VERTEX INTERACTIVE, INC.
(Exact name of registrant as specified in its charter)
______________
New Jersey 22-2050350
(State of Incorporation) (I.R.S. Employer Identification No.)
3619 Kennedy Road, South Plainfield, New Jersey 07080
(Address of Principal Executive Offices) (Zip Code)
(908) 756-2000
(Registrant's Telephone Number)
Indicate by check mark whether the registrant (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 registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _____ No __X___
Common stock, par value $.005 per share: 48,201,978 shares
outstanding as of December 31, 2003.
Preferred stock, Series "A", par value $.01 per share: 1,356,852
shares outstanding as of December 31, 2003.
Preferred stock, Series "B", par value $.01 per share: 1,000
shares outstanding as of December 31, 2003.
Preferred stock, Series "C", par value $.01 per share: 997
shares outstanding as of December 31, 2003.
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
FORM 10-Q
December 31, 2003
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets 3 - 4
December 31, 2003 and September 30, 2003
Condensed Consolidated Statements of Operations 5
For the three months ended December 31, 2003 and 2002
Condensed Consolidated Statement of Changes in 6 - 7
Stockholders' Deficiency For the three months
ended December 31, 2003
Condensed Consolidated Statements of Cash Flows 8
For the three months ended December 31, 2003 and 2002
Notes to the Condensed Consolidated Financial
Statements 9
Item 2. Management's Discussion and Analysis Of 23
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 28
Market Risk
Item 4. Controls and Procedures 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Changes in Securities and Use of Proceeds 32
Item 4. Submission of Matters to a Vote of Security 32
Holders
Item 6. Exhibits and Reports on Form 8-K 32
2
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, September 30,
2003 2003
(Unaudited)
------------ -------------
CURRENT ASSETS:
Cash and cash equivalents $ 45,125 $ 25,265
Accounts receivable, less allowance for doubtful accounts
of $456,358 at December 31, 2003 and September 30, 2003 354,812 639,208
Inventories, net of valuation allowance 499,837 537,337
Prepaid expenses and other current assets 42,542 20,103
------------ -----------
Total current assets 942,316 1,221,913
Equipment and improvements, net of accumulated depreciation
and amortization of $1,334,408 at December 31, 2003 and
$1,320,152 at September 30, 2003 55,993 70,249
Capitalized software costs, net of accumulated
amortization of $260,452 at December 31, 2003 and
$231,513 at September 30, 2003 86,817 115,756
Other assets 111,273 111,273
------------ ------------
Total assets $ 1,196,399 $ 1,519,191
============ ============
See notes to condensed consolidated financial statements.
3
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
December 31, September 30,
2003 2003
------------- -------------
(Unaudited)
CURRENT LIABILITIES:
Notes payable - unrelated parties $ 1,887,972 $ 1,869,236
Notes payable - related parties 4,223,989 4,095,848
Convertible notes payable - related parties 2,294,324 2,294,324
Accounts payable 4,456,055 4,533,875
Net liabilities associated with subsidiaries
in liquidation 9,410,550 8,511,077
Payroll and related benefits accrual 2,457,334 2,622,354
Litigation related accruals 4,086,885 4,077,665
Other accrued expenses and liabilities 4,934,223 4,870,759
Deferred revenue 413,146 305,243
------------- -----------
Total current liabilities 34,164,478 33,180,381
------------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Series A preferred stock, par value $.01 per share; 2,000,000
shares authorized, 1,356,852 shares 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 shares issued and outstanding
($1,000,000 aggregate liquidation preference) 10 10
Series C preferred stock, par value $0.01 per share;
10,000 shares authorized, 997 shares issued and outstanding
($997,000 aggregate liquidation preference) 10 10
Common stock, par value $.005 per share; 75,000,000 shares
authorized; 48,201,978 shares issued and outstanding 241,011 241,011
Additional paid-in capital 155,418,295 155,364,295
Unearned income (400,000) (400,000)
Accumulated deficit (184,990,255) (184,332,055)
Accumulated other comprehensive loss (3,183,479) (2,480,790)
Less: Treasury stock, 87,712 shares of common stock (at cost) (67,240) (67,240)
------------- -------------
Total stockholders' deficiency (32,968,079) (31,661,190)
------------- -------------
Total liabilities and stockholders' deficiency $ 1,196,399 $ 1,519,191
============= =============
See notes to condensed consolidated financial statements.
4
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended December 31,
----------------------------------
2003 2002
-------------- --------------
REVENUES $ 832,270 $ 1,282,136
COST OF SALES 539,977 639,983
-------------- ------------
GROSS PROFIT 292,293 642,153
-------------- ------------
OPERATING EXPENSES:
Selling and administrative 599,440 1,359,727
Depreciation and amortization 43,195 71,659
-------------- ------------
Total operating expenses 642,635 1,431,386
-------------- ------------
OPERATING LOSS (350,342) (789,233)
-------------- ------------
OTHER INCOME (EXPENSES):
Interest income 0 1,200
Interest expense (279,271) (164,745)
Other (28,587) (7,312)
-------------- -----------
Net other income (expense) (307,858) (170,857)
-------------- -----------
NET LOSS $ (658,200) $ (960,090)
============== ============
Net loss per share of
common stock:
Basic and diluted ($.01) ($.03)
============== ============
Weighted average number of
shares outstanding:
Basic and diluted 48,201,978 37,201,978
============== ============
See notes to condensed consolidated financial statements.
5
VERTEX INTERACTIVE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE THREE MONTHS ENDED DECEMBER 31, 2003
(UNAUDITED)
Preferred Stock Common Stock Additional
--------------- ----------------- Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ -----------
Balance September 30, 2003 1,358,849 $ 13,589 48,201,978 $241,011 $155,364,295
Effects of issuance of warrants
with notes payable - related parties 54,000
Net loss(A)
Change in unrealized foreign
exchange translation gains/losses(A) - -
---------- -------- ---------- -------- ------------
Balance December 31, 2003 1,358,849 $ 13,589 48,201,978 $241,011 $155,418,295
========== ======== ========== ======== ============
See notes to condensed consolidated financial statements.
6
VERTEX INTERACTIVE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE THREE MONTHS ENDED DECEMBER 31, 2003
(UNAUDITED)
(CONTINUED)
Accumulated
Other
Unearned Accumulated Comprehensive Treasury
Income Deficit Loss Stock Total
--------- ------------ -------------- --------- -------------
Balance September 30, 2003 $(400,000) $(184,332,055) $(2,480,790) $ (67,240) $(31,661,190)
Effects of issuance of warrants
with notes payable - related parties 54,000
Net loss(A) (658,200) (658,200)
Change in unrealized foreign
exchange translation
gains/losses(A) (702,689) (702,689)
---------- -------------- ------------ --------- -------------
Balance December 31, 2003 $(400,000) $(184,990,255) $(3,183,479) $ (67,240) $(32,968,079)
========== ============== ============ ========== =============
(A) Comprehensive loss for the three months ended December 31, 2003 totaled $1,360,889.
See notes to condensed consolidated financial statements.
7
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended December 31,
-----------------------------------
2003 2002
--------------- --------------
Cash Flows from Operating Activities:
- ------------------------------------
Net loss ($658,200) ($960,090)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 43,195 71,659
Charges to interest expense for warrants
issued with note payable - related parties 54,000
Changes in assets and liabilities:
Accounts receivable, net 284,396 217,731
Inventories, net 37,500 137,129
Prepaid expenses and other current assets (22,439) (17,321)
Other assets 36,692
Accounts payable (77,820) (25,825)
Accrued expenses and other liabilities 104,448 123,265
Advances from customers - (343,547)
Deferred revenue 107,903 (308,955)
----------- -----------
Net cash used in operating activities (127,017) (1,069,262)
----------- -----------
Cash Flows from Financing Activities:
- -------------------------------------
Proceeds from notes payable - 250,000
Payment of senior credit facility and
notes payable - (145,736)
Proceeds from notes and convertible notes payable -
related parties 128,141 1,082,931
----------- -----------
Net cash provided by financing activities 128,141 1,187,195
----------- -----------
Effect of exchange rate changes on cash 18,736 -
----------- -----------
Net increase in cash and cash equivalents 19,860 117,933
Cash and cash equivalents at beginning of period 25,265 74,016
----------- -----------
Cash and cash equivalents at end of period $ 45,125 $ 191,949
=========== ===========
See notes to condensed consolidated financial statements.
8
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Background and Description of Business
Vertex Interactive, Inc. ("Vertex" or "we" or "our" or the
"Company") is a global provider of supply chain management ("SCM")
technologies, including enterprise software systems and
applications, that enable our customers to manage their
orders, inventory and warehouse 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'TM'-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 support 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.
In August 2002, Vertex formed XeQute Solutions, Inc. ("XeQute"),
a Delaware corporation, which is an indirect, 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. These assets
comprise substantially all of the enterprise software businesses
of Vertex. XeQute is a wholly-owned subsidiary of XeQute
Solutions PLC ("XeQute PLC") which is a holding company that is
a direct, wholly-owned subsidiary of Vertex.
Since February 17, 2003, the Company's securities
have been quoted on the Pink Sheets under the symbol "VETXE".
9
Going Concern Matters
Based upon our substantial working capital deficiency and stockholders'
deficiency of approximately $33,222,000 and $32,968,000 at December 31,
2003, respectively, our recurring losses, our historic rate of cash
consumption, the uncertainty arising from our defaults on substantially
all of our notes payable, the uncertainty of our 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 our
ability to continue as a going concern will require on a going forward basis,
the Company to raise substantial funds to finance (i) continuing operations,
(ii) the further development of our enterprise software technologies,
(iii) the settlement of existing liabilities including past due payroll
obligations to our employees, officers and directors, and (iv) possible
selective acquisitions to achieve the scale we believe will be necessary
to enable us to remain competitive in the global SCM industry. There can
be no assurance that we will be successful in raising the necessary funds.
Outlook:
In light of current improving economic conditions and the upswing in the
economy we now anticipate, but cannot assure, reaching the point at which we
will generate cash in excess of our operating expenses in the quarter ending
June 30, 2004. However, we had current obligations at December 31, 2003
accumulated during the past several years that substantially exceeded our
current assets and, to the extent we cannot settle existing obligations in
stock or defer payment of our obligations until we generate sufficient
operating cash, we will require significant additional funds to meet accrued
non-operating obligations, to fund operating losses, if required, to pay
short-term debt and related interest, capital expenditures and expenses
related to cost-reduction initiatives, and to pay liabilities that could
arise from litigation claims and judgments.
Our sources of ongoing liquidity include the cash flows from our operations,
potential new credit facilities and potential additional equity investments.
Consequently, Vertex continues to aggressively pursue obtaining
additional debt and equity financing, the restructuring of certain existing
debt obligations, and the reduction of its operating expenses. In addition, it
has structured 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.
Initiatives Completed or in Process:
The following initiatives related to raising the required funds, settling
liabilities and/or reducing expenses have been completed or are in process:
(i) As of December 31, 2003, the Company had borrowed approximately $6,518,000
from Midmark Capital L.P., a Company that owns shares of Vertex's preferred and
common stock (See Note 5). Midmark Capital L.P. and its affiliate, Midmark
Capital II, L.P., and certain individuals related to these two entities,
are referred to collectively as "Midmark".
10
Included in the aforementioned amount payable to Midmark is $272,000
which has been borrowed under a Grid Note which provides for up to
$1,000,000 of availability from Midmark. This note will be funded by
the proceeds, if any, from the sale of any shares of Vertex common stock
held by Midmark. This note is payable on demand, carries interest at the rate
of 10% per annum and is secured by substantially all of the tangible and
intangible property of the Company. 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 February 15, 2004, the Company had not borrowed any
additional amount under this arrangement.
(ii) The Company completed the sale of certain entities and
assets during fiscal 2002. After being unsuccessful in attempting
to sell its five remaining European operations (Vertex UK,
Vertex Service and Maintenance Italy, Vertex Italy, Euronet
and Vertex France), and based on the continuing cash drain
from these operations, during fiscal 2002 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 approximately
$9,411,000 of net liabilities of these remaining European entities
as of December 31, 2003, we expect to recognize a non-cash gain (and
no significant cash outlay), however the amount and timing of such gain
and cash outlay, if any, is totally dependent upon the decisions
to be issued by the respective court appointed liquidators (See Note 2
as to the approval of the liquidation of the U.K. subsidiaries in
January 2004).
(iii) We have conducted extensive negotiations with various sources as
a result of which we have a tentative agreement, that is subject to
certain conditions, for the provision of up to approximately $8,000,000
of new financing for XeQute by David Sassoon Holdings, Inc. which may
be in the form of debt or equity or a combination of both.
(iv) We have continued to reduce headcount (to approximately 35
employees in our continuing North American business at December
31, 2003, and to 23 employees as of February 15, 2004, of whom 7
were 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 an estimated fair
market value at that time of approximately $400,000, to American
Marketing Complex, Inc. ("AMC")(see Note 6). 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.
11
In addition, the Company agreed to loan AMC $150,000 of which
$10,000 was delivered at closing; $40,000 was delivered in
August 2003; and the remainder was required to be but was not
delivered prior to December 31, 2003 (See Note 6 below).
(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 $4,100,000 of litigation related accruals
at a discount or with the issuance of shares of either Vertex or
XeQute.
While we are continuing our efforts to reduce costs, increase
revenues, 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 will 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.
Basis of Presentation
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 accompanying consolidated
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, 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, financial
condition and ability to continue as a going concern.
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by
accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have
been included. Operating results for the three month
period ended December 31, 2003 are not necessarily indicative of
the results that may be expected for the year ending
September 30, 2004.
12
The balance sheet at September 30, 2003 has been derived from the
audited financial statements at that date but does not include
all of the information and footnotes required by accounting
principles generally accepted in the United States of America for
complete financial statements.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended September 30, 2003.
2. 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 Note 3 in the 2003 Form 10-K). 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 retained liabilities of these businesses are classified
as net liabilities associated with subsidiaries in liquidation in the
accompanying December 31, 2003 and September 30, 2003 condensed consolidated
balance sheets. While the Company expects the liquidation process to take
through at least June 30, 2004, significant variations may occur based on the
complexity of the entity and requirements of the respective country.
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
December 31, 2003 and September 30, 2003:
December 31, September 30,
2003 2003
------------ -----------
Cash $ 482,544 $ 654,068
Receivables, net 1,099,912 990,468
Inventories, net 661,506 608,993
Accounts payable (3,197,515) (2,959,933)
Accrued liabilities (5,641,680) (5,207,546)
Deferred revenue (1,288,418) (1,186,486)
Loans payable - banks (1,166,763) (1,074,142)
Other liabilities (360,136) (336,499)
------------- -----------
Net liabilities associated with
subsidiaries in liquidation $(9,410,550) $(8,511,077)
============= ===========
The results of these businesses' operations for the three months ended
December 31, 2003 and 2002, which were not significant, are not
segregated from other businesses in the accompanying condensed
consolidated statements of operations as they are not considered
distinct segments or discontinued operations.
13
The Company received notice that the liquidation of the UK companies, which
were under liquidation as of December 31, 2003, has been approved
and finalized by the UK creditors as of January 5, 2004. Based on such
notice, management estimates the Company will reduce net liabilities
associated with subsidiaries in liquidation by approximately $1,600,000 and
recognize a gain of approximately $1,400,000 in the second quarter
of fiscal 2004.
3. INVENTORIES
Inventories consist of raw materials of $499,837 and $537,337 at
December 31, 2003 and September 30, 2003, respectively, and were net of a
valuation allowance of $50,504 at those dates.
At December 31, 2003 and September 30, 2003, inventories of the European
operations in liquidation amounted to approximately $662,000 and $609,000,
respectively, and are presented on the balance sheets in net liabilities
associated with subsidiaries in liquidation.
4. NOTES PAYABLE TO UNRELATED PARTIES
Notes payable to unrelated parties consist of past due notes payable to the
following:
December 31, September 30,
2003 2003
--------- -----------
Renaissance Software, Inc. $1,227,500 $1,227,500
Divisions of Genicom International 375,000 375,000
Aryeh Trust 285,472 266,736
--------- ----------
$1,887,972 $1,869,236
========= ==========
These notes remained unpaid as of February 15, 2004. For additional
information, see Note 5 below and Note 10 in the 2003 Form 10-K.
5. NOTES AND CONVERTIBLE NOTES PAYABLE - RELATED PARTIES
Notes and convertible notes payable to related parties consist of past due
or demand notes payable to Midmark as follows:
December 31, September 30,
2003 2002
----------- ------------
10% convertible notes $ 1,814,324 $ 1,814,324
Convertible loan note 480,000 480,000
Demand notes 3,701,900 3,701,900
Grid note 272,089 143,948
Bridge loan 250,000 250,000
----------- -------------
$ 6,518,313 $ 6,390,172
=========== =============
Midmark is a shareholder of the Company and certain
Midmark Managing Directors have served as directors
of the Company. In June 2001, November 2001 and again in
January 2002, the Company issued in the aggregate $5,500,000
of convertible notes payable to Midmark. These notes were
to automatically convert into shares of Vertex common stock
on the day that the Company obtained the requisite shareholder
approval for the issuance of shares upon conversion to Midmark.
In the event that shareholder approval was not obtained by
September 30, 2003, the principal amount plus any accrued interest
(at the 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%.
14
In March 2002, the Company agreed to amend the agreement related
to the $5,500,000 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 elected to convert approximately $782,000 of
principal and $218,000 of accrued interest into 997 shares of
Series "C" preferred stock. The remaining principal balance of the
convertible notes payable of $4,718,717 and accrued interest at prime
were convertible into Series "C" preferred shares at a conversion
price of $1,000 per share. The Series "C" preferred shares in turn were
convertible into shares of common stock at $0.84 per share.
In November 2001, the Company issued $3,000,000 of
10% convertible notes payable, with an original maturity date of
September 30, 2003, to Midmark that would have been convertible
into 3,000 shares of Vertex Series "C" Preferred Stock at the
option of Midmark on the day that the Company obtained the
requisite shareholder approval for the issuance of Series "C"
Preferred Stock upon conversion to Midmark. Midmark could have
converted the Series "C" Preferred Shares into 3,570,026 shares of
Vertex common stock 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%.
On August 9, 2002, the remaining principal balance of $4,718,717
of the convertible notes and $1,185,176 of the $3,000,000 of 10%
convertible notes were fully settled in connection with the sale
of the Company's French based advanced planning software business
to Midmark. The remaining $1,814,324 of past due 10% convertible
notes payable at December 31, 2003 and September 30, 2003 are
convertible at $0.84 per share and collateralized by all tangible
and intangible property of the Company.
In December 2002, XeQute received an additional $480,000 from
Midmark under a Convertible Loan Note with terms similar to the 10%
convertible note payable described above. The Convertible Loan Note
would have automatically converted into Non-Voting Shares of XeQute
PLC at $0.672 per share when a minimum subscription of
$480,000 of a proposed but now aborted private placement had
been reached.
The conversion rates of all of the above Midmark notes are
subject to certain antidilution provisions.
The Company borrowed an additional $2,588,900 during the year ended
September 30, 2002, and an additional $1,113,000 (including $425,000
restricted for usage on XeQute obligations) during the year ended
September 30, 2003, from Midmark under nonconvertible notes that 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 agreement related to the
convertible notes payable described above.
15
During October 2002, Vertex also executed a Grid Note which
provides for up to $1,000,000 of availability from Midmark.
This note will be funded by the proceeds, if any, from the
sale of any shares of Vertex common stock held by Midmark.
This note is payable on demand, 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 the
agreement related to the convertible notes payable described above.
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 February 15, 2004, the Company had borrowed
$272,089 under this arrangement. As a result of the borrowings through
December 31, 2003, the Company was obligated to issue to Midmark warrants
to purchase 5,411,580 shares of common stock at an exercise price of
$0.05 per share. The aggregate estimated fair value of the warrants at
the respective dates of issuance was $54,000 which was determined using
the Black-Scholes option pricing model and recorded as a charge to
interest expense, with an offsetting increase in additional paid-in
capital, during the three months ended December 31, 2003. In applying
the Black-Scholes option pricing model, the Company used the following
assumptions: expected dividend yield - 0%; expected stock price
volatility - 142%; risk-free interest rate - 3.50%; and expected life
of the warrants - three months.
In December 2002, Vertex, through XeQute PLC, closed a $500,000 Bridge Loan
arranged by CSS whereby it borrowed $250,000 from both Midmark and Aryeh
Trust, an unrelated party. The Bridge Loans are to be repaid
with proceeds from a proposed private placement funding. The Bridge Loans
matured on June 9, 2003. The Company has agreed to continue paying interest
at the original rate of 3% per month, with the principal to be repaid when
funds become available. The Bridge Loans are secured by a first security
interest in all of the assets of XeQute. The lenders were each granted
warrants to purchase shares of XeQute PLC as part of the consideration for
this loan. The interest charge relating to the fair value of these warrants
was not material and was recognized over the original term of the Loan.
Upon the receipt of the minimum subscription amount for a private placement
by XeQute PLC, Midmark has agreed to relinquish its security interest in the
assets of XeQute, in exchange for warrants to purchase 250,000 common shares
of XeQute 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 XeQute PLC owned by Vertex and in all of
the assets of Vertex.
As of February 15, 2004, the Company was in discussions to renegotiate all of
the terms of the outstanding obligations to Midmark.
16
6. STOCKHOLDERS' DEFICIENCY
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 $400,000, to AMC. Payment for this purchase by AMC was in the
form of cash equivalent trade credits with a face value of $4,000,000, which
the Company can use or sell to others for the purchase of merchandise and
services. The face value is not necessarily indicative of the ultimate fair
value or settlement value of the 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. The trade credits were valued
at the fair market value of the shares issued by the Company of $400,000 and
classified as unearned income, which is a separate component of stockholders'
deficiency in the accompanying condensed consolidated balance sheets as of
December 31, 2003 and September 30, 2003. The unearned credits will be offset
as the trade credits are used.
In addition, the Company agreed to loan AMC $150,000 of which
$10,000 was delivered at closing; $40,000 was delivered in
August 2003; $50,000 was to be delivered by September 10, 2003
and $50,000 was to be delivered by October 10, 2003. The
Company did not make the September or October payments. This
loan will be repaid exclusively from funds received from the
sale by AMC of its 10,000,000 shares of the Company's Common Stock.
The Company is required to register these shares within six months
of the closing.
17
Preferred Stock
Series "A"
The Company has issued 1,356,852 shares of Series "A" Preferred Stock. Each
outstanding share of Series "A" Preferred Stock is convertible at any time,
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"
The Company raised $1,000,000 in cash through the issuance and sale of
1,000 shares of Series "B" Convertible Preferred Stock, with each share
of Series "B" Preferred being convertible at any time 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.
Series "C"
In March 2002, the Company issued 997 shares of Series "C"
Convertible Preferred Stock to Midmark upon conversion of approximately
$997,000 of convertible notes payable and accrued interest.
Each outstanding share of Series "C" Preferred is convertible at any time
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.
Pro Forma and Other Disclosures Related to Stock Options
As of September 30, 2003, the Company had granted options to purchase a total
of 7,597,106 shares of common stock. No options were granted and options to
purchase 175,000 shares were cancelled during the three months ended
December 31, 2003.
As further explained in Note 13 in the 2003 Form 10-K, as permitted by
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation" the Company accounts for its stock option plans
using the intrinsic value method under Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, it
does not recognize compensation cost for options with exercise prices at or
above fair market value on the date of grant and, instead, it is required by
SFAS 123 and SFAS 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure" to make pro forma disclosures of net income (loss) and earnings
(loss) per share as if the fair value based method of accounting under SFAS 123
had been applied. The Company did not grant any stock options to employees
during the three months ended December 31, 2003 and 2002; however, it did grant
options to employees in prior periods. If the Company had elected to recognize
compensation cost based on the fair value of the options granted at the grant
date and had amortized the cost over the vesting period pursuant to SFAS 123,
net loss and loss per share would have been increased to the pro forma amounts
indicated in the table below:
Three Months Ended December 31,
--------------------------------
2003 2002
------------- --------------
Net loss-as reported $(658,200) $(960,090)
Deduct total stock -
based employee compensation
expense determined under a
fair value based method for
all awards, net of related
tax effects (247,686) (248,082)
------------- ------------
Net loss - pro-forma $(905,886) $(1,208,172)
============= ============
Loss per share - as reported $(0.01) $(0.03)
Loss per share - pro-forma (0.02) (0.03)
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model (see Note 13 in the 2003 Form 10-K as
tothe assumptions used in prior periods).
18
7. EARNINGS (LOSS) PER SHARE
The Company presents "basic" earnings (loss) per share and, if applicable,
"diluted" earnings per share pursuant to the provisions of SFAS 128,
"Earnings per Share". Basic earnings (loss) per shares is calculated by
dividing net income or loss (there are no dividend requirements on the
Company's outstanding preferred stock) by the weighted average number of
common shares outstanding during each period.
The calculation of diluted earnings per share is similar to that of basic
earnings per 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, such as those issuable upon
the exercise of stock options and warrants and the conversion of convertible
securities, were issued during the period and appropriate adjustments were
made for the application of the treasury stock method and the elimination
of interest and other charges related to convertible securities.
As of December 31, 2003, there were 18,726,878 shares of common stock
potentially issuable upon the exercise of stock options (7,422,106 shares),
warrants (5,411,580 shares) and the conversion of convertible securities
(5,893,192 shares). However, diluted per share amounts have not been
presented in the accompanying condensed consolidated statements of operations
because the Company had a net loss for the three months ended December 31,
2003 and 2002, and the assumed effects of the exercise of all of the Company's
outstanding stock options and warrants and the conversion of all of its
convertible securities would have been anti-dilutive.
8. COMMITMENTS AND CONTINGENCIES
Pending Litigation
We are party to a number of claims, which have been previously
disclosed by the Company, and claims by vendors, landlords and
other service providers seeking payment of balances owed. Since
such amounts have already been recorded in accounts payable or
accrued liabilities, these claims are not expected to have a
material affect on the stockholders' deficiency of the Company.
However, they could lead to involuntary bankruptcy proceedings.
a) On April 16, 2003, an action was commenced in the Supreme
Court of the State of New York, County of Suffolk, entitled
Bautista v. Vertex Interactive, Inc and Renaissance Software,
Inc. The action, which demands $394,000, is brought by a former
employee claiming breach of his employment agreement.
b) On June 25, 2003, an action was commenced in the United
States District Court, District of New Jersey, entitled CPG
International, N.V. vs. Vertex Interactive, Inc. The action,
which demands $406,342, alleges the Company's breach of an
Asset Sale and Purchase Agreement pursuant to which the Company
acquired various assets related to CPG International's Service
business. On March 3, 2004, the action was settled for the sum
of $125,000 to be paid by March 31, 2004. If the amount is not
paid by that date, the Company agreed to have a consent judgement
entered in the amount of $413,332 less any amounts already
paid by the Company.
c) 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.
19
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.
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
$1,000,000 each were entered against Vertex on July 19, 2002.
The incremental liability has been included in other expense
(provision for litigation) for the three months ended December 31,
2002. The Company is currently negotiating with the former owners to
accept forms of payment other than cash. However, 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.
20
d) 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 was 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 denied such claims, and through
its insurance carrier defended the action. Renaissance
had counterclaimed against Pierce alleging that Pierce had paid only
a portion of the contract fee agreed to by the parties. Total damages
claimed by Pierce were approximately $1,500,000 plus interest and
penalties. Renaissance sought approximately $76,500 on its
counterclaim. In December, 2003, the Company, through its
insurance carrier, reached a settlement in this matter, which
settlement will be paid by the insurance carrier.
21
PAYROLL OBLIGATIONS
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. agreed to consider
the Company's plan, together with its request for a reduction
in the penalty assessed by N.J.D.O.L. As of February 15, 2004,
the Company has made some minimal payments toward this proposed
plan.
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
which remain unpaid as of February 15, 2004, were granted to
these former employees.
22
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
This Quarterly Report on Form 10-Q 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", included in our Annual Report on Form 10-K
for the year ended September 30, 2003. 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 Quarterly Report
or to reflect the occurrence of other unanticipated events.
This discussion and analysis should be read in conjunction with
the unaudited condensed consolidated financial statements and
related notes of the Company contained elsewhere in this report.
In this discussion, the years "2004" and "2003" refer to the three
months ended December 31, 2003 and 2002, respectively.
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 as further explained
in the Company's Annual Report on Form 10-K for the year ended
September 30, 2003.
Results of Operations
Three months ended December 31, 2003 ("2004") compared to the three
months ended December 31, 2002 ("2003").
Operating Revenues:
Operating revenues decreased by approximately $450,000 (or
35.1%) to approximately $832,000 in 2004.
Revenues were negatively impacted by the continued weak demand in its
key markets, exacerbated by the Company's lack of financial resources.
23
Products and Services
Sales to external customers by the two significant
product and service line groupings for the three months
ended December 31, 2003 and 2002 (in thousands) are as
follows:
2004 2003
---------- ----------
Enterprise Solutions $ 278 $ 83
Service, Maintenance and Other 554 1,199
-------- --------
$ 832 $ 1,282
======== ========
Enterprise solutions revenues increased to $278,000 in 2004
from $83,000 in 2003. The increase was a result of some existing
customer warehouse expansions during the period.
Service, maintenance and other revenues have decreased approximately
$645,000 from 2003. The decrease was a result of our strategy of
de-emphasizing lower margin product sales, together with the impact
of the downturn in the economy, especially post-September 11.
Gross Profit:
Gross profit decreased by approximately $350,000 (or 54.5%)
to $292,000 in 2004. As a percent of operating revenues,
gross profit was 35.1% in 2004 as compared to 50.1% in 2003. The
gross profit percentage was negatively impacted by a lower
percentage of higher margin service and maintenance revenues.
Operating Expenses:
Selling and administrative expenses decreased approximately
$760,000 (or 55.9%) to $599,440 in 2004. During 2004 we
continued various cost reduction measures, including reduction
in the number of our employees, facilities consolidations, as
well as reductions in other expenses deemed redundant such as
marketing and advertising and other headcount-related expenses.
There were no research and development expenses ("R&D").
As a result of the slow economy and our cost cutting efforts,
we suspended R&D, focusing our technical resources on
maintenance services.
The decrease in the amortization of intangibles to $43,200
in 2004, as compared to approximately $72,000 in 2003,
is the result of certain assets becoming fully amortized.
24
Interest expense increased by approximately $114,500 to
$279,000 in 2004. This increase is due to increased
borrowings and a $54,000 charge related to warrrants issued to
Midmark (see Note 5).
The income tax provision (credit) is negligible in both years due
primarily to operating losses.
Liquidity and Capital Resources
Based upon our substantial working capital deficiency
($33,222,000) and stockholders' deficiency ($32,968,000) at
December 31, 2003, 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) settlement of
existing liabilities including past due payroll obligations to
its employees, officers and directors, and (iv) 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 2004:
Outlook
In light of current improving economic conditions and the
upswing in the economy we may now anticipate reaching the point
at which we generate cash in excess of our operating expenses in
the quarter ending June 30, 2004, about which there can be no
assurance. However, the Company has accrued significant
obligations during the past several years and 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, if required, to pay short-term debt and related interest,
capital expenditures, expenses related to cost-reduction initiatives,
and potential liabilities that could arise from litigation claims
and judgments.
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, the restructuring of certain existing
debt obligations and the reduction of its operating expenses.
In addition, Vertex has structured 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.
25
The following initiatives related to raising the required funds, settling
liabilities and/or reducing expenses have been completed or are in process:
(i) As of December 31, 2003, the Company had borrowed approximately $6,518,000
from Midmark Capital L.P., a Company that owns shares of Vertex's preferred and
common stock (See Note 5). Midmark Capital L.P. and its affiliate, Midmark
Capital II, L.P., and certain individuals related to these two entities,
are referred to collectively as "Midmark".
Included in the aforementioned amount payable to Midmark is $272,000
which has been borrowed under a Grid Note which provides for up to
$1,000,000 of availability from Midmark. This note will be funded by
the proceeds, if any, from the sale of any shares of Vertex common stock
held by Midmark. This note is payable on demand, carries interest at the rate
of 10% per annum and is secured by substantially all of the tangible and
intangible property of the Company. 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 February 15, 2004, the Company had not borrowed any
additional amount under this arrangement.
(ii) The Company completed the sale of certain entities and
assets during fiscal 2002. After being unsuccessful in attempting
to sell its five remaining European operations (Vertex UK,
Vertex Service and Maintenance Italy, Vertex Italy, Euronet
and Vertex France), and based on the continuing cash drain
from these operations, during fiscal 2002 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 approximately
$9,411,000 of net liabilities of these remaining European entities
as of December 31, 2003, we expect to recognize a non-cash gain (and
no significant cash outlay), however the amount and timing of such gain
and cash outlay, if any, is totally dependent upon the decisions
to be issued by the respective court appointed liquidators (See Note 2
as to the approval of the liquidation of the U.K. subsidiaries in
January 2004).
(iii) We have conducted extensive negotiations with various sources as
a result of which we have a tentative agreement, that is subject to
certain conditions, for the provision of up to approximately $8,000,000
of new financing for XeQute by David Sassoon Holdings, Inc. which may
be in the form of debt or equity or a combination of both.
(iv) We have continued to reduce headcount (to approximately 35
employees in our continuing North American business at December
31, 2003, and to 23 employees as of February 15, 2004, of whom 7
were furloughed until additional funds are raised), consolidate
facilities and generally reduce costs.
26
(v) Effective July 31, 2003, the Company completed the sale of
10,000,000 shares of its common stock, which had an estimated fair
market value at that time of approximately $400,000, to American
Marketing Complex, Inc. ("AMC")(see Note 6). 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 was delivered in
August 2003; and the remainder was required to be but was not
delivered prior to December 31, 2003 (See Note 6).
(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 $4,100,000 of litigation related accruals
at a discount or with the issuance of shares of either Vertex or
XeQute.
While we are continuing our efforts to reduce costs, increase
revenues, 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 will 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.
27
ITEM 3. 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 in
Europe which are currently in liquidation. 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 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 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.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management,
including our principal executive officer and principal financial
officer, evaluated the effectiveness of the design and operations
of our disclosure controls and procedures with respect to the
information generated for use in our reporting system. Based upon,
and as of the date of that evaluation, our principal executive
officer and principal financial officer concluded that our
disclosure controls and procedures were effective to provide
reasonable assurance that information required to be disclosed
in the reports that we file or submit under the Securities
Exchange Act of 1934 are recorded, processed, summarized
and reported within the time periods specified by the Commissions'
rules and forms.
28
There was no change in our internal control over financial reporting
during the quarter ended December 31, 2003 that has materially
affected, or that is reasonably likely to materially affect, our
internal control over financial reporting.
It should be noted that our management, including our principal
executive officer and principal financial officer, does not expect
that our disclosure controls and procedures or internal controls
over financial reporting will prevent all error and all fraud. A
control system, no matter how well conceived or operated, can
provide only reasonable, not absolute, assurance that the objectives
of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been detected.
These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because
of simple error or mistake. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more
people, or by management override of controls. The design of any
system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all
potential future conditions; over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the
policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
In November 2003, as part of the Company's ongoing efforts to
tighten internal controls and to streamline and improve the
timelines of reporting, the Company consolidated four separate
financial reporting systems onto a single financial reporting
system at XeQute. As a result, the Company has reduced the
manual consolidation procedures, involving four disparate
financial reporting systems, providing a significant improvement
in internal financial procedures and controls.
Going forward financial reporting and controls at the XeQute
level will be fully automated. As the system is refined and
improved, the Company expects to experience continued improvement
in the effectiveness of its internal financial procedures and
controls.
29
Part II Other Information.
Item 1. Legal Proceedings
Pending Litigation
We are party to a number of claims, which have been previously
disclosed by the Company, and claims by vendors, landlords and
other service providers seeking payment of balances owed. Since
such amounts have already been recorded in accounts payable or
accrued liabilities, these claims are not expected to have a
material affect on the stockholders' deficiency of the Company.
However, they could lead to involuntary bankruptcy proceedings.
a) On April 16, 2003, an action was commenced in the Supreme
Court of the State of New York, County of Suffolk, entitled
Bautista v. Vertex Interactive, Inc and Renaissance Software,
Inc. The action, which demands $394,000, is brought by a former
employee claiming breach of his employment agreement.
b) On June 25, 2003, an action was commenced in the United
States District Court, District of New Jersey, entitled CPG
International, N.V. vs. Vertex Interactive, Inc. The action,
which demands $406,342, alleges the Company's breach of an
Asset Sale and Purchase Agreement pursuant to which the Company
acquired various assets related to CPG International's Service
business. On March 3, 2004, the action was settled for the sum
of $125,000 to be paid by March 31, 2004. If the amount is not
paid by that date, the Company agreed to have a consent judgement
entered in the amount of $413,332 less any amounts already
paid by the Company.
c) 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.
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.
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.
30
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
$1,000,000 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 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 was 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 denied such claims, and through
its insurance carrier defended the action. Renaissance
had counterclaimed against Pierce alleging that Pierce had paid only
a portion of the contract fee agreed to by the parties. Total damages
claimed by Pierce were approximately $1,500,000 plus interest and
penalties. Renaissance sought approximately $76,500 on its
counterclaim. In December, 2003, the Company, through its
insurance carrier, reached a settlement in this matter, which
settlement will be paid by the insurance carrier.
31
Item 2.Changes in Securities and Use of Proceeds
None.
Item 4. Submission of Matters to a Vote of Security Holders
None this quarter
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
31.1 Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) The following Reports on Form 8-K were filed
during the period:
Form 8K, dated September 23, 2003, filed October 14,
2003 and Form 8K/A as amended, dated September 23, 2003
and filed November 5, 2003 regarding the resignation of
Withum Smith & Brown, P.C. the Company's auditors for fiscal
2002 and the appointment of J.H. Cohn LLP as the Company's
new auditors for fiscal year 2003.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
VERTEX INTERACTIVE, INC
Registrant
By: /s/ Nicholas R. Toms
Nicholas R. Toms
Chief Executive Officer
Chief Financial Officer
March 08, 2004
33